Back in 2017, Itaú Unibanco paid BRL 6 billion for a 49 percent stake in XP Investimentos. This marriage between Brazil’s biggest private bank and the country’s leading independent brokerage firm was dubbed as one of the smartest in the history of the Brazilian financial market. Not only did the bank hedge its franchise, but it also multiplied its investment by 11 in just three years. Plus, it will have an option to purchase an additional 12.5-percent stake in 2022.
However, despite being highly profitable for both parties, the relationship between XP and Itaú has soured quickly. To the point in which the bank ran a commercial laden with sarcasm casting doubt over the commitment of XP’s autonomous investment agents — the Brazilian equivalent to registered investment advisors — to their fiduciary responsibility. XP chief executive officer Guilherme Benchimol hit back in kind, saying the attack comes from a player that simply cannot compete with his firm.
As we explained in a January 21 story, the relationship between XP — associated with nearly 80 percent of Brazil’s autonomous investment agents — and banks has never been an easy one, as the latter accuses XP of being monopolistic and wanting a share in the agents’ market. The debate has prompted the Brazilian Securities Commission (CVM) to promote hearings towards updating the legislative framework for autonomous investment agents, but a final decision is yet to come.
To better understand the implications of the latest developments, The Brazilian Report reached out to entrepreneur Marcelo Maisonnave, a former XP partner and currently a founding partner at investment platform Warren.
In his view, the fight between XP and Itaú is exposing the need for better regulation of investment agents in Brazil, and investors should reap the rewards.
Disclaimer: this interview was edited for clarity and brevity.
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<p><strong>Why would Itaú attack XP and its business model, if it partially owns the firm?</strong></p>
<blockquote class="wp-block-quote"><p>It is surreal, but it is happening because their businesses are on a collision course — to the point that their partnership was put aside and each part moved forward with their own strategy. Itaú’s reaction is like a compressed spring, after years without saying a word against the brokerage’s business model. The result is a milestone for the investment industry in Brazil, because both sides have exposed the guts of their competitors. Itaú exposed the conflict of interests and the risk brokerage’s customers are exposed to, and XP exposed decades of conflicts in banks, such as offering expensive and bad products. They showed these inefficiencies to the public and investors are the ones to benefit from that, as they will be able to better evaluate the services. </p></blockquote>
<p><strong>This may be new to the public, but not for regulators. Why is CVM taking so long to act?</strong></p>
<blockquote class="wp-block-quote"><p>Because the issue is very complex and CVM’s stance will be absolutely important due to the current situation of the distribution system. Investment platforms grew significantly with values that were quite proper when they arose, about 10 years ago. It was based on two cornerstones: open architecture, offering different products from multiple issuers, and a layer of investment agents spread all over the country, with great communication and selling skills. This was good for the market, but we can’t stop there. </p><p>There are conflicts going on in this network of agents, because they are entrepreneurs and, as such, they want to have better revenue. Therefore, they have to offer a product that compensates them better. The problem does not lie in the agents, but in the incentives proposed by the model. Platforms charge a fee to offer a product and this pushes agents to offer a product. The CVM must assess this situation and get inspiration from other markets. </p><p>I always quote the British model: in the UK, agents are paid by their customers, while in Brazil they are paid by the product, so obviously the incentives are twisted. In the U.S., the regulation has not terminated commissions, but increased transparency. From the 1990s on, the Registered Investment Advisors that have no conflict of interests control more than 80 percent of the industry.</p></blockquote>
<p><strong>You helped to create XP and know this model inside out. XP currently holds near 80 percent of the investment agents in the country. What would be the impact of breaking this near-monopoly?</strong></p>
<blockquote class="wp-block-quote"><p>We are not proposing the elimination of investment agents and payments for distributing investment products, instead, we are proposing a revamp of Brazil’s regulation. Fund managers would get their management fees and brokerages would get their distribution fees straight from the customers. Such a change would reduce conflicts and make monopoly less harmful. </p></blockquote>
<p><strong>But that doesn’t change the fact that a single company holds 80 percent of the market. </strong></p>
<blockquote class="wp-block-quote"><p>I think competition will arise naturally. BTG Pactual is quite active, we at Warren are quite active, doubling our growth every year. Banco Inter has also created a platform that grew very fast. Companies are interested in this business, so this will happen naturally. But the current situation puts investors in a conflict of interest. I am not criticizing XP or banks as dominant players, but we must use this debate to change the regulations about fees.
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Photo: XP/Div.
