Brazil is updating its investment agent regulation. What comes next?

. Jan 21, 2020
Rules for autonomous investment agents are complex and alterations could have a profound effect on top brokerage XP Investimentos Photo: Rokas Tenys/Shutterstock

As Brazil’s financial markets blossom, the entire investment industry develops alongside it. But this burgeoning growth is not without its ups and downs. In 2020, Brazil’s Securities Commission (CVM) will have the chance to untangle one of the main knots in the distribution system: the regulation over autonomous investment agents. However, changing the way the main link between clients and brokerages works in Brazil is not as easy as it seems and may have deep impacts on a major domestic player: XP Investimentos.

</p> <p>In 2011, the CVM established the current regulation for autonomous investment agents, which must apply for official credentials in order to operate. They are allowed to prospect for clients, provide information on financial products and receive and transmit investment orders. But there is a catch: though they are nominally autonomous, AAIs—as they are more commonly known in the industry—may only represent a single brokerage firm, which will pay them a fee on their sales.&nbsp;</p> <p>They are also not allowed to provide financial advisory services—which involves expressing their opinion on products or managing a client’s investment portfolio. This ability is reserved for fully-fledged financial advisors.</p> <p>In practice, regulatory differences are quite blurred in clients’ minds. Used to reaching out to their bank managers for any kind of financial help, Brazilians who are newcomers in the investment arena tend to replicate that relationship with their AAIs, as reported by market observers. Also, while financial advisors are paid by clients themselves, AAIs are commissioned by brokerages according to the products they sell, which is also not public information, opening up enormous potential for conflicts of interest.</p> <div class="flourish-embed" data-src="visualisation/1264370"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <h2>Top investment dogs fighting it out</h2> <p>No one company has been more successful in implementing the AAI advisory model in Brazil than brokerage firm <a href="https://brazilian.report/business/2019/12/09/ipo-decade-xp-investimentos/">XP Investimentos</a>. The company’s founder himself, Guilherme Benchimol, used to be an agent and knew how to create a system attractive enough for these professionals, turning the company into the ultimate market leader. Now, XP is associated with several AAI offices, which represent billionaire <a href="https://brazilian.report/newsletters/brazil-daily/2019/11/05/brazilian-big-banks-losing-battle-asset-management/">portfolios</a>.&nbsp;&nbsp;</p> <p>Data provided by Ancord shows the country has 9,607 certified autonomous investment agents, of which 7,480 are currently connected to a brokerage. Of those, nearly 80 percent are believed to represent XP Investimentos, according to the Brazilian Association of Autonomous Investments Agents (ABAAI). In second place comes investment bank BTG Pactual, which is investing heavily in this model and even sued XP over the issue of exclusivity. In January, news broke that BTG would be willing to acquire brokerage firm Guide from the <a href="https://brazilian.report/newsletters/brazil-daily/2020/01/16/latest-scandal-bolsonaro-cabinet/">Fosun group</a>, increasing its footprint on the market, though the rumor was denied by the companies.&nbsp;</p> <p>As <a href="https://www.sunoresearch.com.br/noticias/btg-estuda-comprar-guide/">Suno Research</a> reported, compared to XP, Guide has one-tenth of the number of associate AAIs.</p> <h2>Actions and consequences</h2> <p>Last year, the CVM initiated a public consultation process to change the rules in this market, focusing on the issue of exclusivity, more transparency in the payment of agents and relaxing requirements on the corporate model demanded from AAI offices. Consulted by <strong>The Brazilian Report</strong>, CVM representatives have confirmed a public hearing on autonomous investment agents is foreseen on its 2020 regulatory agenda, <a href="http://www.cvm.gov.br/noticias/arquivos/2020/20200106-1.html">as previously announced</a>, but it is not possible to provide deadlines or details yet. However, as ABAAI superintendent Francisco Amarante says, a 2011 normative instruction regulating the activity of AAIs has already changed the market substantially.</p> <p>“From 2011 to 2015 the number of AAI has dropped because the regulation forbids people to have more than one certificate, piling up the jobs of fund managers, analysts, and consultants, due to conflicts,” he told <strong>The Brazilian Report.</strong> “Many people gave up on being AAIs to become analysts or fund managers. Also, 2013 was a bad year for the stock exchange. But since 2015, as new platforms came to the market, we have seen a significant amount of people trying to get their certificates.”