From the December 2010 issue of Investment Advisor • Subscribe!

December 1, 2010

Wealth Without Borders

Wealth management firms have their sights set on Brazil and its growing prosperity

Brazil’s growth boom has earned the country a permanent place among those nations considered most important to the global economy. It has resulted in greater affluence for the already affluent and created a more prosperous middle class, both of which have led in turn to an increase in demand for new financial products and investment services.

This dynamic is attracting a growing number of international financial firms seeking to establish themselves in Brazil and grow their businesses there. These companies are particularly keen on launching wealth management businesses, and over the past few months, quite a few big name firms have been either setting up local wealth management efforts in Brazil, strengthening existing platforms or making strategic acquisitions in the country with the goal of offering their products and services to a market that’s slated for even greater growth going forward.

But while launching an onshore wealth management business in Brazil and expanding it over time may well be the right course to take at this point in the Brazilian story, it won’t be all that simple, experts say, not least because Brazilian investors are reputed for their financial sophistication, entrepreneurial spirit and razor-sharp market knowledge. They have high expectations for both quality and delivery, so if these firms want to succeed in growing their businesses, they need to make sure that they remain attractive to their customers and retain their attention by offering cutting edge products and services.

“Brazil is the largest local market in Latin America and we estimate the [high-net-worth] market is growing at around 25% a year,” says Antonio Costa, head of wealth management for Brazil at Bank of America Merrill Lynch. “We believe that there is a lot of scope for major banks to develop onshore platforms in Brazil, but even though Brazil is a big market, the competition is very strong, and given the profile of the Brazilian investor, you really need to be able to differentiate yourself from your competition.”

Bank of America Merrill Lynch recently set up an open architecture, local currency wealth management business in Brazil. The firm is counting on its strong investment and corporate banking capabilities to assure the success of its Brazilian wealth management operations, Costa says, and because it has participated in most local IPOs this year, including deals for Brazil’s national oil company, Petrobras, and Banco do Brasil, the country’s largest public sector bank, it has solid relationships that would cement that effort. The firm also has a global brand name to leverage and a strong business model to ensure its success, he says.

But Bank of America Merrill Lynch is not the only international financial firm counting upon its reputation to establish a strong foothold in Brazil: More and more big name financial firms are looking to get into the country and set up wealth management platforms, and they say they’re there for the long haul.

UBS, for example, recently relaunched its Brazilian wealth management business, which it had first started in 2002 and then had to shutter briefly during the financial crisis. The firm—which has had a presence in Brazil since the 1960s—has also acquired Link Investimentos, the largest independent broker-dealer in Brazil with a strong position in equities, equity research, equity derivatives, exchange-traded FX, fixed income and commodity products.

And another heavy hitter, JP Morgan, has just purchased a majority stake in asset manager Gavea Investments, founded in 2003 by the former president of Brazil’s Central Bank, Arminio Fraga, a highly respected figure in international financial circles. Gavea, with operations in Rio de Janeiro and Sao Paulo, currently has about $10 billion in assets under management.

“Wealth [in Brazil] has been generated from entrepreneurs who are successfully participating in the booming economic environment,” says Fernanda Pasquarelli, who heads up UBS’s local wealth management business in Brazil. “We do anticipate growth in the number of clients, which is in line with the expected economic growth of the country in the next years.”

Brazil has always been an attractive country to financial firms for its sheer size and for its importance to Latin America. Yet when it comes to wealth management, none have really succeeded to date in establishing a lasting and dedicated business, says Bruno del Ama, CEO of asset management company Global X Funds in New York, because the boom and bust cycles that through the decades have been typical of countries like Brazil and Mexico have gone against them. International firms want to invest in countries that have stable economic and political environments in which they can grow and expand their businesses, he says, and for many years, this was just not the case in many Latin American countries including Brazil.

[Read more about ETFs that invest in Brazil.]

Now, though, things are very different and Brazil has been on a steady course of increased stability and prosperity that looks set to endure both economically, as well as politically, thanks to outgoing President Luis Inacio Lula da Silva, whose eight-year tenure delivered far more than anyone had ever expected. Lula—whose victory in 2002 led many to believe that Brazil would spiral rapidly down a path of Leftist decline—surprised the world by enacting various measures that actually supported business and allowed the private sector to flourish, del Ama says, all the while making sure to address the fundamental social issues that are so important in a country like Brazil, where marked inequalities between the different socio-economic classes could, if not taken care of, greatly undermine growth and progress.

