With a virtual treasure-trove worth of investible assets at stake, banks and startups are pulling out the stops to corner Latin America’s largest economy.
In booms or busts, Brazilians possess massive sums of wealth. And now with interest rates at historic lows as the country emerges from one of its worst recessions in modern history, many investors are looking beyond the traditional fixed-income instruments that are the backbone of most individual portfolios.
They don’t have far to look for alternatives as wealth advisors, both new and seasoned, gear up to compete for would-be customers. Brazil is the richest and potentially most lucrative segment of the expanding wealth industry in Latin America, and that potential has ignited a round of startups, acquisitions, partnerships and strategic retooling among fintechs and traditional banks as they battle for a piece of the prize.
In May, the online brokerage firm and robo-advisor Magnetis said it struck a strategic partnership with the family office GPS Investimentos, owned by Julius Baer.
Two months earlier, Warren, another digital brokerage startup, said it had raised 25 million reais ($6.2 million) in a round led by Palo Alto, California-based venture capital firm Ribbit Capital. It now plans to raise a new financing round at the end of this year, says Tito Gusmão, the company’s chief executive and co-founder.
Last November, Brazil’s Central Bank approved Fosun International’s acquisition of online brokerage firm Guide Investimentos. The Chinese investor remains bullish on the financial services sector and fintechs in Brazil.
“There’s very significant M&A activity in this sector,” says Isaias Sznifer, managing director at boutique advisory firm Greenhill & Co in São Paulo. “We expect to see an increase in capital investments and new company formation.”
Then there are established players. In May, Banco Bradesco acquired BAC Florida Bank for $500 million. The Coral Gables bank will offer an expanded menu of services to Bradesco’s private banking clients. Earlier this year, investment bank BTG Pactual added a former finance minister as CEO of its asset management division and poached a BlackRock executive for its asset management group, while it aggressively grows its digital platform.
All this maneuvering is largely aimed at the middle-class market. While high-net worth individuals have traditionally invested offshore or entrusted their wealth to family offices, most Brazilians have had few investment options. The drop in interest rates in response to Brazil’s struggling economy has only compounded the problem by whittling away previously high bond yields.
Still, an investment culture is taking root despite the country’s economic challenges. Individuals in Brazil invested 2.7 trillion reais in 2018, a 7% increase over 2017, according to the Brazilian Financial and Capital Markets Association, known by its Portuguese acronym Anbima. In all, investments have grown by an average 10% a year since 2015. During that same period, the country’s GDP contracted by 3.8% in 2015 and 3.6% in 2016, followed by lackluster growth the last two years.
“Even if Brazil continues on the same path with no economic improvement, there’s still a lot of opportunity for growth in this market,” says Pietro Bonfiglioli, a founding partner of São Paulo-based Fisher Venture Builder, a fintech company builder and investor. “Money in Brazil is poorly used and poorly invested.”
Demographics provide ample reason to believe the trend will continue. While the Brazilian stock exchange can boast it has a million individual investors, twice as many as 2014, that represents a mere 0.5% of the total population. A survey published in May by Anbima and Datafolha also suggests a huge untapped market, pointing out that 88% of those who made an investment in the past year put their money in low-yielding saving accounts.
Many competitors are hoping to emulate the success of XP Investimentos, an early pioneer and leading player in the wealth industry. Founded in 2002, the company is the largest independent broker in Brazil and provides basic financial education and portfolio management services to clients. It also offers an array of investment products, many available online, while fielding an army of independent financial advisors. In 2017, Itaú Unibanco acquired just under 50% of XP, greatly expanding the bank’s wealth footprint.
Potential digital rivals to XP include investment platforms Orama, Genial, and Easynvest. The latter stresses the simplicity of investing and counts the US private equity firm Advent International as a minority investor. Robo-advisor firms pushing automation are also growing and include Verios, as well as Warren and Magnetis. Sweden’s Vostok Emerging Finance invested in Magnetis in 2018.
One company, Diin, which launched its initial product in January, is even going after low-income Brazilians who have never invested before. They can save as little as one to two reais per day on the platform. “We’ll try to fundraise this year,” says Monica Saccarelli, Diin’s co-founder and chief executive. Saccarelli previously co-founded digital brokerage Rico, which was acquired by XP in 2017.
Some of these contenders are benefitting from the talents of XP veterans who have struck out on their own. For example, Warren’s founders include Marcelo Maisonnave, XP’s co-founder, and Gusmão, one of XP’s first 10 employees. “Our principal competitors are still the large banks,” Gusmão says. “But clearly outside of the banks, XP is also a big competitor.”
Brick-and-mortar institutions aren’t standing still. Santander Brasil recently launched Pi, a digital investment platform that offers products from the bank and third parties. Bradesco is also offering products from other institutions through Bram, its asset management arm.
BTG Pactual has been the most aggressive of legacy banks. Its digital platform, launched in January 2017, has 130 fund managers responsible for 310 different funds, according to Marcelo Flora, head of BTG Pactual Digita. In the fourth quarter of 2018, it introduced an equity investing platform.
The bank credited a 9.2% increase in profits in the first quarter in part to fees from asset and wealth management, which climbed 30.1% over the previous quarter. New net money totaled 7.3 billion reais in the first three months.
“XP has a very large lead in the retail market,” says James Gulbrandsen, chief investment officer, Latin America, at NCH Capital. However, “when BTG puts as much effort behind an objective, you better be careful. They may not beat you, but it’s going to be a dogfight.”
Tensions among the leading contenders are already running high. XP sued BTG Pactual in December alleging it used confidential information from XP to build its platform. In February, XP won an injunction that barred BTG from poaching its independent investment advisors. Though a higher court overturned the injunction in April, the case is still pending in the courts.
For its part, XP is countering the competition by growing its business, offering more investment
products and expanding its network of advisors. Says Bruno Ballista, an XP partner: “Our challenge is to remain at the vanguard of the market.”