Editor's note: This article examines developments in the Latin American region as a wealth management market. This publication aims to acquire more views and commentary from the industry about this increasingly lively sector in the coming months. As ever, views and feedback from our subscribers is greatly valued.
The Brazilian stock market is up around 7 per cent this year, the country’s government is trying to curb capital inflows to cool a red-hot currency, and even in the more struggling economy of Argentina, new funds have been launched to tap the country’s growth potential.
Against this backdrop, wealth managers are looking to expand. Western banks such as Santander, Citigroup, Julius Baer and Morgan Stanley are doing business with high net worth clients. In the case of Citi, for example, the New York-based titan said recently it was looking to boost its private banker headcount. Early in March, Banco Santander Brasil said it planned to grow its team of 122 private bankers by as much as 20 per cent in 2011.
"The economic strength of Brazil has captured the imagination of many international wealth managers as both an onshore and offshore proposition. The US firms are particularly committing resources to Brazil and the southern cone," Sebastian Dovey, managing partner, head of consulting, Scorpio Partnership, told this publication.
"The success of the domestic banks in wealth management recently, notably in Brazil but also elsewhere, has caught the attention of the international players. Banks such as Itau, Safra and Bradesco are all big forces in the home market,” he said.
The vibrancy of the LatAm market has naturally attracted attention from banks in North America as well as from the Spanish and Portugese-speaking world, for obvious cultural and historical reasons. But the story has also caught the imagination from a broad geographical base of banks. For example, BNP Paribas Securities Services, part of Paris-listed BNP Paribas, is doing more work in the custody industry in the region, as are firms such as BNY Mellon.
Dovey argues that the Asia-Pacific growth story has taken so much prominence and business development energy that Latin America’s own growth story may have been overshadowed. That’s changing.
"Latam is often overlooked by international banks whose eyes are focused on Asia Pacific. However, this is possibly an oversight, particularly in the context of Brazil,” he said.
Pioneer International Group, a firm which provides financial planning advice to expats, said Latin America is driving growth for previously little-used requirements such as family governance.
“While profits certainly fell along with assets during the crisis, the marketplace appears to be bouncing back strongly with significant upside potential. Latin America clearly will be one of the most profitable markets globally,” said analysts at PricewaterhouseCoopers in an emailed response to questions from this publication.
“We see the greatest growth in wealth management as a business in Brazil, Chile and Mexico. Other markets including Argentina and Uruguay continue to show strong growth,” PwC continued.
The continent’s patterns of business ownership are favourable to the family office model, PwC said, seeing particularly strong growth on the ultra high net worth end of the spectrum.
“Latin America wealth continues to have a unique long term time horizon in terms of family wealth management which recognizes family wealth management as a profession,” it said.
The 2008 financial crisis may not have hit Latin America as hard as some other regions, but people do bear scars, which will affect developments, PwC said: “Regulatory challenges across the individual markets, and a conservative approach to the marketplace post crisis may ultimately gate growth and provide opportunities for foreign firms to provide additional services stressing risk while providing access to global markets.”
According to last year’s Merrill Lynch/Capgemini World Wealth Report, the HNWI population in Latin America grew 8.3 per cent to 500,000, while HNWI wealth in the region jumped by 15 per cent; that is not quite in the Asia-Pacific league, but strong nonetheless.
And the upside potential is considerable. Take Brazil, the largest nation in the continent. It has 201 million people – double the average of Group of Eight nations. Of that number, 250,000 have an annual income of more than $500,000, although this may be an understatement, as people under-report income to avoid high taxes. It is still, however, an unequal society: the top 10 per cent of the population hold 43 per cent of wealth, compared with 26 per cent for the G8, according to Ledbury Research, a UK-based organisation. (A necessary caveat on such wealth statistics, however, that they take no account of upward or downward mobility, a key issue in an emerging market country). Brazil’s richest person, Eike Batista, has $27 billion of assets, putting him, and other super-rich people, into the same bracket as people such as Warren Buffett and Bill Gates. The world’s richest man is Carlos Slim, the telecoms and mining tycoon from Mexico. (Source: Forbes).
In the Merrill Lynch/Capgemini report, it reveals how Latin American investors are still pretty cautious, keeping 52 per cent of portfolios in cash/deposits or fixed income.
Home-region allocations were up 3 percentage points to 47 per cent in 2009, unlike the global trend, suggesting that clients regard their domestic market more favourably than before. On the alternatives side, hedge funds made up 49 per cent of all such holdings when fieldwork for the survey was done over a year ago.
Brazil naturally grabs much of the media spotlight, given its size. The success of Brazil in recent years has created the “problem” of an expensive exchange rate for its currency, so much so that the country has sought to curb it with controls. The Brazilian government recently announced further restrictions on capital inflows by extending a 6 per cent IOF tax to short-term loans and security issuance.
Another country with a reputation – at least since the late 1980s – for relative stability and economic growth is Chile. The government in Chile recently increased the percentage of assets that fund-holders could invest overseas to 80 per cent. In Mexico, meanwhile, the country has a large mutual fund business with $92.5 billion of assets (source: Investment Company Institute).
Risks, continued problems
Any analysis of the continent from a wealth management point of view cannot afford to ignore certain problems. While issues such as kidnappings in some countries – such as in Colombia – may have eased recently, they have not gone away. And in Mexico, for example, the country’s recent troubles serve as a reminder of how careful any banks must be in crafting their business strategy.
UBS, in a recent note, said that the “rise in violence and homicides in the seven most competitive cities in Mexico has had a negative effect on the country’s economy as a whole”. It pointed out, additionally, the move by drug cartels to large population centres.
As mentioned recently by the Florida Bankers Association, up to $100 billion of wealth, much of it sourced from Latin America, is deposited in US banks because clients are concerned to protect their wealth from sometimes rapacious governments and criminals. This suggests the domestic LatAm onshore market needs to show clients it is a safe, as well as lucrative one in which to do business.
Such worries aside, there are clearly many opportunities for wealth management growth in Latin America. It will come as no surprise if this publication carries reports of further bank expansion in the months ahead.