Looking to expand its wealth management business after a period of corporate turbulence, Merrill Lynch & Co. opened a private banking service in Brazil in November and promoted it with an advertising campaign in the country’s financial media. The firm had high ambitions, given the robust growth of the country’s economy in recent years, but even so executives were struck by the response. Within days of the launch, the firm had dozens of wealthy individuals knocking on its door to become clients — and several private bankers looking for jobs.
“It was very well received,” says Antonio Costa, managing director of Merrill Lynch Wealth Management in Brazil.
Merrill is far from alone. Brazil’s economic transformation over the past decade has created an explosion of wealth, and most of the world’s leading private banks and wealth managers are scrambling for a piece of the action.
In addition to Merrill, other U.S.-based firms that have launched new initiatives or revamped their existing offerings in Brazil in the past year include Goldman Sachs Group and Citigroup. Other international firms, including Credit Suisse Hedging-Griffo, Banco Santander and HSBC Holdings, are ramping up their efforts, seeking to capitalize on their strong brands and a growing appetite among Brazilians for international investments. The country’s big domestic retail banks, meanwhile, are actively defending their turf. Itaú Unibanco Holding, Bradesco and Banco do Brasil have traditionally dominated the market by virtue of their extensive branch networks and relationships with local entrepreneurs, and they are expanding their ranks of private bankers.
“Brazil is a key market for us,” says Beatriz Sanchez, the Geneva-based head of private wealth management for Latin America at Goldman, which launched a domestic private banking service in Brazil in October. “China and Brazil had two of the fastest-growing wealth markets between 2005 and 2008. According to market sources, the country has 130,000 millionaires but a population of 190 million people. The potential for wealth generation is enormous.”
Brazil has always contained pockets of great wealth, but the economic reforms of the past decade have dramatically expanded the pool. In the late 1990s then-President Henrique Cardoso’s administration put an end to the country’s notorious economic volatility with a disciplined fiscal and monetary policy. His successor, current incumbent Luiz Inácio Lula da Silva, continued with similar macro policies and has presided over an annual growth rate of more than 5 percent for much of this decade. The strong economy attracted unprecedented waves of international capital, making São Paulo’s Bovespa one of the world’s best-performing stock markets during the period and unleashing an IPO boom that generated billions in fresh wealth.
“Three or four years ago, many Brazilians could be seen as rich, but they did not have liquidity,” says Marcelo Stallone, head of wealth management at Gávea Investimentos, a Rio de Janeiro–based fund manager. “That changed when people started to carry out IPOs or sold their businesses. That freed up a great deal of wealth.”
Although Brazil’s stock market has weakened somewhat in recent months, the long-term outlook remains bright. With a sound banking system and low levels of credit, Brazil is poised to recover from last year’s mild recession; the International Monetary Fund projects the economy will grow 4.7 percent this year. Development to prepare for soccer’s World Cup in 2014 and the Summer Olympic Games in 2016 should provide a further impetus in coming years.
Brazil boasted 131,000 high-net-worth individuals, or people with more than $1 million in liquid assets, in 2008, according to figures from the most recent World Wealth Report published by Merrill Lynch and Cap Gemini. That total ranked the country in tenth place globally, ahead of Australia and Spain. Brazil’s millionaires saw their wealth decline by 8.4 percent during 2008, but their loss during that year of market turbulence was much less than the global average decline of 19.5 percent.
In addition to a booming domestic economy and stock market, Brazil’s private banking industry has benefited in recent years from a repatriation of wealth by Brazilians who previously dealt with instability at home by keeping the bulk of their money offshore.
Given those dynamics, it’s no surprise that private banks and wealth managers are eager to expand there. Success is not guaranteed, though.
“I have a whole string of private banking groups and wealth managers from around the world contacting me about how to enter the Brazil market,” says André Xavier, a managing director of Boston Consulting Group in São Paulo. “However, it is a very hard market to penetrate, with such strong and established domestic players. An international group can only manage it if it has a specific niche.”
The Brazilian market presents some contrasts to norms in the U.S. and Europe. Wealth is concentrated at the high end of the market. About 40 percent of assets managed by private banks in Brazil belong to clients with more than $20 million, compared with only 20 percent in Europe. By contrast, only 10 percent of assets at Brazilian private banks come from clients with less than $1 million, compared with 25 percent in Europe.
Revenues per assets under management, or RPA, a key industry metric, averages slightly below 80 basis points in Brazil, roughly in line with or just below comparable levels in the U.S. and Europe, according to Boston Consulting Group. RPAs can vary from less than 50 basis points to more than 100 per institution, depending on the end of the market in which a firm specializes. Pretax profit margins are generally higher than U.S. and European levels, though, because costs are lower.
The Brazilian wealth market is still very new compared with the U.S. and European industries, and in many cases plain-vanilla products still dominate. Brazil has traditionally had very high interest rates, a legacy of the hyperinflation of the 1980s and early ’90s. As a consequence, wealthy Brazilians have long put much of their money into fixed-income investments and certificates of deposit. Equity allocations, by contrast, are relatively low at around 10 to 15 percent, compared with 50 percent or more in the U.S.
