Wealthy Latin Americans broaden investment horizons

Historically low interest rates and mounting concerns about Latin American countries’ abilities to maintain political and fiscal stability due to the devastating impact of the Covid-19 pandemic are reshaping the wealth management sector in the region, with their effects felt on portfolio construction, wealth creation and the competitive landscape.

With deposits no longer offering the double digits returns of the past, wealthy clients in the region have been increasingly looking to diversify their assets and currencies, investing in developed market and US dollar assets. This brings the added benefit of hedging portfolios against the volatility of local currencies, which have collapsed against the dollar this year.

The desire to diversify jurisdictions is also stronger, and is benefiting Latam institutions with US and international presence, as well as global players active in the region.

Safe haven

US-based Northern Trust has reported double digit growth in deposits from Latin American clients since the beginning of 2020, and is seeing more and more wealthy clients moving their structures to US trust jurisdictions, such as Delaware and Nevada, for succession planning purposes and asset protection. The shift of wealth structures from other offshore jurisdictions to US trust jurisdictions has been growing in recent years, following more stringent international regulatory standards.

Despite president Donald Trump’s botched response to the pandemic, and risks around upcoming presidential election, “the US remains a very safe jurisdiction,” says Jacobo Schatz, director of international inbound wealth management at Northern Trust. “Many of our clients, primarily in Latin America, seek safety and capital preservation.”

It is indeed all a matter of relative political and economic stability, which in the US has increased vis a vis the rest of the world. The US is increasingly viewed as a more stable jurisdiction for deposits and investments, while investment in US capital markets are perceived as more liquid and safer, adds Mr Schatz.

Some Latam countries allow for dollar deposits at local banks, but during a crisis there is a heightened degree of risk of holding dollars in local institutions, especially in countries that are currently suffering severe economic depression, which explains “steady flows” from all Latam countries.

Across the region, economies are likely to suffer a significant contraction, with the recovery next year varying depending on the fiscal stimulus available in each country and the state of the economy before the pandemic. Many clients are very dependent on the economy, being business owners, many in areas such as retail and hospitality that have been hit hard by the pandemic.

“More and more clients are deciding that, since they hold US dollars, they might as well bank with a US bank,” says Drake Jackman, managing director of international wealth advisory services, Northern Trust.

Moreover, geographic proximity is also crucial. Many Latam wealthy families have strong US nexus, own second homes, especially in Florida, while some of their children may have studied in the US, stayed there and married Americans. “There are a lot of mixed families, what we would call multi-jurisdictional, multi-generational families that naturally gravitate towards the US,” says Mr Jackman.

The healthcare emergency has accelerated a trend that was already in place. One of the reasons why assets are flowing to the US is its “very beneficial” income tax treatment for non-residents. They need to make sure to have all their structures in place to hold their assets in the US, in order not to pay inheritance or estate tax, which is very onerous for non-residents.

In Miami, the quality of legal and tax advice available from local attorneys and accountants has increased enormously over the past 10 years, and in some cases even exceeds that available in New York, explains Mr Jackman.

Giving the complexity of wealth planning and structures, clients are required to invest $10m to $15m in assets to open a US account with Northern Trust, to benefit from the bank’s holistic approach and capabilities, both on the domestic and inbound wealth side.

These large accounts require a higher level of due diligence, which take time and resources, and striking the “right balance” for the business is crucial.

“The pandemic has intensified the ever-present concerns regarding Latam jurisdictions, as the crisis has magnified the risks of political instability, with worries regarding fiscal trajectory and sustainability,” says Fabio Feitler, head of wealth management US at BTG Pactual, the Brazilian bank with booking centres in New York and Miami and, since last year, in Lisbon too.

Being the largest world’s economy, and having its main reserve currency, the US has been able to intervene quickly and strongly on the fiscal and monetary side, without significantly affecting the market’s perception of its creditworthiness. While in Latin America, the reaction has varied greatly between countries and has created a lot of uncertainty about these countries’ abilities to maintain political and fiscal stability, says Mr Feitler.

