Regulation and technology lead Madrid’s transformation

The rise of powerful potential clients among Spanish banks has paved the way for many international fund firms to come to Madrid. 

“Ten years ago there were just a few international asset managers in Madrid and it was a challenge for us, because the economic environment was so depressing,” admits Ana Claver, general director for Spain and Chile at Dutch funds house Robeco, recalling the country’s recent brush with bankruptcy. “But over the last five years, 50 new asset managers have joined the Spanish market, which is quite incredible.” 

Although a massive consolidation that cleaned up the banking sector, shrinking players from more than 50 to just 15, has helped restructure the economy, a reduction in distributors has also made the funds market much more competitive.

“To sell your funds and position your products is not an easy story, that’s for sure,” says Ms Claver, who expects the market to become more and more concentrated, with the lion’s share of private client assets invested in funds belonging to just 15 investment houses. She admits that times are starting to get tougher for the foreign players, after a good run for many investors in mutual funds.

“Mutual funds have been a nice story for investors until now,” she says. “Private bankers – our main interlocutor and asset gatekeeper – need to make sure clients are in the right risk profiles.”

Yet despite this caution, Ms Claver sees extremely encouraging signs in the Spanish economy. “Spain is now one of the leaders for small and start-up companies,” she says, with no shortage of new business ideas from well-educated Spanish graduates. “But the labour market is not offering so many opportunities for the talents of these entrepreneurs, so they are setting up their own businesses.”

Asset managers such as Robeco also see the increasing importance of Madrid as a financial centre, particularly valuing the Spanish city as a springboard to Latin markets including Chile. “Madrid is an open door to Latin America and gives the Spanish institutions a lot of strength,” says Ms Claver, who also rates other local qualities.

“Spain is one of the leaders in transparency and technology. Madrid is a city well-prepared to be a financial centre.”

Many companies from Barcelona are now moving to Madrid, she says, with the Catalan capital increasingly losing out to its more central rival, with the business community aiming to escape potential political turmoil. “Barcelona invested in facilities, technology and infrastructure before the 1994 Olympics, but not since then,” she says. “You have to invest in infrastructure to be a competitive financial centre and key city for business.” 

But there is also some consternation about the lack of central resources committed to boosting Madrid’s claim as a financial centre, with an absence of statements made during the UK EU referendum campaign, during which London’s status as a finance capital was looking precarious. “We wish the Spanish government took this more seriously,” laments Juan Soto, head of private banking for JP Morgan in Madrid.

But Madrid’s real estate is now booming and the financial sector is benefiting from this, with banks and corporates renting out their offices in the Central Business District and increasingly setting up new campuses on the city’s outskirts. This trend, started by Banco Santander, has since been followed by BBVA and Telefonica.

“Just a few years ago, Spain was going to disappear, we were about to be thrown out of the European community and everything was looking pretty bad,” says Alejandro Monge, who runs the Spanish real estate arm for fund managers Invesco out of offices close to Madrid’s Retiro Park.

“We still have 20 per cent unemployment, which needs to be resolved and a deficit which needs to be lower, but things have improved quite a lot.”

Like Madrid’s private banks, Invesco is struggling to keep up with the demand for real estate in Madrid and Barcelona, originally fuelled by Latin American investors feeling a strong cultural affinity to their Spanish investments.

“We have seen a lot of Latin American families in our private bank,” confirms Manuel Sanchez del Valle, chief financial officer for private banking at Popular Banca Privada. “With their origins in Spain, these were the first investors into Spanish assets in the midst of the crisis. Even when the results of changes were not yet clear, they bet that a strong economic adjustment would take this country into a good place.” 

From 2006, South Americans were buying houses and high street units, according to Invesco’s Mr Monge. “The next steps could be in the commercial sector,” with a Venezuelan family recently having purchased a shopping centre next to Madrid’s M40 ring road.

The land beyond this artery is part of an ambitious redevelopment plan, which will see the grand, wide avenue of La Castellana, home to major banks, government ministries and Real Madrid’s Santiago Bernabeu football stadium, extended northwards, requiring railway tracks to be diverted underground, to create a new high-rise business district.

“Madrid has been moving north for the last 40 to 50 years,” says Invesco’s Mr Monge. “But if we extend La Castellana, it will immediately change the new district into prime territory.”

Fashionable La Morajela nearby, a short hop from Barajas airport, was popularised by David Beckham during his time playing for Real and is home to businesses, as well as sporting celebrities. Real’s creative Croatian midfielder, Luca Modric, is a regular at Romano, the chic Italian restaurant also used by staff of Santander’s funds selection unit Allfunds Bank, situated next door.

