The rising number of millionaires in Latin America, most notably in Brazil but also in Mexico, Argentina, Chile and Colombia, looks set to fuel growth in the region's wealth management sector, at least in the medium term.
"In terms of assets under management, we could see growth of 8% to 9% a year by 2015," says Jorge Becerra, senior partner and managing director for the Boston Consulting Group in Chile, speaking on the sidelines of the Private Banking Latin America Conference, held in November in Miami. "Brazil, Mexico and Argentina will remain the biggest markets, but growth will be larger in Chile and Colombia, where we could see gains of more than 10% ."
According to other conference delegates, Latin America's wealth management sector is the most profitable in the emerging markets, where banks can charge management fees 20% to 30% above those found in developed markets. According to a senior banker working in the region, $1000bn of Latin America's wealth is invested in offshore funds, of which $500m is in US bank accounts. The banker estimates that 75% of this money comes from clients in Brazil, Mexico, Chile and Argentina.
Asked for the reasons behind this growth, Flavio Souza, CEO of Banco Itaú Europa International in Miami and head of private banking for Latin American markets for the Itaú Unibanco group, says Latin America's commodities super-cycle is still in its early stages. In addition, while Chinese demand for the region's vast metal, energy and food commodities has slowed recently, it should still remain relatively high in the near to medium term.
"There is still very strong demand for the region's commodities and this will continue to generate a lot of wealth in Brazil, Chile, Argentina, Peru and Chile, barring an unexpected shift in Chinese demand," says Mr Souza.
Beyond the big guns
Isabelle Wheeler, senior vice-president and head of investment services overseeing Latin America at BNP Paribas , says banks could also benefit from entering some of Latin America's smaller and emerging wealth markets such as Ecuador, Bolivia and parts of Central America, where there is a growing number of wealthy families that are untapped by the region's banks. According to Ms Wheeler, while due diligence and risk-profiling processes can be more complicated and prone to delays in these "overlooked" markets, the potential returns make such risk worthwhile.
However, there is a general consensus among private banks that Brazil still presents the greatest opportunity for wealth management in Latin America. The region's economic super-power with the fastest-growing middle-class consumer segment and robust gross domestic product growth forecasts.
According to according to some estimates, Brazil has been generating 19 millionaires (in local currency terms) a day since 2007, mostly in the 1m reais ($540,000) to 5m reais net-worth bracket. Whether of not this figure is accurate – there are some observers who say that the figure is 'over-hyped' – there is plenty of business for wealth managers in the country as the industry is expected to grow 22% in 2012 to be worth some $250bn. The majority of banks are targeting individuals holding between $1m and $10m, though the $20m to $30m-plus segment is also growing – and not just in Brazil.
"We also see these individuals popping up in Mexico, Colombia, Peru and Chile," says Mr Souza, adding that Itaú hopes to sharply expand in these markets in coming years.
In Mexico, Jose Fierro Von Mohr, investment director at Mexican brokerage house GBM, says that the $1m to $5m net-worth individuals segment is the most interesting for private banks. His firm is also looking to become a regional player, with plans to roll out several offices in Brazil and the countries of South America's west coast by 2016.
Local gain
According to Mr Souza, a string of struggling European banks have exited the Latin American private wealth management market in recent months, generating growth opportunities for regional rivals, which are rushing to deepen their presence in the increasingly lucrative market. "Local players are growing a lot as they move to take the space left by international competitors," says Mr Souza, who adds that Itaú recently acquired HSBC's private banking operations in Chile, and is considering buying some of Crédit Agricole's business in the region.
Meanwhile, some banks that have traditionally operated largely within the realms of their host countries are moving to become regional players. A case in point is Itaú, which is working to build a presence in Mexico, Chile, Colombia and Peru, where a growing number of millionaires are creating strong business opportunities. Itaú is leveraging its regional retail and investment banking presence to flesh out its private banking franchise, according to Mr Souza. He says that Latin American banks are expanding so aggressively that he expects them to outflank foreign managers in the next five years to lead the regional market.
