Chile’s wealth management market is experiencing substantial growth with its population of around 40,000 Millionaries set to grow substantially in the coming years off the back of a 7-8% growth rate. Ivan Castano finds that while promise abounds, the locally based market is tough going for foreign firms.
Chile’s wealth management sector is expected to grow strongly in 2013 as the country’s growing millionaire set continues to invest in increasingly sophisticated range of products, according to industry observers.
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Wealth managers should see onshore assets under management (AUMs) rise 15% this year from $30bn currently, matching similar gains in recent years, according to Federico Muxi, a partner and managing director for Boston Consulting Group who oversees wealth management in Latin America.
The hike is comparable with onshore managers’ forecast growth rates in Brazil and above Latin America’s 8% average, he adds.
According to Muxi, Chile’s wealth base is growing 7-8% annually, generating exciting business opportunities for local and international managers fighting tooth and nail for a piece of Latin America’s most lucrative market.
Boast ing the region’s most stable economic and political climate, Chile’s ultra-high wealthy segment is made up of 60 households with over $100m in investable cash. In the affluent space, there are 18,000 families with more than 500,000 in investable assets. Overall, the market has 130bn in AUM, excluding pension funds, Muxi says.
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By GlobalDataEmerson Pieri , head of wealth management at Haliwell Bank, adds Chile is expected to have 43,998 millionaires in US-dollar terms this year, up from 27,781 in 2011. Other industry estimates, from WealthInsight and Credit Suisse put it at a similar level.
According to observers, the market is very sophisticated and competitive. Well-heeled Chileans prefer to invest in onshore products.
"The ultra-high segment is highly sophisticated and invests in both onshore and offshore products through their family offices. They can invest in a range of assets including private equity, hedge funds and closed investment funds and are very sensitive to price and rigorous about the institutions they work with, typically as many as five," Muxi says.
"The affluent segment invests primarily in onshore instruments including local and international mutual funds, stocks and bonds. They usually seek one-stop solutions and work with one institution."
Onshore focus
Chile tops the region in the percentage of wealth invested in onshore vehicles.
However, Muxi says that could change soon as returns in emerging and other offshore markets begin yielding higher returns.
This is already happening in Brazil, where managers have begun offering offshore alternatives as the performance of once highly profitable Brazilian alternatives began to disappoint.
According to Muxi, roughly 20% of Chilean AUMs are in offshore products, down from 30% in Brazil.
"Chileans have a strong confidence and preference to invest in their local market," Muxi adds. "The economy has grown strongly and at stable rates for years, there is low inflation and the currency has maintained its value." Accordingly, Chileans have made a big bet on the local market, which has become increasingly sophisticated, Muxi notes. However, as other emerging markets develop and begin showing equally strong returns, "I wouldn’t be surprised if Chileans start demanding offshore products from their manager." Muxi says.
And, afraid of losing a highly-lucrative customer, managers will likely acquiesce.
According to Muxi, wealth management in Chile pays an average ROA of 100bp, up from an average of 70-80bp in the region. The country, alongside Colombia and Peru, has the fastest growing wealth management sector in Latin America, Muxi says.
Precious metals fuel boom
Juan Carlos Ojeda, wealth management director Banchile, agrees growth will be buoyant and for his bank, well above the industry average.
Ojeda expects Banchile’s wealth division, which has $4.3bn under management, will grow 23% this year, thanks to new client acquisitions and new business from existing customers.
Ojeda says there are 40,000 wealthy families in Chile. Its members belong to the rising millionaire set generated by strong economic growth – in the range of 6% a year – and a commodity boom in the past decade.
"A lot of busines ses have been consolidating with people selling their family stakes to huge companies, suddenly becoming millionaires," Ojeda says. He adds a lot of these enterprises operate in Chile’s burgeoning copper and iron mining sectors.
Chile’s copper industry has ballooned in the past five to seven years, driven by soaring exports to Asia, mainly China.
Hyperkinetic exports of the highly valuable industrial metal have generated huge wealth in the thin and elongated South American country.
Meanwhile, savvy sales in the growing real-estate market have also made many people rich, Ojeda says. Executive pay and bonuses are also rising across the board, he adds.
"Chi le’s prosperity is creating millionaires everywhere," Ojeda says. "This is making some management houses very profitable."
Ojeda says some rivals, notably the fast-growing multi-family office segment, are seeing revenues climb more than 30-40% annually.
Banchile is working hard to keep competitors at bay, he says. However, he expects the bank, which has Chile’s largest retail and investment operations, will continue to grow its private banking earnings by at least 20% a year.
Banchile, which has 60 diversified investment funds, also hopes to double its clientele to 4,000 in five years. This is up from around 2,000 currently and 1,000 five years ago when Chile’s wealth sector began to growth rapidly,
‘Patience and deep pockets’
This type of growth is a l so highly attractive to foreign firms, many of which have established or are planning to set up local operations. Scotiabank is planning to expand its wealth management business in Latin America according to recent media reports, including Mexico, Chile and Peru.
Julius Baer has transferred legal entities in four locations in relation to its acquisition of Merrill Lynch’s International Wealth Management (IWM) unit including Chile. In January 2012 Credit Suisse obtained a broker-dealer licence in Chile to expand its services in the South American country.
In February last year Brazil’s BTG Pactual bought Chilean rival Celfin Capital for US$600 million gaining about $5bn in AUM. And two years ago, Brazil-headquartered Itau Unibanco (Itau) signed an agreement with Chile-based asset manager Munita Cruzat & Claro (MCC) to create a new Chilean wealth management firm. Despite its attractiveness, Chile’s market is very tough to crack, particularly for foreign firms, says Pieri.
Client-conversion costs are the highest in Latin America – as much as $35,000 compared to half that in Brazil and around $10,000 in Argentina.
"Chile is a very difficult market to enter and the most complicated market to compete in Latin America," Pieri says.
"Wealthy people are very conservative and like to work with local offices. They choose their managers by word of mouth."
Amid this backdrop, Pieri says many international banks seeking access will have to acquire local multi-family firms.
"Most are not for sale so they will have to pay a big premium," Pieri says. "My advice for these banks is patience and deep pockets."
Muxi agrees competition is tough as banks, asset managers, brokerage firms, family offices and other players strive to win new customers through increasingly innovative investment products.
He says multi-family offices have gained traction because many individuals view banks’ private banking units as too skewed on the "sell side".
Looking forward, wealth managers will have to continue improving their products, in addition to the relationship managers they use to invest their clients’ money, Muxi concludes.
"Product sophistication is key," he notes. "Also, clients are seeking more quality and trustworthy bankers so wealth managers that can show they have these [connections] will have a competitive advantage."
Ojeda says there are also deepening regulatory challenges.
Chile’s bank and stock market regulations have become more aligned with international "suitability" laws to ensure wealthy investors are protected from bad managers.
"Clients are much more knowledgeable about their rights than ever before," Ojeda says. "We are very advanced in this [the suitability] issue but many others aren’t."
