Size matters in the brokerage business. And with the cost of recruiting and training soaring, firms continue to turn to acquisitions. The purchase by UBS of Piper Jaffray's brokerage unit is the third such wirehouse/regional deal in 10 months, and certainly not the last as competition for clients and their assets continues to intensify.
“There's a real clear advantage to being bigger,” says Sanford Bernstein analyst Brad Hintz. “Bigger is better — margins are higher, you can spend more revenue per dollar, do more marketing per revenue dollar, all the metrics support scale,” he says.
But, the Swiss asset manager/brokerage will need a few more Pipers to match the other wirehouses in terms of reps on the Street. It ranks sixth among all firms in number of retail reps, behind the four other wirehouses and Edward Jones, and its advisor force hasn't grown in over a year. And while average revenue per advisor has improved to $562,000 in 2005 (behind only Merrill's $735,000-per-rep average) from $475,000 in 2000 when it acquired Paine Webber, UBS' U.S. wealth-management operation hasn't been as successful as its European private-banking unit. The firm's client assets, roughly $621 billion in 2005, are about even with Morgan Stanley's but far less than those of Merrill, Smith Barney and Wachovia.
Big Fish Swallows Big Fish?
With Legg Mason, Advest and now Piper Jaffray being gobbled up, other mid-sized firms are on the menu for the wirehouses. But will a wirehouse ever eat another wirehouse or other large firm? Hintz says that type of deal would likely prove too cumbersome: “There's just so much overlap, from the trading operations to the merchant-banking portfolios, there's just so much stuff in there.” Dennis Gallant, president of Gallant Distribution Consulting, agrees: “Acquisitions like this one have been good and bad,” he says. “But I think you will see more firms doing these smaller-type deals because there's a fear of biting off more than you can chew.”
If it retains all of Piper's 840 brokers, UBS increases in size to 8,360 reps from 7,520, moving ahead of Wachovia into fifth place in terms of reps and closer to the firms' goal of 10,000 advisors in the next three to five years. The deal also expands its geographic footprint: Of Piper's 91 branches, 60 of them have no overlap with the 350 current UBS branches. The merger also potentially brings 366,000 accounts and $52 billion in client assets to UBS, moving it into third place in AUM.
But as Merrill Lynch has learned from its recent acquisition of Advest (see story, page 53), retaining advisors is a tricky game: You need competitive retention packages, of course, but there is the more vexing issue of integrating sometimes widely different corporate cultures. And communication among management and reps has to be a two-way street in order to head off any misunderstandings among the rank-and-file as they develop.
One top Piper producer worries that if UBS decides it has overpaid for Piper, there will be little left in the coffers to entice reps to stay. Brokers can rest easy, says André Cappon, founder of the CBM Group in New York, a consulting firm to the financial-services industry. If you consider the $500 million purchase price, not including the $75 million potential bonus for performance of the group, UBS paid $595,000 for each one of the 840 Piper brokers. The average Piper rep produced $410,000 in revenue in 2005; therefore, UBS paid roughly 1.5 times trailing production. “That's a fair price in the market today,” says Cappon, who adds that without Piper's overhead and back office (350 back-office personnel were let go) it becomes a better deal.
The retention booty UBS is offering is certainly better across the production quintiles than that offered to Advest reps by Merrill and to Legg Mason financial advisors by Citigroup. At the top, advisors who generate $1 million or more in annual revenue will receive 70 percent of their last year's revenue. That compares to the 45 percent given to million-dollar Advest reps and 40 percent for comparable Legg reps. Low-end reps are getting handsome bonuses, too. Reps producing $300,000 to $399,999 will get 40 percent; those with $200,000 to $299,000 will get 25 percent; and sub-$200,000 producers will get 10 percent. In addition, the large deferred-compensation packages that many Piper reps have accrued (up to 8 percent of production for the top reps) will be transferred directly into a UBS deferred-comp account, dollar for dollar.
Having It All
Recruiters agree that UBS seems to have learned from the mistakes of competitors by offering sweeter-than-average deals to the Piper folks. “After seeing the Advest deal go the way it did, I'd say UBS is doing intelligent brokerage arbitrage,” says Nick Ferber, a recruiter with Sanford Barrows. “They obviously want all of the Piper brokers, not some of them.”
Marten Hoekstra, head of U.S. wealth management, and other UBS execs have been on an extended road show, traveling to all the branches after holding a conference in Minneapolis for managers on April 12. One Piper branch manager in attendance says that Hoekstra — a legacy Paine Webber rep from Grand Forks, N.D. — made a good first impression. “He's a sharp guy,” he says. “They're selling the idea of UBS to us, sure, but they also made it clear why they bought us and what they intend to do.”
There is something in it for Piper reps, too. They will benefit from the larger platform of products and services, including alternative investments and lending capabilities. They also get UBS' superior compensation grid. That includes a 4 percent kicker for fee-based business and bonuses for net new assets and other rewards. The downside: Reps who enjoyed a certain flexibility in structuring unique solutions for clients may be reigned in somewhat. “But if I had to choose a large firm, UBS would be it,” says one top Piper rep.