Last year, however, interest rates dropped to an historic low of 8.75 percent and have stayed there. Now, many Brazilians are looking to diversify their holdings into everything from real estate funds to hedge funds to private equity in a search for higher returns. This trend has received a further impetus from a 2008 regulatory change by the Comissão de Valores Mobiliários, the country’s securities regulator, which for the first time allowed domestic funds to invest in overseas markets.
The results have been dramatic. In the middle of 2009, Gávea’s private clients held some 25 to 30 percent of their assets in cash. Today their cash holdings stand at just half that level. Industry experts believe that wealthy Brazilians will continue to diversify and become more sophisticated investors, presenting challenges — and opportunities — to private bankers.
Itaú Private Bank, a subsidiary of the country’s largest bank, has been a leading player in the sector for the past two decades, and Itaú’s 2008 acquisition of rival Unibanco has given it an even greater dominance. With some 25,000 clients and 100 billion reais ($55 billion) under management, the bank estimates it has 37 percent of Brazil’s wealth management market.
“During the subprime crisis, many high-net-worth individuals felt uncomfortable about what was happening in international markets,” says Charles Ferraz, head of investments and wealth management at Itaú Private Bank. “Brazilians understand Itaú. It is all about the comfort level. Our private bank has performed very well during the past few years because of the growth of the overall wealth market and a migration of clients to the bank. We have a window of opportunity for up to three years to get things right. As the leader in the industry, we are obviously targeted by competitors, old and new.”
Itaú splits its clients into three segments: special, or clients with 2 million to 6 million reais in liquid assets, which account for 30 percent of its private banking assets; high, for individuals with 6 million to 50 million reais, which makes up an additional 30 percent of assets; and ultra high, or those with more than 50 million reais, which accounts for the remaining 40 percent of assets. The bank has 90 private bankers and operates from four offices: São Paulo, Rio de Janeiro, Curitiba and Recife.
Itaú aims to fend off competitors by emphasizing the scale and breadth of its operations. The parent company is the country’s largest commercial and investment bank, brokerage, asset manager and provider of treasury services. “In Brazil direct investment in real estate remains an important part of a private client’s portfolio,” says Ferraz. “We have such a strong network of clients, we know who has a real estate opportunity, who is selling a property. We can advise high-net-worth clients about this. I do not think any of our competitors can do that.”
In common with most top wealth managers in Brazil, Itaú usually sets up exclusive funds for its biggest private banking clients, which are similar to segmented portfolio accounts in the U.S. These funds can invest in mutual funds or in individual investments.
Elsewhere, there has been significant change among the industry’s top ranks. UBS Pactual had been a leading player but took a reputational hit when its Swiss parent ran up massive subprime losses. UBS has suffered significant outflows of assets in Brazil and sold Pactual last year to BTG, Brazil’s largest independent investment bank.
The new BTG Pactual has emerged as a major wealth manager, focusing its efforts at the higher end of the market. The bank has 22 billion reais of assets under management. It has a team of 30 private bankers to service its 800 clients. BTG Pactual says clients like the synergies between wealth management and investment banking.
“Our investment bank has a leading position in IPOs and M&A,” says Roberto Sallouti, BTG Pactual’s chief operating officer. “Our wealth management clients can rely on our investment banking expertise once they decide to take their companies public, or when they decide to sell or even buy a competitor. Investment banking clients can also rely on our expertise to manage their newly created wealth once they decide to IPO a company or to sell it.”
BTG Pactual also regards its partnership model and relatively small size as competitive advantages. Employees are incentivized to help clients work with all areas of the bank. Clients have access to the same information used by the bank’s proprietary trading desk. “Major investment banks have huge trading desks, but their clients will hardly get close to head traders,” says Sallouti. “With a boutique style and meritocratic model, our private clients are very close to the investment decisions made by these trading desks.”
Another big beneficiary of UBS’s woes is Credit Suisse Hedging-Griffo. The outfit was formed in 2007 when the Swiss bank bought a 50 percent plus one share stake in Hedging-Griffo, a major Brazilian asset manager. The bank’s assets under management jumped by 70 percent last year, to a total of 30 billion reais, and its number of private clients increased by 15 percent, to 5,000.
“The brand helped us last year,” says Marco Abrahão, head of CSHG Private Banking. “CSHG is very integrated to the rest of the Credit Suisse platform in Brazil and globally. The bank is also one of the most important investment banks in Brazil. This helps us when clients have companies that want to go public or make an acquisition.”
The bank has a total of 35 private bankers in Brazil and plans to increase that head count by 20 percent this year. “When clients are becoming more demanding, as is the case in today’s market, it’s important that you have sufficient private bankers to distinguish yourself from competitors,” says Abrahão.
CSHG has also been quick to introduce new products to attract clients. The bank was one of the first groups to take advantage of the 2008 regulatory change to launch a domestic fund focused on overseas investment. “Since many competitors opted to compete on price, we focused on improving service levels to the highest standards,” says Abrahão. “This strategy is consistent with our core business, private banking, and has paid off.”
