BEST OF 2013 SO FAR: A Look At The Mexican High Net Worth Client Market

Harriet Davies

2 April 2013

The editors at FWR are repeating those items that prompted particularly strong reader interest and reaction. During the holiday season, we thought readers would enjoy a chance to study these insights again.

Mexico is home to the world’s richest man in the form of telecoms magnate Carlos Slim, but its wealth management market has not received the attention of Brazil’s. That may be changing as the emerging economy garners attention from the industry.

“In LatAm, there’s Brazil and there’s everywhere else – that’s the way it’s traditionally been divided in the past. But Mexico, as the number two in LatAm, as an economy and as a wealth management market, really holds its own,” says Isaac Barrocas, senior director at BNY Mellon International Wealth Management.

Mexico is the world’s 11th most populous country . Its economy is the world’s 12th largest, with an estimated GDP for 2012 of around $1.76 trillion , while Brazil is the eighth largest, at $2.36 trillion .

“Mexico is a coveted market for most large US wealth managers with an interest in Latin America,” says Barrocas. “The demographics of the population have shown very positive shifts in recent years, with a growing middle class.”

The country is also taking back manufacturing share from Asia and is home to a number of tech start-ups in Monterrey - its own Silicon Valley - according to the New York Times.

This broader economic revival is boosting the high net worth market in Mexico, which is growing at around 9 per cent per year in dollar terms, says Joel Muniz, partner at Boston Consulting Group in Mexico City.

Stalwarts of the wealth management industry like UBS and Deutsche Bank are known to be keen on the Mexican wealth market, and Deutsche recently hired Raphael Zagury as head of key client partners and wealth investment advisory for Latin America. He will work with ultra high net worth clients in Latin America on investments, with Mexico and Brazil being key focuses, sources said.

The growth of the onshore market

One of the most striking trends, says Muniz, is the way margins are luring traditional offshore players onshore. As such, the onshore market is growing about 300 basis points faster annually than the offshore market.

“We’ve definitely seen clients wanting to keep more assets at home,” says Barrocas, although BNY Mellon is focused for the time being on the offshore market.

Muniz says there are a few factors driving this onshore growth, such as more stability in the financial markets and the fact that onshore gains from stock appreciation aren’t taxed.

Meanwhile, personal safety is “increasing, not dramatically, but increasing,” says Joaquin Valle, a Mexico City-based principal at Boston Consulting Group.

Figures from different bodies differ sharply, but the Council for Law and Human Rights said in early December 2012 that an average of 72 people had been kidnapped daily during that year, La Opinion reported. The country also has a violent crime problem that has plagued its international reputation.

Country risk, on the other hand, is dropping dramatically, says Valle. Others in the industry agree. Mexico’s new government has bolstered hopes for reforms, said Esty Dwek, an investment strategist at HSBC, in a recent outlook. Investors hope this will unleash dormant economic growth in a country where many important industries have been stifled by market power abuses.

As the financial markets there strengthen, US and European banks are moving towards offering peso-denominated investments onshore and large Brazilian banks are solidifying their positions in the Mexican market, says Muniz.

Independent financial advisors are also setting up shop and managing to sell a different kind of offering to the banks, he says. However, differentiators like independence and open architecture - key selling points in the US - carry less cachet in younger wealth markets.

Independent providers are also stymied by the need to custody assets at one of the major banks, most of which have a closed architecture system, so it can actually be hard to invest in other products while assets are custodied with those banks, says Muniz.

Barrocas sees plenty of opportunities for providers both within the onshore and offshore markets.

“We see that as a trend but there’s also a limit to how much an ultra high net worth individual from an emerging market is comfortable investing at home,” he says.

What clients want

“Our sense is that one of the first criteria for Mexican high net worth clients is a rock solid financial institution,” says Barrocas.

On a wider basis than the purely financial, the main concern of some ultra high net worth clients is security, says Valle. “It’s something where, especially as you go higher into the wealth band, they’re going to try and keep a very low profile as they might be concerned about information security.”

“On the investment side, Latin American high net worth and ultra high net worth clients’ needs aren’t that different from other clients’ needs,” says Barrocas. In his view, they want yield, and to manage asset allocation dynamically.

When it comes to diversifying internationally, “the first step a Mexican HNW client will take when considering wealth managers outside of Mexico is typically a US institution," he says. "There is very much an affinity for the US given the shared border and levels of trade between the two countries.”

Clients are looking for return and product, says Muniz, and this has been where foreign institutions have had an edge in the past.

“In general when you start interviewing wealth management clients, they think Mexican banks have narrower product offerings, but this is changing,” says Muniz. They’re branching out into liabilities and discretionary mandates for asset management are also growing, he said.

Regulatory framework

And while growing competition from local providers is likely to be something foreign firms will have to contend with, operating in Mexico also requires adhering to strict international laws about money laundering. Illegal drug export revenues from Mexico in 2011 were estimated at approximately $6.2 billion .

In December 2012 HSBC agreed to pay $1.92 billion to settle a US criminal investigation over breaches of anti-money laundering and sanctions laws. According to the authorities, this partly related to HSBC Bank USA failing to monitor over $670 billion in wire transfers and over $9.4 billion in purchases of physical US dollars from HSBC Mexico between 2006 and 2009. The bank has since taken a number of steps to strengthen its AML and Bank Secrecy Act compliance systems.

Relating to the HSBC case, the US Drugs Enforcement Agency said there was evidence of serious money laundering risks associated with doing business in Mexico

“AML legislation is one of the key things institutions have to consider and international banks will tend to use their own standards from their countries as well as have internal compliance standards,” says Muniz.

Valle says that the cliché of a smaller local bank tolerating money laundering might have applied in the past, but that today all institutions – no matter of their origin or size - have to comply as the government is seriously “diving in” to enforce the regulations.

However, Muniz is sanguine about the effect of this on the industry. “The margins are very healthy in the Mexican market,” he says. Essentially, the extra compliance cost is worth it, with additional margin of about 300 basis points up for grabs compared with slower-growing developed wealth markets.

That is bound to catch the eye of the industry.