High Net Worth

What Wealth Managers Can Expect From The "Booming" Private Banking Market In Chile

Eliane Chavagnon Deputy Editor - Family Wealth Report 25 July 2013

What Wealth Managers Can Expect From The

Chile doesn’t grab wealth management headlines as much as its fellow emerging market Brazil, but it has an interestingly traditional - yet developed - wealth management market.

Chile is an attractive retirement destination and, with 22,000 onshore high net worth individuals together representing liquid assets of $74 billion, has an interestingly traditional - yet developed - wealth management market, Edward Felmingham, private wealth management analyst at Datamonitor Financial, tells Family Wealth Report.

Chile doesn’t grab wealth management headlines as much as its fellow emerging market Brazil, for example. But the narrow strip of land, stretching from the Andes to the east and the Pacific Ocean to the west, is one of South America’s most “stable and prosperous nations” (source: BBC) and regarded as a “high income” economy by the World Bank.

Of note, the HNW expat market in Chile is 5 per cent higher than the global average of 15 per cent, with European countries such as Spain, Italy and Germany being major sources of HNW expats. Factors behind the country’s appeal include tax-free income on foreign earnings for the first three years of residency and tax-free income on foreign pensions and retirement benefits for life, according to Datamonitor’s report, Wealth in Chile: HNW Customers - Understanding HNW individuals and wealth management strategies, which also found that 98 per cent of HNW expats living in Chile stay in the country for at least five years.

Felmingham, author of the report, highlighted that family businesses are a major source of wealth for Chilean HNW individuals, at 48 per cent compared to 26 per cent globally. Other notable sources of wealth are earned income (22 per cent), inheritance (22 per cent) and being a first-generation entrepreneur (11 per cent). By contrast, the global spread is much more balanced, at 23, 27 and 22 per cent respectively.

Somewhat unsurprisingly, then, Felmingham said there are “plenty” of multi-family offices in Chile, which he added symbolizes the prevalence of family businesses and multi-generational wealth management. Equally suggestive of the traditionalistic nature of the private banking market, he also observed that while the “global format” for contacting clients face-to-face is once a quarter, in Chile it is “almost 100 per cent once a month” (followed by email at around once a week). With regard to social media, there is - “like most other markets” - very little uptake among wealth managers, he said.

But while the salaries that are expected from relationship managers in Chile are quite high and akin to the Singapore/Hong Kong level of remuneration, the cost of poaching clients - particularly ultra-wealthy ones - is “definitely something you need to take into account when thinking of entering the market,” he noted. “Relationship managers know that if they’ve got some of the biggest and wealthiest families in Chile on their books, they can demand a premium for it.” Internal and external referrals are still of course important factors in terms of client acquisition.

“Quiet” growth, competition

In an interview with Credit Suisse’s One magazine last year, Andrea Cuomo, head of Credit Suisse Chile, described private banking in Chile as a transparent, US-oriented and fragmented market, where local intermediaries have been growing fast. “They are our strongest competitors,” Cuomo said.

But interestingly, according to Felmingham, it seems that foreign wealth managers have either always been there or have “grown quietly.” Some Swiss banks already have a presence in Chile - Julius Baer opened an office in 2008, and it is joined by JP Morgan, Santander Private Banking and RBC. “It was actually quite surprising how many foreign banks I found to be already in Chile compared to somewhere like Brazil,” Felmingham said, adding that the market “doesn’t look like it has undergone any Asia-Pacific-esque above-average development in any way; it’s almost ticked along.”

The Chilean private banking industry started around 20 years ago and, having grown 9 per cent over the last few years to represent some $60 billion in investable assets, is now “really booming,” Cuomo said in the above-mentioned interview. In the case of Credit Suisse, the firm became - having operated in the country for 20 years - a domestic wealth manager when it was granted a broker-dealer license last year. An advantage it now has, Cuomo believes, is that while local intermediaries principally have Chile-based knowledge, Credit Suisse brings international expertise to the table. 

“Recruiters said some of the foreign banks are well-respected by the Chilean HNW [individual] - they like the idea that foreign banks are safer than local banks,” Felmingham told this publication.

Investment strategies

There tends to be strong demand for all investment products in Chile and the multi-investment proposition model is prevalent, offering discretionary, advisory and execution-only services asset management services as standard, Felmingham said. However, while there is high demand for the multi-investment proposition model, none of the wealth managers Datamonitor interviewed said they expected any increased demand over the next two years. This, the report said, suggests that the market is “already maturing.”

Demand for tax planning, on the other hand, looks set to rise substantially, although to a lesser extent than the global average at 87 and 97 per cent respectively. A reason for this could be linked with the leniency of the local tax system, Felmingham said. “I think in the past Chilean HNW individuals used offshore to expand their investment opportunities because the local market used to be quite restricted in what you could do with your money. That’s obviously changing as Chile develops, but I think it’s still there.”

Again highlighting the seemingly conservative nature of Chilean HNW individuals, Datamonitor’s report showed that demand for art advisory and philanthropy is below the global average. In terms of asset allocation, it’s “standard equities and bonds, with a bit of cash and property,” Felmingham explained. Meanwhile, the report also showed that, unlike Brazil, Chilean HNW investors aren’t particularly strong on alternative areas such as hedge funds; rather, investments tend to be split evenly between direct investments and funds. However, there is “change of foot” in how the fund management industry is being regulated, making fund investment more attractive to the HNW, Felmingham added. 

In conclusion, wealth managers looking to gain a foothold in Chile's fast-growing but unique private banking market should be aware of the profile of the Chilean HNW individual and the investment trends of an average portfolio, Datamonitor's report said. Of equal importance are client acquisition and communication trends as, at present, the market “doesn’t look like it’s going to change that much from where it’s at,” according to Felmingham. 

Datamonitor’s Wealth in Chile report is based on findings from the firm’s global survey of wealth managers between September and October 2012.  The average AuM value of the respondents was $3.4 billion, with an average of 1,340 clients per respondent.

 

Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes