Over the past 25 years, Chile has made remarkable progress in creating wealth and reducing inequality through gradual reforms. President Michelle Bachelet’s government has implemented a series of additional reforms in recent years, which have proved somewhat contentious. Among these reforms are changes to Chile’s tax and labour laws, along with substantial rewriting of the country’s education and healthcare systems.
The depth of these reforms and the speed with which they have been passed has led to some within the country wondering whether the policies faced enough scrutiny and analysis during their formulation. Overall growth rates in Chile for 2015 did have to be revised from 3.6 to 2.5 percent, but that was due, in part, to the unfavourable international environment, with lower commodity prices and decreased liquidity in emerging market economies – something that all governments are struggling to contend with.
Therefore, in the grand scheme of things, Chile is still on course to be one of Latin America’s leading economic hubs in the coming years and, according to José Miguel Ureta Cardoen, Founding Partner and CIO of PICTON, a wealth management company, the country is well-positioned to overcome the challenges it faces.
What are the main challenges to growth in Chile?
In the short term, we must regain private sector confidence by going back to our traditional model of gradual reforms and consensus, with enough political and technical debate.
Our long-term challenge is to diversify our exports, migrating from commodities to more value-added products and services. We have adequate infrastructure, international treaties and a sound institutional base; however, we have two clear bottlenecks: high-energy cost and low-skilled labour force. We must move towards equal access to quality education. To gain on productivity, we need better-qualified workers. This will also have the benefit of reducing inequality, which is key to avoid social unrest.
In energy, the focus has to be on diversifying our generation base and investing more in transmission projects. The difficulty to develop efficient power plants, our high dependency on hydrological plants and five dry years in a row have led to high energy costs, with a direct impact on competitiveness.
Do you think that Chile is on course to overcome these challenges?
Yes, Chile is a great country and I like to see the glass half full. However, it will take long-term public policies, which are not easy to implement.
In the educational reform currently under discussion, I believe there needs to be more focus on quality, which should be the main focus, instead of reducing the role of the private sector. It is not easy, even developed countries struggle with issues such as education.
In terms of energy cost, we need to create new rules to remove obstacles for new investments in generation and transmission. The current minister of energy has shown proactivity to make these changes, and the results are shown in the reduced prices of the recent energy auction.
What trends are you noticing in the wealth management market?
I see M&A activity that will create liquidity events such as the recent sale of CFR, CGE and Cruz Verde. This will give rise to more family offices, and creates an opportunity for independent wealth managers and advisors. Since PICTON entered the market, I have seen more independent advisors and managers coming onto the scene. Additionally, some players of the retail market will migrate to open architectures, separating the distribution channel from the investment company. The sale of Santander Asset Management is a clear move towards this trend.
How did PICTON come to be?
On June 2011, Gregorio Donoso, then Head of the Wealth Management Division at Larraín Vial, met his childhood classmate Matías Eguiguren to help him manage the liquidity from the sale of his five percent stake in Celfin. The meeting had a radical twist and ended up with an agreement to create an independent company with a focus in two businesses: Multy Family Office (MFO) and International Fund Distribution (IFD), to institutional investors in Chile, Peru and Colombia.
The key of the model was to have 100 percent alignment of interests with our clients, avoiding any potential conflict of interest. Donoso asked Augusto Undurraga, his partner at Larraín Vial to join as partner, so both of them have the daily relationship with the MFO clients.
Matías asked me to be the fourth partner in charge of the investment team for the MFO and help him in the due diligence for the IFD. I was the CIO of Consorcio Insurance Company, a great company with great people, and the decision was not easy. In fact, all four partners had promising career paths ahead of us, but our complementary skills, the market opportunity, the soundness of the model, and the attractiveness of entrepreneurship was more appealing. I think we helped open the eyes of many other great people that have decided to enter this industry, which is great because the model gets even more validated.
Many companies talk about putting customers at the heart of their business, but how do you put that promise into practice?
One of our corporate values is ‘client focus’, which means that our clients’ interests will always come first. Having a small organisation makes it easier to create such a culture where the client comes first. All our decisions must put our client’s interests first, at any cost.
Let me illustrate it with three examples: first, we have decided that instead of hiring bankers, every client will be served by either Donoso or Undurraga, my two aforementioned partners, and that each of them will not serve more than 20 clients. This guarantees quality, consistency, risk control, continuity, permanent client knowledge and better alignment of interests. This restriction puts a limit to our scale, but we think that this is key to achieving the highest standard in client service.
Second, we have decided not to receive rebates from fund managers, given the potential bias towards the products that offer the highest rebate. Our policy of ‘one client, one invoice’ means that we are only remunerated by our clients. We only receive our management fee, which is visible to our clients at the end of every month. This might be less profitable for PICTON, but plays in the best interest of our clients.
Third, we have also decided not to structure success fees. It would put an incentive to assume more risk at the expense of our clients. For the same reason, we have decided not to charge different fees for different asset classes. If we charge more for a particular asset class, we might have a bias toward such asset class. We might make more money, but at the expense of our clients.
What is specifically unique about PICTON’s business model?
We strongly believe that wealth management delivers better results in absence of any conflict of interest, with total transparency and independence. Rather than managing conflicts of interests, we have decided not to have them. This guarantees total alignment of interests that will be translated into higher returns and/or lower risk in our clients’ portfolios.
Rather than advisors, we manage 100 percent of the financial assets of our clients in a discretionary way. We are the external CIO of our clients, optimising their asset allocation and selecting the best products on each asset class. This gives us better alignment, the fastest reaction, more control, clear accountability and guarantees portfolio coherence.
Additionally, we don’t have products. We believe that it is healthy for the market to clearly separate the sell side from the buy side. We focus on finding the best third party provider of any asset class or investment alternative. Our scale allows us to access all the market opportunities for our clients and choose the best alternative. Not having bias toward local products has been key during the last four years, during which developed markets have greatly outperformed Chilean and emerging markets.
Having fewer clients allows us to devote a lot of time defining the risk tolerance of every client, the nature of their strategic assets and their liquidity needs. Then we create a truly tailor-made investment policy that meets their risk tolerance, has low correlation with their strategic assets, and meets their liquidity requirements. We are able to hold a monthly investment committee for each of them. It is there where we make sure that every client is meeting its investment policy, risk profile and particular restrictions, and that the portfolio reflects PICTON’s investment views.
How do you see the wealth management landscape evolving over the next five years?
Wealth management will keep double-digit growth rates. The recently published Global Wealth Report by Credit Suisse expects the number of Chileans with wealth above $1m to grow 52 percent in the next five years (see Fig. 1).
I see more independent advisors and managers coming into the scene. Many newcomers will be tempted to do too many things, but the successful ones will be the ones with focus. You cannot be the best at everything.
The market will continue evolving towards open architectures, separating the distribution channel from the products.
How does PICTON plan to adapt to this ever-changing environment?
We believe that focus, independency, open architecture, being close to our clients, plus the flexibility of being a small organisation will be key to adapt in this highly competitive industry with highly-skilled and very sophisticated players.