Other foreign players are still in their formative stages. Merrill Lynch has hired eight financial advisers since introducing its private banking service in Brazil late last year, under the Merrill brand rather than that of its parent, Bank of America Corp. The bank plans to recruit an additional five advisers by the end of the year. “The brand is really respected in Brazil, and they were very happy to join us during the build-up phase,” says managing director Costa. “The advisors are bringing us a large number of high-net-worth clients as well.”
The banker acknowledges that Brazil’s established private banks are formidable competitors. “Of course, it is a challenge to set up the private banking platform in the country,” Costa says. “There are a number of very respected players in the market with very talented people.” But like BTG Pactual, Merrill believes a well-established investment banking franchise in Brazil will be a big asset in helping to attract private banking clients. “When the investment bank has helped someone take a company public, we can approach the individual and pitch our wealth management business,” says Costa.
Merrill is also selling itself on the fact that it does not have an asset management operation in Brazil. Operating an open architecture platform that offers funds from at least ten providers rather than exclusively pushing in-house products eliminates potential conflicts of interest. Merrill, which has a 5 million reais minimum for the private bank, also tells prospective clients that it will reimburse them for all commissions it earns from selling third-party products.
Goldman Sachs Private Banking also plans to be a niche player in the Brazilian market, focusing on the wealthiest individuals and families. It says it would be happy with 200 individual or family clients. Currently, it has eight private bankers and a further eight investment professionals. “We want to develop a deep relationship between the private clients and the Goldman Sachs platform globally,” says Fernando Vellada, managing director of Goldman Sachs Private Banking in Brazil. “We are advisory-driven and can provide sophisticated solutions for the wealthiest people.”
Industry watchers expect Merrill and Goldman to have more company soon. Morgan Stanley and JPMorgan Chase & Co. are also said to be exploring ways of expanding their presence in the market.
Other foreign competitors are looking to build upon their existing franchises. Last year, Citigroup united under one roof its Brazilian private bank, which caters to clients with a minimum of 20 million reais in assets, and its Citigold services, which serves mass-affluent clients with at least 500,000 reais in liquid assets. The group has 15 private bankers and 100 bankers working for Citigold.
“We are able to leverage the best aspects of Citigold and the private bank,” says Robin Liddle, head of Citi wealth management. Among the products Citi is offering to private clients are two REIT-like funds. In October it established a 48 million reais fund that acquired a 38 percent stake in a shopping mall in the Brazilian city of Florianópolis.
The private bank in the country saw its assets under management drop from a peak of $11 billion in June 2008 to $6.5 billion in February 2009, and the amount has remained steady at that level since. “We did not have huge outflows,” says Liddle. “I see Citi in a strong position in Brazil now because the loss of confidence is over.”
HSBC says its global presence is one of its biggest advantages in Brazil. It emphasizes the cross-border solutions that it is able to provide private clients. “We can arrange bank accounts in China,” says Helena McDonnell, head of HSBC Brazil Private Banking in São Paulo. “We can arrange meetings in China. If a private client who has a company in a certain industry wants to meet his counterparts, we can organize that.”
HSBC also touts the advantages of being part of a fully-fledged international bank. “We can provide private clients not only with help with their investment needs but also with solutions for their corporate banking requirements,” McDonnell says.
Other niche players, including domestic outfits like Gávea and Banco Safra and foreign institutions such as Banque Safdié and BNP Paribas, are also looking to grow.
In September, Gávea, a hedge fund and wealth management firm founded by former central bank governor Arminio Fraga, merged its wealth management arm with that of local rival Arsenal Investimentos. The new venture, Gávea Arsenal Wealth Management, has $2.5 billion of assets under management.
Like some Brazilian wealth managers, Gávea acts almost as a kind of multifamily office for its clients. The firm provides discretionary management and says it can select from as many as 30 different external fund managers.
Safdié Wealth Management boosted its assets under management by 25 percent last year, to $800 million. The company has 235 private clients and ten private bankers. Like Merrill Lynch, it also boasts of its open architecture approach to fund management. “Our aim is to have a corporation focused on state-of-the-art services, counting on very experienced private bankers,” says Otavio Vieira, the bank’s director of investments.
Indeed, service is becoming a key battleground in the fight between local private banking leaders and foreign entrants. Some domestic private banks have built up their private client bases significantly without increasing the number of bankers commensurately. Boston Consulting Group’s Xavier says many private clients are not aware of the low client-banker ratios that some foreign banks offer; if they find out, that could be a problem for domestic banks.
Having deep native roots is a big advantage for the locals, though. One of the more interesting features of the Brazilian market is the fact that many wealthy people in far-flung corners of the country have stuck with their local branch manager and ordinary checking or savings account. Tapping into this resource is the way many domestic banks are fueling their growth. “Moving clients away from ordinary accounts to the private bank is an important way for us to gain new private clients,” says Itaú’s Ferraz.
For now, however, there appears to be plenty of business to go around.
“Brazil has a great future — and always will have.” That gibe was a common refrain during the country’s economically and politically turbulent past. Today, though, private bankers could do worse than adopt it as their motto.