</p> <p>Now, the CVM is being more careful. In 2019, the regulatory body took in several contributions from companies that are expected to be affected by changes to the regulations. Among the issues to be addressed, exclusivity is by far the most controversial. XP is vocally against breaking the monogamous relation of AAIs and brokerages, while firms Modalmais, Órama, Genial and Santander bank <a href="https://valor.globo.com/financas/noticia/2019/09/05/instituicoes-defendem-fim-da-exclusividade-para-agente-autonomo.ghtml">support the idea</a>.&nbsp;</p> <p>For Alexandre Costa Rangel, a lawyer specialized in capital markets and a former member of the CVM, breaking the exclusivity clause is a right of autonomous agents and is a correct decision according to free-market laws. However, he sees little impact in practice. </p> <p>“The agent is connected to a platform and is unlikely to be interested in connecting to many platforms or be able to convince clients to open accounts on so many platforms,” he told <strong>The Brazilian Report</strong>.&nbsp;</p> <p>Mauricio Daoud, a partner at autonomous agents office EQI Investimentos, agrees that clients may be reluctant to open many accounts at first, but believes that the connection between clients and AAIs will be the most important point for a decision.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p> <p>“With the opening, whoever owns customer relationships will be able to search for the best alternatives for them in the market. [Clients] will be able to have access to some investments on a brokerage that they do not have on another. Certainly, not every customer would like to have accounts in several institutions, but since the relationship is focused on one person or group and most of the accounts are free, this barrier tends to fall,” he told <strong>The Brazilian Report</strong>.</p> <p>In Mr. Daoud’s view, this personal connection with customers is one of the most important assets of autonomous agents, a market he believes may reach 15,000 to 20,000 professionals. in Brazil. He wagers that market’s evolution will be propelled by competition and also following investors’ demand.&nbsp;</p> <p>“The future is uncertain, there will be mergers, new players may rise or even smaller brokerages may have some investments and become more relevant. Even among XP-related offices, there are mergers going on due to strategies and business models. I believe that if the demand grows, so will the market,” he notes, saying EQI Investimentos itself—an XP associate—just reached the mark of BRL 7 billion under custody with about 260 agents.</p> <h2>The bottom end</h2> <p>Not everything is rosy about the end of exclusivity, however. Currently, brokerages are as responsible for legal matters as AAIs—so, if they are sued, brokerages are also enrolled in the process. What is yet to be determined is whether and how this relationship will continue if agents are allowed to represent multiple firms.&nbsp;</p> <p>“We can’t tell for sure because there’s no norm yet, but if they choose to make only agents accountable, today that means agents won’t have enough resources to pay, while brokerages will always have resources,” says Mr. Rangel.&nbsp;</p> <p>For Mr. Daoud, one option is to make clear rules. “If the client is harmed by a system error, then it is up to the brokerage to solve it. If the problem was a bad decision from the agent, then it is up to the agent’s office,” he says. The final decision, though, is up to the CVM.&nbsp;</p> <p>Another controversial issue is opening up AAIs remuneration to clients, so they would know precisely how much they earn per sale. The idea is to avoid agents selling a given product just so they earn higher compensation, but it is a controversial issue in the industry, as explains Mr. Rangel.&nbsp;</p> <p>“The critics say that AAIs are the bottom end of the distribution chain, so it would be unfair to release only their payments. So, you either keep it secret or you also disclose how much money the brokerages are making,” he said.&nbsp;</p> <p>For Mr. Daoud, who is in favor of opening up remunerations, the market is on its way to becoming more transparent, following international practices. “In the U.S. it is very common for brokerages to charge investors a yearly percentage fee,” he explains, adding that, as brokerages are adopting similar payment methods, it is harder to have “payment wars” in order to attract agents to their platforms.&nbsp;</p> <p>This risk, though, was highlighted by Credit Suisse in a recent report about XP Investimentos, as reported by newspaper <a href="https://valorinveste.globo.com/mercados/renda-variavel/empresas/noticia/2020/01/06/credit-suisse-e-ubs-iniciam-cobertura-de-xp-com-recomendao-neutra.ghtml"><em>Valor</em></a>. “One of the main risks for the company is the rising of new platforms, which may pressure commission costs and margins. In this sense, Credit Suisse points out that the discussions on the end of the exclusivity over autonomous agents will be very important to XP,” wrote reporter Alvaro Campos.

 
Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, she worked as an Editor for Trading News, the information division from the TradersClub investor community.

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