Following the global financial crisis of 2008, the wealth management industry endured a period of sweeping regulatory changes. Today, after more than a decade of growth, the sector is poised to enter a new period of transformation as the market responds to shifts towards digitalisation and personalisation. By 2020, consulting firm PwC expects the global asset management industry to reach $111.2trn in assets under management (AUM), topping previous forecasts of $101.7trn.
In Latin America, the Boston Consulting Group found that regional AUM grew at a faster rate from 2016 to 2017 than it had on average over the entire previous decade. It came as the region’s ultra-wealthy population expanded: in 2017, the number of high-net-worth individuals (HNWIs) living in Latin America was 4,220, estate agency Knight Frank found in its Wealth Report 2018. By 2022, the number of HNWIs is expected to grow by 30 percent to 5,470.
Wealth management firm Puente has provided its expertise in the capital markets of Latin America since 1915. World Finance spoke to the firm’s managing director, Marcos Wentzel, about what the future holds for the region’s wealth management industry.
As the sector itself transforms at a rapid rate, investor behaviour is also shifting; clients are adopting a stronger appetite for risk and seeking more diversified portfolios
How is the wealth management industry in Latin America faring at present?
Since recovering from the global financial crisis, the Latin American wealth management industry has shown robust growth. Social progress and a rebound in commodity prices have helped foster an environment where educated and innovative professionals are ensuring continued economic growth.
Latin America’s HNWIs are, on average, far wealthier than the affluent populations of other regions, and in recent years, their numbers have also rebounded from an earlier decline. Over the past 10 years, Puente has capitalised on this growth, achieving an average AUM growth rate of 35 percent per year.
How has the industry changed in recent years? What have been the most significant developments?
Aside from the growth in AUM and HNWIs, the needs and desires that clients require are changing. Personalisation has become more important as clients look for localised services. Moreover, transparency is now of utmost importance, driven by pressure from both regulators and investors.
To cater for these new demands, the standards of the wealth management market are rising. Today, the industry prioritises accessibility and sophistication. Local players have been the big winners in the wealth management industry over the past decade as investors seek out firms with a local presence. Large wealth managers that can compete internationally without compromising their local presence could secure the greatest number of new AUM.
At Puente, we aim to meet these demands by using our strength as the largest wealth management player in Latin America’s Southern Cone, which is home to countries including Argentina, Uruguay and Paraguay.
What further changes do you see on the horizon, and how will these come about?
The wheels of change are turning in our industry. New technologies, such as analytics, big data, robotics and cloud systems, have become critical and could reshape the sector. Other elements that are causing disruption in the wealth management sector include rising costs, tightening regulations and a challenging macroeconomic environment. As the sector itself transforms at a rapid rate, investor behaviour is also shifting; clients are adopting a stronger appetite for risk and seeking more diversified portfolios.
Over the next 10 years, the industry is set for even more growth. Wealth managers must keep a watchful eye for new trends and developments in order to stay ahead of the coming changes.
Although Puente has more than 100 years of experience in the market, we consider ourselves revolutionaries. Our company culture is hands-on, and we are prepared for constant change due to our strong relationships with our clients.
Can you talk us through business profitability trends in Latin America?
The importance of achieving both a strong operational efficiency and scale has grown in the wealth management industry as the sector deals with increasingly squeezed margins.
Concurrently, more stringent regulations are being introduced around the world, with rising levels of competition caused by new entrants looking to disrupt the wealth management industry, resulting in a reduction in fees. Bigger companies will benefit from economies of scale as the availability of low-cost products widens. This is expected to cause further consolidation in the industry.
Businesses will have to develop clear strategies to ensure their future success. At Puente, we have focused on our advisors’ productivity and developing new technology to create a truly scalable wealth management platform to meet the demands of investors.
How has new technology impacted the industry in recent years?
Technology is already having a measurable effect on the sector. The degree to which wealth management firms embrace technology’s potential will influence which companies find success in the years to come.
Further advances will fuel changes throughout the wealth management value chain, including the means of sourcing new clients and enabling investment advice to be personalised. Furthermore, we can also expect the transformation of portfolio management alongside middle and back-office services.
We see three dimensions to the future of employment: the work, the workforce and the workplace. With the introduction of automated artificial intelligence technologies, we must continue to assess our talent needs and work to redesign our workforce in line with the coming changes.
How has technology improved levels of productivity within the sector?
Productivity in the wealth management industry has remained at around the same level since the end of the 20th century. However, this will change significantly over the next decade.
In the coming years, the development of technology will bring changes to fees, products, distribution, regulation and more. As the sector continues to embrace the full potential of digitalisation, productivity will only improve.
Puente is focused on building a new economic model through which we can empower advisors to create step changes in their productivity levels and then distribute these productivity gains among clients.
Since recovering from the global financial crisis, the Latin American wealth management industry has shown robust growth
What is the difference between transactional and relational businesses?
Today’s clients are sophisticated. They look to wealth managers to cater to specific needs, rather than to offer generic products. Now, active, passive and alternative strategies make up the building blocks for multi-asset solutions.
Firms either need to achieve a scale that allows them to provide multi-asset solutions on a transactional basis, or operate on a high-service solution standard for a long-term relational business. Puente, for instance, is based on a long-term link relational business model. We have more than 35,000 clients and aim to continue growing consistently and sustainably. While demand for both passive and alternative strategies is expected to grow in the short term, the growth of active management will be slower.
What are the benefits of linking businesses?
Transactional businesses must constantly scale their growth amid lower costs and higher competition, meaning linked businesses are more stable over the long term.
Managers must fully understand their clients’ needs in order to shape personalised solutions. They should also prioritise optimising the company’s distribution channels. Additionally, it is important to focus on core differentiating capabilities and look to outsource any non-core functions. As investors have plenty of choice, they will not hesitate to move to whichever company provides optimal solutions.
Staffing and compensation are important aspects to maintaining and growing long-term relational businesses like Puente. We are also committed to using our tools and experience to inform our decisions about how we want to grow and evolve.
Where do you see the wealth management industry in Latin America heading?
During the coming years, AUM will continue to grow in Latin America. Over the next 10 years, AUM in Latin America will double to more than $7trn. The strong economic forecast and likelihood for new wealth to be created in the region over the next few years will give Latin America a good opportunity to thrive.
With more than 100 years of experience in the Latin American wealth management sector, Puente’s knowledge of the market is enviable. Our business has reinvented itself with the changing market and will continue to do so. Over the decades, Puente has achieved one of the highest and most consistent rates of growth in the region. In the years to come, we will continue to build on this strength as we adapt to the sector’s latest transformations.