LATIN AMERICA'S WEALTHY are becoming more discriminating about the advice they receive from private bankers. They are much less likely to accept advice based on discretionary relationships and require a broader range of services, from stockpicking to succession planning. Competition for market share in private banking is increasing and bankers think an economic rebound in Latin America will create wealth and spur demand for offshore and onshore private-banking services. They also expect Latin America's fragmented private-banking market to move towards consolidation.
Preserving wealth for high-net-worth individuals has been a tough call for Latin America's most seasoned private bankers over the past three years. The rich have been hit by a succession of blows: the collapse of technology stocks in 1999 and the onset of the global recession in 2001; the economic collapse of Argentina; political turmoil and capital flight in Venezuela; and upheaval in Brazil in 2002.
According to the most recent world wealth report produced by consultancy Capgemini Ernst & Young and US broker Merrill Lynch, the number of high-net-worth individuals in Latin America fell by 10,000 to 270,000 in 2002. However, assets of high-net-worth individuals increased by 2.7% to $3.6 trillion. A preference for fixed-income products fuelled the growth in wealth in spite of the decline in the number of high-net-worth individuals.
The upheaval of the past few years has shaken up the genteel world of private banking in Latin America. High-net-worth individuals are adopting the expectations and practices that the wealthy in the US and Europe have enjoyed for years.
José Manuel Maceda, director general of the international private bank for Santander Central Hispano in Spain, says: "The discretionary account has been losing market share in the last few years and our advisory products are being sought by our clients."
Losses in the equity markets have made Latin America's wealthy more preoccupied with managing risk and preserving wealth. Maceda says the risk profile of most clients remains the same. But they are keener to participate in the investment decisions than they have been in the past: "Many want to be in control of their investments rather than leaving the bank to invest discreetly in different markets."
Latin America's ultra-wealthy have always spread their wealth around a group of trusted advisers, but now they are likely to engage the advisory services of another set of independent advisers, the family offices. These independent wealth management companies, usually staffed by former bankers or wealth management specialists, help the families they represent to choose from a range of products and services from private banks and wealth managers.
Family offices can be more discriminating in their choice of
products and tougher with financial institutions competing for their business when negotiating fees.
Even those in the lower brackets of the wealthy expect more bespoke private-banking advice these days. George Crosby, head of Latin American private banking at ABN Amro in Miami, which has a large proportion of clients with average assets in the $1 million to $5 million range, says clients demand a level of expert advice from their private bankers that requires them to behave more like team leaders. Crosby says he is more likely to take one or two specialists with him to client meetings these days than a few years ago. "The relationship private banker is the primary contact for the client but the client will know there is a team of specialists around the individual [such as] investment advisers, trust, tax and estate planning specialists," he says.
Latin Americans have also become much more choosy about the investments they make and the products they buy. Private banks operating in Latin America have embraced open architecture, an increasingly commonplace practice among private banks, which requires them to offer their clients a variety of financial products, some from competing financial institutions, rather than a suite of their own products.
Greater awareness of risk management
They are also more conscious of risk management. Wealthy Latin Americans retrenched by taking up fixed-income investments to weather the recession of recent years but they also recognized the value of spreading risk across a range of financial products in their portfolios. ABN Amro's Crosby says: "In the late 1990s, clients would have invested half of their portfolios in equities. Now we are seeing more of a structured approach to investing. We see much more of a blend, with up to 15% in alternative investments such as hedge funds or structured notes, capital guarantees and fixed income." He says Latin American clients favour capital guarantees and structured products because "they limit the downside risk while allowing for upside potential".
Alternative investments in hedge funds also deliver the kind of double-digit returns that Latin Americans enjoyed for years on sovereign bonds. Rogerio Pessoa Albuquerque, head of private banking at Brazilian bank Pactual, says alternative investments in hedge funds are popular with Brazilian private-banking clients who are suspicious of the equity markets and historically invested in Brazilian fixed-income securities. "They offer clients an alternative to higher returns without the volatility of the equity markets."
Rodrigo Xavier, head of Pactual Asset Management in Brazil, which has around $8.5 billion in assets under management, says his firm offers its clients alternative investments in some hedge funds.
Brazil's hedge fund industry has taken off in the past couple of years, with the creation of as many as 22 hedge funds. Arminio Fraga, the former governor of Brazil's central bank, is the most high profile former investment banker and fund manager to set up a hedge fund, Gavea Investments. Appetite from high-net-worth individuals is so strong that some funds have closed to new investments. Xavier says: "We see demand but are not responding to all the demand. We are controlling growth there. These funds increased tremendously, especially since last year when Brazil performed so well and it was not so difficult a year ago to make money. This year most hedge funds are suffering a tougher environment. This is not a consolidated and mature trend yet."
Even so, private bankers expect hedge funds to become a regular component in many of their Latin American clients' portfolios. Private banks across Latin America say they must be able to offer clients hedge fund investments as part of their advisory services. ABN Amro, for example works with UK hedge fund Man Group. Santander Central Hispano offers private-banking clients two funds – Optimo, one of its family of hedge funds, as well as products from All Funds Bank, which it partly owns. Santander's Meceda says: "This is not incompatible with our open architecture. One of our principles is the independence of our advice. We have a very good product and the market knows it very well, but we are ready to provide customers any third-party product they choose."