In Brazil, for example, this has already happened, with Itaú controlling 25% of the private banking market while foreign players have a percentage much reduced from what it was five years ago, says Mr Souza.
In Chile, investment bank Larrain Vial has been leveraging its growing regional expertise, while investment firm Celfin Capital, which has an established presence in Peru and Colombia, is to merge with Brazil’s largest independent securities firm BTG Pactual. Earlier this year, Colombian financial conglomerate Suramericana joined the fray, securing ING's Latin American pension and life insurance and investment management operations.
Like Mr Souza, Mr Fierro says Mexican wealth managers are also winning business from their international counterparts, mainly because of a rising "lack of trust" in foreign managers. "Wealthy people have become very worried about doing business with international banks so there is a shift of money to local banks," says Mr Fierro. "This is because clients have faster access to local fund managers and can [forge] stronger relationships with them."
He adds: "Many people have been burnt by managers [working for foreign banks] that were very far away from the institutions they worked for, as well as their owners." This preference for local managers also means many Latin American millionaires prefer to invest in onshore instead of offshore instruments, which at present carry more risk and volatility.
Tougher tax compliance
This risk and volatility, says Boston Consulting Group's Mr Becerra, is becoming a major challenge for wealth managers as they look for ways to diversify their portfolios to maximise returns. Another key challenge is tax compliance. "Latin American governments are becoming tougher at enforcing their tax laws as well as any information exchange agreements with other countries," says Mr Souza. Consequently, wealthy individuals are demanding more tax-efficient investment structures to avoid legal problems. "Clients understand that it's no longer about hiding money but about using more efficient investment vehicles to help them pay less tax. We and other banks are working to create these structures as soon as possible."
Such structures are special purpose vehicles that enable people to invest in foreign equities without having to pay capital-gains taxes. "If they invest through this Mexican vehicle, they pay zero capital-gains tax but if they do so directly or with a foreign wealth manager, they have to pay some 30%," says Mr Fierro. Observers at the conference in Miami, a city which has become a major hub for regional wealth managers, say similar structures are being rolled out in Brazil and other Latin American countries to allow wealthy individuals to meet stricter tax governance while optimising investment returns.
Family value
Tax issues apart, wealth managers say the advent of multi-family and family offices is also challenging private banks. "Banks don't serve all of their clients' interests like we do," says Claudio Mifano, executive director at Brazilian multi-family office Claritas Wealth Management. "If a client wants to sell their company, for example, the bank manager will have to show it to his bank first and if the bank doesn't want it, then go to another bank-allied party. In our case, we can show the company to all types of investors, giving the client a much broader choice."
According to Mr Mifano, many wealthy families in Latin America are frustrated with private bank managers' need to satisfy their institutions ‘sell-side’ requirements, which are not always in line with theirs. "Clients have realised that with a bank they are more tied to what it wants to do, to buying its products and following its interests," says Mr Mifano. "With [family offices], they don't have to worry about any of this. We give them a much wider array of wealth-creation choices."
Of course, family offices must deposit their clients’ money somewhere, so they are working with private banks to do this. In turn, private banks are offering more services to family offices, partnering with them or, in some cases, even acquiring them. Wealth managers in Latin America say they expect these alliances, as well as merger and acquisition activity, to increase as private banks struggle to keep family offices onside or work to eliminate their competitive threat altogether. However, Mr Mifano says the multi-family and family office sector is here to stay. He expects the sector to account for 20% of Latin America's wealth management industry in five years, up from the 10% it accounts for now.
A dearth of talented sales agents and investment managers is, however, a problem in Latin America. "The sales force and management efficiency needs to improve through better compensation and incentives," says Mr Becerra. "These people are inefficient prima donnas that charge too much for mediocre results.” The region's sales force has a cost-to-income ratio of 80% for banks while this stands at 60% in other markets, he adds.
