Wealthy Latin Americans looking to increase their proportion of wealth held onshore will have viewed the restructuring of international private banks’ presence in the region with considerable concern. Paul Golden investigates the remaining opportunities, and how private banks can strengthen their proposition
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The impact of private bank consolidation has been keenly felt in Latin America, where it was revealed in March 2016 that JP Morgan had reduced the number of private bankers serving Latin American clients, while Morgan Stanley’s head of international wealth management was talking about hiring 75 advisers as part of a drive to increase its business with wealthy Latin Americans looking to invest in the US.
Morgan Stanley had previously recruited 35 Latin America-focused advisers from Credit Suisse, although the latter has bolstered its team in Brazil and UBS has also been hiring in the region.
The experience of Julius Baer (which has a presence in six Latin American countries) last year illustrates the challenges facing private banks across the continent, with its annual report observing: “Following an encouraging first half of 2015, business momentum in Latin America slowed somewhat, reflecting the difficult economic and market conditions.”
Yet this did not prevent the Swiss bank from completing the acquisition of a 40% stake in NSC (the leading financial advisory firm in Mexico) last November.
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By GlobalDataData on private wealth growth in Latin America supports the view that despite economic concerns and the impact of the slowdown in the commodities market on some of the region’s wealthiest individuals, it still offers significant potential for growth.
According to BCG, private wealth in Latin America grew by 7% to $5trn in 2015, below the rate of growth recorded in 2014 but well above the overall global growth figure.
The BCG 2016 Global Wealth Report also predicts that wealth held by the ultra high net worth (UHNW) and the upper- and lower-high net worth (HNW) segments will expand by up to 11% per annum through 2020, as equity markets recover.
Offshore attractions
When it comes to where wealth is held, the picture is more confusing. BCG refers to Latin America as a front-runner in terms of the share of wealth held offshore (25%) as a result of a combination of economic and political tensions and access to financial products not available onshore.
James Edsberg, a partner at wealth manager and private bank management consulting firm Gulland Padfield, says that on balance, the trend is to bring more wealth onshore, but he also acknowledges that it has been a very uncertain process because of the stop-start approach of the region's regulators and tax authorities.
“Historically, the wealthiest families and individuals kept the bare minimum onshore. Recently, that started to change with the announcement of a series of amnesties in various Latin American jurisdictions which allow HNWIs and wealthy families to declare and bring wealth onshore and pay tax accordingly,” he explains.
However, the findings of the firm’s recent Latin American HNW research programmes indicate that two significant hurdles remain. Firstly, there is a high degree of scepticism among HNWIs about whether tax authorities will stick to what they announce and not revisit the terms negotiated with individuals to bring wealth back onshore.
Added to this is the overriding concern among many of the wealthiest families that details of their wealth will not be kept confidential by tax authorities.
Banamex, Mexico's second-largest bank, has seen a trend for private bank clients in Latin America to bring back some investments in the US due to FATCA and other tax concerns, says director of private banking Felipe Watson.
“These clients are tired of excessive regulation and compliance requirements, especially if those institutions are foreign bank-owned with the Federal Reserve burden on their shoulders.”
Where is the money?
In relation to investment preferences, BCG found that more than half of Latin American wealth remained invested in cash and deposits in 2015. In Brazil, however, the largest share of wealth remained in bonds and the share of wealth held in equities is expected to increase through to 2020.
“Private bank clients in Latin America have shown themselves to be reluctant to follow their banker to smaller or less well-known institutions and have displayed a willingness to change institution,” explains Watson, adding that they tend to prefer to have all or most of their business with no more than two private banks.
“Current investment preferences are to protect their investment in dollar term investments, although they are also looking for real estate opportunities.”
Edsberg agrees that wealthy individuals in the region are increasingly multi-banked and multi-advised. However, when asked whether they have any unique characteristics – for example, placing greater value on long-term relationships than their counterparts in other regions – he says this is less a question of nationality and more about when the wealth was created.
“The wealth of some Latin American HNWIs is only one or perhaps two generations deep, so they have yet to develop and value deep intergenerational connections with their advisors. There are also cultural differences.
“The overriding concern of Latin American families is the protection of wealth and navigating the complex security, confidentiality and political uncertainty of their homelands,” he adds.
The extent to which the Latin American diaspora represents a significant market for private banks has been widely discussed as a source of future growth. However, Edsberg reckons many international banks have damaged their brand in the region by the way they have closed accounts with HNWIs and their families over the last three years.
“That leaves a huge opportunity for those international players that remain, as well as the regional banks and local boutiques that are well placed to move into the vacuum of wealth advice.
“The challenge is that local regional banks need to progress and build a credible private client advisory offering, which is often weak or even non-existent,” he concludes.
