Introduction  

It goes without saying that Luxembourg has established itself as the main European hub for investment fund managers (IFMs). But with almost 30% of European assets under management (AuM)) Luxembourg-domiciled IFMs are facing constant pressure from fee compression, regulatory requirements, and growing client requests.

To ensure operational efficiency and maintain profitability, investment fund managers are constantly looking for ways to optimize their structure and streamline day-to-day operations. As of 2025, digitalization and leveraging AI to automate operations has come into favor. While both approaches can be extremely beneficial, this article explores another strategic option that often goes under the radar: optimizing the physical branch structure in local markets.

This article will explore the history of branches, their related challenges and opportunities, and the operational efficiency that can result when leveraging them as “centers of excellence.”

The history of distribution branches: A background

Distribution branches trace back to 1985, when they were introduced in the Undertakings for Collective Investments in Transferrable Securities (UCITS) Directive to facilitate fund distribution across the EU. Later, when the 2011/2013 AIFMD Directive granted AIFMs the ability to leverage branch distribution without Member State-specific licenses, the benefits were clear. Not only could IFMs more easily increase their geographical reach, but they could also offer quicker and higher quality client service at lower costs.

However, in recent years, compliance and governance requirements have increased significantly, with regulatory bodies—both in the host and home Member States of the IFM—imposing more stringent reporting obligations. These obligations require a local anti-money laundering (AML) officer with additional local AML reporting obligations and enhanced oversight measures. Naturally, these added layers of complexity have increased the direct and hidden costs of maintaining branches, leaving us to wonder: Are they really still worth the effort?

Operational challenges in branch distribution

Some investment fund managers are cutting their losses. While more and more IFMs in Luxembourg might be opening branches in different Member States, the average overall number of such branches is diminishing, as IFMs look to protect the bottom line and adopt a more cautious approach to expanding their branch network.

Consequently, opening a branch in today’s market requires a strong business case that justifies the project's net new money flows. But then it gets even more complicated. Member State regulators have specifically targeted branches to evaluate their oversight and governance models. While branches have always been fully integrated into the IFM’s compliance, oversight, and risk management processes, we are now seeing more and more branches requiring additional processes on top of those of the IFM.

This is a direct result of divergent regulatory requirements between Member States. Some requirements, such as a local compliance officer or additional AML staff, differ from those of the home Member State. Thus, to leverage local distribution through branches, investment fund managers must meet the requirements of both home and host Member States. Thanks to this complexity, there’s little wonder why opening and/or maintaining a branch is facing increased scrutiny.

Branch benefits: Passporting and cross-border fund distribution

Branches are usually relied on to leverage local distribution capabilities, and for some investment fund managers this continues to feel worthwhile. Yes, client relationships are crucial for fund distribution, and having direct, human contact with your clients allows you to build the strongest connections. Nevertheless, it is possible to distribute funds without physical presence through passporting, and sometimes the benefit of distribution may not justify the costs of establishing a branch.

Furthermore, for some IFMs, introducing branches in certain countries is a suboptimal choice, particularly when the potential client base cannot cover a distribution branch’s operating expenses. This is why, thanks to the EU’s single market policy, we are seeing more and more IFMs adapting cross-border distribution via passporting. This tactic is drastically less expensive than a physical branch network and allows funds to be distributed in countries with potentially smaller client bases—opening new possibilities for investment fund managers and investors. With its cheaper and quicker way of expanding a fund’s geographical footprint, its appeal is understandable.

This said, European passporting has its limits. For one, it doesn’t support the development of deeper client relationships. It also doesn’t provide the same level of efficiency in client service as physical branches. These limitations become especially critical when operating with high-net-worth individuals or institutional clients.

Given Luxembourg’s market, it should come as no surprise that IFMs do in fact keep expanding their branch structure, albeit using a hybrid model that leverages distribution through passporting.  This mixed approach allows IFMs to benefit from the best of both worlds as they maximize their geographic footprint without having to assume the full financial impact of extensive physical expansion.

Branches as “centers of excellence” for increased efficiency

Because of their physical proximity to the target market and potential investor base, physical branches—especially when using hybrid models—are generally considered to have increased flexibility in cross-border fund distribution.

But in recent years, more and more IFMs in Luxembourg are taking advantage of a branch’s closeness to the local markets and turning them into local centers of excellence. As a result, in addition to serving as a hub for distribution, they also employ local talent that is on the ground in the target market. These professionals can better inform marketing efforts, help develop best practices that consider local regulations, and provide feedback to those operating the fund back in Luxembourg.

As such, by leveraging branches in this strategic way, IFMs can build a better case for expanding their branch networks. This allows branches to come to serve as a key lever in operational efficiency, as local is tapped for real estate valuation, fixed-income portfolio management, and/or fund structuring.

This approach also often synergizes with the regulatory requirements of host Member States. For instance, if a branch is required to have a dedicated compliance officer, adding a valuation function to the branch to value local assets could create operational synergy.

Conclusion

As investment fund managers look to streamline their branch network operations amid growing regulatory requirements, it is certainly easy to position branches as cost centers and opt for cheaper, easier options. But try to keep operational efficiency in mind. When you consider what can be gained from local expertise, the benefits of shifting from “branches as distribution hubs” to “branches as centers of excellence,” are clearer.

So, what’s next? IFMs that are interested in building out their own physical centers of excellence should first identify functions that would not only support the parent entity in Luxembourg but would also require local market insights. Then, they should then start sourcing the talent to meet those specific needs.

We have already begun to observe a growing number of IFMs bundling multiple activities in their branches, challenging the notion of the traditional branch model, and we look forward supporting its continued growth.

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