Julius Baer has released its inaugural report looking at Latin America and how recent changes in the region are opening up opportunities for the wealth management sector.

Latin America has undergone a “profound transformation” over the past 40 years, paving the way for medium-term wealth creation and ripe opportunities for the wealth management sector, according to Julius Baer’s inaugural report on the region.

Once the sole realm of foreign players, the local market is fast catching up; Latin America is one of the regions with the highest expected growth rates of ultra high net worth individuals - a segment expected to grow by 42 per cent until 2023.

Since 2002, the region has nearly tripled its gross domestic product, while external debt as a percentage of GDP has fallen from 42 to 25 per cent. This has driven institutional and socio-economic change, enabling sustained periods of political stability and in turn growth - and wealth.

The growing middle class is thinking beyond immediate consumption needs and re-evaluating notions of saving, wealth protection, investment preferences and allocations, creating a strong need for comprehensive financial planning.

While the roster of wealth management players operating in or out of Latin America is “in flux,” the trend is “opening a gap for others to fill,” the Industry Report: Latin America said.

It cited four drivers of change in global wealth management: regulation, client expectations, technology and competition. While these forces have always existed, Julius Baer noted, shockwaves from the global financial crisis have intensified them. This has catalyzed business reviews, repositioning and has led to full or partial market exits by a number of players.

In 2012 the UK private bank Coutts sold its LatAm, Caribbean and Africa business to RBC Wealth Management, while Bank of America Merrill Lynch sold its entire international wealth management business outside the US – including LatAm – to Julius Baer. In 2013, Barclays Wealth & Investment Management is said to have sold its Miami, FL- and New York-based LatAm and Caribbean businesses to Santander Private Banking. And this year, BNP Paribas Wealth Management is believed to be offloading its Miami-based private banking business – which deals with LatAm clients – by selling it to Santander. Meanwhile RBC closed an office in Chile and HSBC in Switzerland sold a book of business with LatAm clients to LGT Bank.

“Behind the scenes, however, further repositioning has been taking place,” the report said.

“Whether a firm makes a full or partial exit from Latin America, the change in approach to business will not always fit with the preferences and needs of their bankers or clients. In either case, the resulting gap is an opportunity to be filled by other wealth managers, whether local or foreign, banks, broker-dealers, or EAMs [external asset managers],” it added. 

Localization, a stronger focus on transparency and the role of cross-border banking are ultimately accelerating the demand for a “refined” high net worth service offering in the region.

Structure, market participants

At end-2013 there were some 13.7 million high net worth individuals globally, of which 4 per cent, or 542,000, were in Latin America (source: RBC and Capgemini's World Wealth Report 2014). But despite a relatively low number of high net worth individuals in the region, they are typically “far wealthier” than their global peers ($13.5 million compared to European HNWIs with $3.3 million, for example).

Latin American investors have also become “younger and more sophisticated,” although cash, fixed income and real estate investments still represent 76 per cent of average asset allocation (high net worth individuals in the region have historically had a low risk appetite.)

Industry players include domestic banks; foreign banks; fund managers; broker-dealers; single family offices; multi-family offices; and EAMs. These include exclusively onshore operations, exclusively offshore operations, and, increasingly, a combination of both.

In Brazil, the majority of firms are onshore-oriented, while in Argentina it is largely the opposite. Meanwhile – as trust has evolved – markets such as Brazil, Colombia, Mexico and Peru have logged a growing desire for wealthy individuals to have their primary wealth management relationship locally.

“But whatever the type and focus of these firms, their overall number has jumped over the last ten years, particularly in Brazil and Mexico. The result is a far more competitive and sophisticated market,” the report said.

Regulation and business standards have also come under the limelight, as legislation such as the Foreign Account Tax Compliance Act have demonstrated. This has led to local banking and securities market regulations, and self-regulatory organizations re-defining standards.

In terms of assets under management, private banks – onshore or offshore – represent $2.6 trillion (source: McKinsey 2012), dominated by Brazil with $1.1 trillion and Mexico with $651 billion. Those two countries represent 67 per cent of the region’s total private banking AuM, which is “no surprise” given their populations and economies. “...Plus the fact that they have, along with Chile, the most advanced onshore financial markets in the region,” the report said.

External asset managers

The report said there is a growing role for local and regional wealth managers as the above-mentioned drivers of change (regulation, client expectations, technology and competition) converge and favor specialization and localization. And as wealth continues to grow, the circumstances around wealth holders and their assets increasingly require more sophisticated support.

One particular area Julius Baer believes has “much potential” is EAMs, which the firm said are well-known in places like Switzerland, the US and UK but have been on the rise in LatAm, too.

“…If the sector adapts as now required, we see the characteristics within its model for further growth,” the report said. “As bankers continue leaving international banks there remains a potential flow of senior bankers into the EAM landscape offering the EAM segment the energy for growth,” it added.

There are challenges, however. To pursue growth, EAMs must: scale their businesses internally; ensure independence and transparency; select professional and dedicated custodian banks; and adhere to codes of best practices of regulatory bodies.