This news service talks to PwC in Luxembourg about the seemingly irreconcilable demands that are present to asset managers in Europe, and what the solutions to these are.

Technology can play a part in squaring the circle between demands for tough regulatory compliance and reduced fee margins but it isn’t a magic bullet solution, PricewaterhouseCoopers has told this news service.

Regulations as varied as the European Union’s MiFID II (2018), the General Data Protection Regulation (2018), the Directive on Alternative Investment Fund Managers (2011) and various anti-money laundering directives, to name a few, have added burdens to Europe’s fund management sector.

And, with a collective asset under management total of €19.1 trillion ($20.42 trillion), as at December 2022 (source: Association of the Luxembourg Fund Industry), the stakes for getting the balance right are high. Fees can detract from investment returns and, with millions of EU citizens counting on investment to fund retirement, this is a major issue.

That’s certainly the view of Mike Delano, asset and wealth management leader at PwC Luxembourg. Luxembourg alone is home to more than €5 trillion in fund assets (UCITS and alternative investment funds).

“Technologies such as cloud computing and advanced analytics, to name a few, are already proving to be a major boon to asset managers,” he continued. “With the latter, for instance, asset managers are better capable of analysing customer behaviour data and predicting future demand trends and potential risks. With the former, cloud-based platforms greatly improve operational efficiency by bringing about seamless collaboration within teams,” Delano told this publication. 

“Nonetheless, we need to bear in mind that the latest digital tools – and all the costs their implementation incur – are not a magic bullet that will solve the woes traditional asset managers are facing, be it the increasing competition and pressure on fees to juggling a myriad of regulations.”

Costs “remain a focus for our clients and a focus also for regulators. Managers now need to demonstrate how they are providing value,” he said. 

Pressures to demonstrate value, justify fees and explain costs is also a factor behind a certain amount of industry consolidation and M&A activity, he said. 

Unlike the US, which is a single jurisdiction, the 27 member states of the EU cap the ability to consolidate funds and achieve resultant economies of scale, although there “has been some consolidation of funds overall,” he said.

One trend that is seen in the Luxembourg and the wider EU funds' market is interest in so-called “active ETFs” – exchange-traded funds which have a manager or team making decisions on the underlying investments in the fund. “A lot of that is driven by pressure on costs,” Delano said.

Technologies such as blockchain, artificial intelligence, big data vary in how they can change the industry. On the blockchain side, the cryptocurrency angle has been considerably over hyped, Delano said. With AI, on the other hand, there’s big potential to wring out efficiency gains in processes, such as middle and back office functions. “We need to be able to do more with fewer people,” he said. 

This publication asked how, in particular, AI would change fund management.

“Many nodes within the investment fund management value chain will be affected by AI. When it comes to portfolio management, investment decision-making, and risk assessment and management, AI-driven data analysis will prove to be particularly crucial. On the operational side, AI will bring about efficiency gains in transaction processing and record-keeping, while on the compliance side, AI will be of great use for regulatory reporting,” Delano added.