Santander Asset Management is soon to become a major global fund manager, provided its planned merger with Italy’s Pioneer is given the go-ahead from regulators. This will add huge kudos to Madrid’s ambitions as a financial centre.

NEW MINDSET

But there is already a change taking place in terms of confidence and competency, believes Jaime Perez-Maura, director of business development at Allfunds Bank, which has more than 300 employees in nine countries, although the majority of staff are based in the Madrid hub.

“People here now are a lot better prepared and trained,” he says. “They’ve become fluent in English and most of them have worked abroad. Their international experience is helping reshape the industry and the mood has improved a lot from that perspective.”

Both regulation and technology have been important drivers, with the quality of local institutions fast catching the bigger name incomers.

“Private wealth services in Spain were once all about the global banks. The Americans, Europeans and Swiss come first to your mind and the minds of clients,” says JP Morgan’s Mr Soto. “But competition from domestic players is strong, as they have a fantastic network, resources, information, insight and competitive advantage.”

Spanish private banking has adopted a totally new model today compared to how things worked five or six years ago, says Victor Allende, head of private banking at La Caixa. “I think the leading players existed only in foreign private banking names,” he says, having worked along with many other Spanish bankers at Morgan Stanley, before his institution was taken over by an increasingly confident, Barcelona-based Caixa Bank.

But today that feeling has changed, with the likes of Caixa Bank, BBVA and Santander claiming to provide the same type of high quality services as foreign rivals.

Caixa enjoys a share of between 15 to 20 per cent  of Spain’s private banking market, says Mr Allende.

“When you work for Morgan Stanley, UBS or Credit Suisse, you think you are the centre of the whole world,” he remembers, smiling about the golden days for foreign banks who controlled the vast majority of Spanish-generated wealth. “But then you reach a name like Caixa and you become aware there is a whole book of people who who would like to have a private banking service outside these foreign names. It’s no longer just about UBS, Morgan Stanley and Credit Suisse.” 

The fact that 93 per cent of Mr Allende’s 57,000 clients have signed forms committing themselves to a fee-paying advisory service is testament to the success of his bank in this competitive segment, he believes, when just seven years ago, not a single client was prepared to take this plunge.

Regulation has played a major part in this shift, says the engaging, bearded Mr Allende. “Under Mifid II, there is only one way to provide a private banking service for the future,” he says. “Advisory is the only way.” While these European regulations have signified a “point of no return” for Spanish private bankers, there is an admission that fees will not be easy to collect, as first they have to be justified and then the client needs to be convinced about the need to pay for having their portfolios managed. “This will be a challenge for the whole market, not just for us,” he concedes.

The other factor enabling fast progress is technology. “Technological process during the last 10 years has fostered the entrepreneurial spirit among young people,” confirms JP Morgan’s Mr Soto. “Entrepreneurs want everything to be digital, with transactions executed and accessed through their phone or tablet.”

Since March 2016, all fund transactions at Caixa are now made digitally, through a smart PC, or home banking facilities. “It’s just one click from the client, and the transaction is accepted,” says Mr Allende, revelling in the fast pace of Spanish private banking transition. He stops short of promoting robo-advice, however, believing the wealthiest individuals will always “want to speak to a real guy.” 

The other reason is that exchange traded funds, the easy to trade instrument considered a perfect fit for fintech wealth management firms, attract tax very time they are traded in Spain, with standard mutual funds far more fiscally friendly.

But mutual funds are now no longer undergoing the boom of the last two years in Spain, when Mr Allende’s team could barely keep up with the demand of yield-seeking clients bettering their zero bank account returns through funds.

Not only has market volatility spooked some safety-loving private clients, but the older generation of investors has also been tempted to sell up and buy variable annuities in a tax-friendly transfer. The popularity of these products has also been helped by their access to an underlying balanced portfolio rather than just the fixed income core of old.

The challenge now is to find alternatives to the plain vanilla equity mutual funds of yesteryear and technology is playing a key role in this task. “We have a better overview of client needs due to technology, a clearer picture of what they are seeking in the short, medium and long-term,” says Mr Allende, with alternatives such as private equity now proving a more attractive option.

“We are struggling in mutual funds but enjoying huge success in private equity,” he says, reporting a Ä200m close for a recent technology venture capital fund as part of a partnership with alternatives provider Altamar for the last 10 years. Caixa’s private clients now have Ä700m invested in this asset class. “This differentiates us from competitors,” he says.

This confidence in investing in smaller domestic businesses is reflected in clients’ own business interests, the value of which is increasing steadily, with foreign buyers now more ready to purchase assets from Spain’s entrepreneurs.

“Our economy was absolutely paralysed since 2007,” admits Mr Allende. “But now for the first tine in seven years, international investors are quite confident about Spain.”