“We have seen rising interest from clients in diversifying their custodies away from their home countries,” he adds. “Interest in alternative assets has also intensified, as historically low interest rates in local countries are creating the need for a new framework and mindset in search for future returns.”

Shocks of this nature “validate” BTG Pactual’s recommendation to clients to always diversify their portfolios across asset classes, currencies and jurisdictions.

“It is very important for us to be able to give clients the options of having assets in the US, as we don’t have a bias as to where our clients’ assets are located,” he adds.

Heated competition

Tax amnesty programmes introduced by Latam countries such as Chile, Brazil and Argentina in past years, which have given local institutions access to wealth pockets not available before, and the current low interest rate environment have heated up competition in wealth management in the region. Large players such as BTG Pactual, Itaú, Credit Suisse and Bradesco have been fighting for top teams of private bankers and advisers with seasoned portfolios, able to offer customised, more complex investment solutions to clients.

Increased local competition is a key reason behind JP Morgan’s recent decision to exit Brazil, according to industry sources.

In September, JP Morgan announced that has entered into a “referral agreement” with Bradesco as the recommended financial partner for existing private banking onshore clients in Brazil.

The “vast majority” of JP Morgan’s Brazil business, both revenues and assets, has historically been in the offshore business, according to the US private bank, which says it remains committed to Brazil, supporting Brazilian clients on its offshore platform.

As for any international bank serving Latam clients offshore, JP Morgan’s book for its offshore portfolio was mainly generated from New York, says Gerard Aquilina, a former senior private banker who now advises wealthy families in Latin America, Europe and the Middle East. But if before Covid a local presence was not essential, with the pandemic making it impossible to travel into Brazil, a local presence is essential for client maintenance, service and origination.

“Closing down seems counterintuitive,” he believes. JP Morgan’s investment bankers in Brazil could play a very important role in referring clients who have had liquidity events to their private banking counterparts offshore, although in the industry it has historically been a “big challenge” to get the two sides of the business to work together, argues Mr Aquilina.

“Clients are more engaged with their banks, they are looking for sophisticated advice given increased volatility and zero rate environment,” notes Martin Marron, CEO of JP Morgan’s Latam Private Bank.

Mr Marron also reports investors’ increased appetite for growth opportunities such as those related to megatrends, including technology, healthcare and sustainability, both in private and public markets. In some instances, clients are taking advantage of ultra-low interest rates to lever up financial portfolios or operating businesses. There is also significant traction in private investments, especially tech-related, with the rich keen on being part of private ventures to develop technology in their local markets. 

The pandemic has created “a burst of activity”. But Latam wealthy business owners, being exposed to currency, policy and political risk, have historically looked at “the safety and security of JP Morgan either in the US or Switzerland,” says Mr Marron.

But political and economic risk is not the only determinant of flows. Diversification of assets and currencies is critical.

“The next step, and it is already happening, is for Latin American wealthy client not only to invest in the financial markets in the US but also to invest in their real economy, in actual businesses, we are seeing that more and more.”

Lost decade

The biggest concern today for clients is the impact of the pandemic on the regional economy. The region was just slowly recovering from mediocre growth following Brazil’s economic crisis from 2014 onward, which occurred alongside the political crisis resulted in the impeachment of former president Dilma Rousseff.

“We’ll likely see Latam take around two to three years to recover from this economic downturn driven by the pandemic, so all in all the decade between 2015 and 2025 will have been a decade lost for Latam,” argues Mr Marron.

In countries where governments quickly responded with fiscal stimulus, it is likely the tax burden will rise in the future, impacting companies and individuals. Argentina, whose response to the Covid crisis in terms of fiscal aid was slight, is now considering a one-off tax on the super-rich to help pay for the response and support the economy.  

JP Morgan sees opportunities for growth, leveraging its global platform, especially in countries where a large concentration of assets is still in local markets, such as in Chile and Brazil. “In Brazil, given the historical low level of interest rates, local investors will increase their diversification and offshore markets will play an important role,” predicts Mr Marron.