Experts don’t expect to see any reversal of Lula’s policies under Brazil’s freshly elected president, Dilma Roussef (who is the nation’s first female leader). In fact, they expect further growth and greater wealth creation as Brazil expands its role in the global economy.

“No one expected the Left to be so successful in Brazil, and one of the main reasons why the wealth management industry is developing so rapidly is because people are more comfortable with the government,” del Ama says.

UBS, Bank of America Merrill Lynch, J.P. Morgan and other firms are eager to tap into the increased wealth in Brazil, and on a macro level, have been encouraged by the stable political and economic environment in the country. Brazil’s capital markets have both strengthened and deepened over the years, and a greater number of people are investing in equities and other kinds of financial products, Pasquarelli says. Risk appetite is increasing and investors are showing more interest in putting their money into different areas like real estate, agribusiness, asset-backed securities and other kinds of alternative investments.

Given the cachet that names like UBS, J.P. Morgan and Bank of America Merrill Lynch carry, it’s quite natural that affluent Brazilians would want their money to be managed by firms of that caliber. But because they’re so financially savvy, Brazilian investors set the bar extremely high, del Ama says, and firms are going to have to really prove themselves worthy of interest to their clientele, not just through their range of offerings, but also by showing that they truly are committed to the Brazilian market. Commitment, in fact, is one of the most important criteria by which Brazilians judge financial firms.

“A lot of these banks have come in and started businesses and sold them, gone away and then come back,” del Ama says, “and this creates an issue for people who are entrusting their savings to them. They want to see stability and credit quality from the firms that are managing their assets. They want these firms to devote the time, provide value add, foster relationships and understand the local culture.”

In that regard, there are some like William Heuseler, chief wealth planning officer at Itau Private Bank International, who believe that local banks have a far better chance than their international counterparts of appealing to Brazilian clients looking for wealth management services. International banks are clamoring for a share of what promises to be a fabulous business opportunity going forward, but according to Heuseler, they may not achieve the success they’re hoping for simply because they may not know the lay of the land the way local players do.

Succeeding in Brazil, Heuseler says, means having an in-depth knowledge of local regulation, in particular the tax code, which is extremely complex. It means being able to relate to local people on their turf and really having a keen sense of the local business culture.

Itau—which is Brazil’s largest private sector bank and in its wealth management business already has about $100 billion in assets under management—already has an edge over other banks that are just getting their wealth management businesses off the ground now, Heuseler says. The bank has an extensive reach across Brazil and it is practically a household name, and this is very important since wealth creation is happening in cities beyond Rio de Janeiro and Sao Paolo.

“We obviously have a vested interest in Brazil and we feel that Brazilians would rather put their money in a bank that will stay in Brazil—a bank that knows the local culture and the local norms and whose professionals speak the local language,” he says.

UBS’s Pasquarelli agrees that given the nature of the wealth management business, it is extremely important for provider firms to really understand the culture and the local regulatory and tax environment. However, because of its long presence in Brazil, UBS has successfully acquired that requisite expertise. Its investment banking and research capabilities have allowed the bank to develop a deep knowledge and understanding of the local market and culture, she says, and it can leverage this with the additional benefit of being a firm that has a truly global reach.

The Brazilian market is certainly unique and global firms need to be able to adapt to that uniqueness by understanding local regulation and offering attractive and innovative product platforms. But Bank of America, for its part, is also making sure to hire the right kind of talent, says Andres de Corral, managing director at the firm, and is staffing its operation with people who both know the Brazilian market and are known in it, so as to cover it to the greatest extent possible.

“If you want to remain competitive, you also need to have a truly competitive model and the right infrastructure to make that long-term commitment,” de Corral says. “You need to have the right talent, the right technology and the right level of sophistication. We have all of that plus a very strong brand name in many different businesses.”

At the end of the day, though, brand name, reputation, relationships and innovation will all play a role in how successful a wealth management business can be. And firms that make an effort to hire Brazilians who have their fingers on the pulse of what investors are looking for and can ensure that business keeps pace with their expectations will do best, del Ama says. But overall, what’s going to count the most will be commitment. The Brazil story still has a lot of momentum in it and right now, firms appear to be willing to invest in their respective wealth management businesses for the long haul. But those that really stand the test of time and stick with their commitment will be the ones who will ultimately succeed.    

Savita Iyer-Ahrestani is a freelance writer and regular contributor to Investment Advisor and AdvisorOne.com based in New Jersey.

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