Indeed, Latam and Brazilian banks are all making efforts to develop a stronger business abroad to meet their client needs for diversification. Last year, Brazilian player Bradesco embarked on its first ever international acquisition and bought Miami-based BAC Florida Bank, with aggressive expansion goals.

São Paulo-headquartered Itaú Private Bank, the largest private bank in Latam, with BRL570bn ($103bn) in AuM, sources 25 per cent of its clients’ assets from its international booking centres in the US and Switzerland.

“In terms of flow of assets, it has been super important for us to have the international business, both before and during the pandemic,” says Carlos Albertotti, managing director at Itaú Private Bank. Wealthy clients are “structurally” investing more in developed market assets, and mainly US ones, versus emerging market investments given the interest rate differential. The 2 per cent spread between Brazilian and US rates is the lowest it has ever been.

However, “tactically” strong currency depreciation, which started a couple of years ago, has prevented bigger flows, despite client worries about fiscal challenges in Brazil.

As a result, at Itaú Private Bank the proportion of client assets that shifted abroad during the pandemic has stayed at its historical level. “As the currency moves to a more fair value, we think there will be a bigger flow of funds internationally,” predicts Mr Albertotti.    

Record flows

Yet, despite the three months “shutdown” due to the pandemic, the Brazilian bank experienced its second highest ever year in terms of net new money year-to-date, cashing in around BRL23bn. While benefiting from competitors “in turmoil”, a key reason for Itaú’s success has been the strong rebound of capital markets in the country.

These have been “on fire”, as the fall in interest rates, coupled with low inflation, caused real assets to appreciate, pushing clients to sell their businesses and properties, raising money through IPOs and creating wealth.

These macro-economic conditions contributed to better than expected GDP recovery, with analysts revising their GDP forecasts compared to the first months of the epidemic. Brazil’s GDP shrank 9.7 percent in a quarter in the three months to June 2020. In mid-September, the country’s GDP was forecast to decrease by 5.05 per cent during 2020, an improvement in comparison to the 5.46 per cent decrease forecast a month earlier, according to market data provider Statista. The OECD projects global growth at -4.9 per cent this year.

Optimistic outlook

In the Latam wealth management space “local presence is critical and ‘the fly in, fly out’ model will lose its significance with time,” believes Mr Albertotti, explaining that Itaú’s biggest competitors are local institutions, and Brazilian banks especially. For international based assets, the main competitor abroad is JP Morgan, he acknowledges, although the impact of its exit from Brazil is still uncertain.

Local banks with international presence have some key competitive advantages over international players. “We are able to see clients more holistically and therefore service them better when it comes to wealth planning,” claims Mr Albertotti. Other advantages include being able to advise entrepreneurs on IPOs, and having the cross-border ability to offer them a loan to buy, for instance, a property in Brazil or the US, using the collateral on assets in Brazil to get a loan in the US and vice versa, plus offering currency trading at very competitive pricing.

Also, a Latam bank has a smaller number of clients among which to spread an attractive US investment opportunity, compared to large international banks such as JP Morgan, Goldman Sachs or UBS, he insists.

Itaú Private Bank’s clients are required to have a minimum account of BRL10m, and are advised to allocate at least 30 per cent of their assets to US dollars or developed market currencies.

In Brazil, and some other Latam jurisdictions, it is possible to invest in some US dollar assets through local funds. But opening an account abroad is highly advisable for individuals with more than $1m assets allocated abroad, as it offers a much wider range of investment options.

Despite the pandemic, which has severely affected the region, with Brazil having the second highest death toll in the world after the US, contributing to the exacerbation of wealth inequality, Mr Albertotti maintains an optimistic outlook for the wealth management sector.

“We are very bullish for the private wealth management market in Brazil,” says Mr Albertotti. “While the pandemic is bringing the fiscal issues more to the forefront, the structural forces of low interest rates, low inflation for long time in Brazil are extremely positive for the country and wealth creation, and much stronger than the pandemic.”