UBS Wealth Management Is Growing But Margins Are Under Pressure

New money is not finding its way to the Americas business.

UBS Group AG’s newly created Global Wealth Management unit anticipates growing at a good clip in the coming years. But the bank acknowledged significant headwinds and risks in its 2017 annual report released last week.

In 2018 and beyond, Global Wealth Management expects to grow net new money from 2 to 4 percent each year and is targeting a pre-tax profit of 10 to 15 percent, according to the report. As a whole, the UBS wealth management businesses grew net new money by more than 2 percent in each of the last three years.

But not all segments of wealth management are contributing equally to that growth. Inflows to the Americas business have tapered in recent years and have been replaced by new money in the Asia Pacific region and ultra-high-net-worth clients globally, the bank said.

Net new money in the Americas business grew 2.1 percent in 2015, 1.5 percent in 2016 and then fell 0.7 percent last year. Meanwhile, net new money for the rest of wealth management grew 5.1 percent in 2017, up from 2.8 percent in 2016.

Where new money is coming from matters, because some regions and clients are more profitable than others.

“Over time, inflows from these lower-margin segments and markets have been replacing outflows from higher-margin segments and markets, in particular cross-border clients,” the report stated. “This dynamic, combined with changes in client product preferences as a result of which low margin products account for a larger share of our revenues than in the past, has put downward pressure on our Wealth Management’s margins.”

Both the Americas business and the rest of wealth management (which together now form the Global Wealth Management unit), oversee more than $1 trillion in client assets.

Negative growth of net new money pressuring pre-tax margins is generally not a good thing, but it also doesn’t appear to be causing any alarm at UBS.

Kirt Gardner, CFO of UBS Group AG, said during the bank’s most recent earnings call that Wealth Management Americas’ negative net new money in 2017 was largely due to lower net recruiting during the last year. Wealth Management Americas’ profit before tax was up 9 percent year-over-year in the fourth quarter of 2017.

Global Wealth Management’s profit before tax was up 18 percent year-over-year in the fourth quarter of 2017, as operating income increased 6 percent and expenses increased by 2 percent.

As markets reached record highs and investments are made in technology for wealth management businesses, Wall Street has taken notice and is paying close attention to pre-tax margins.

Morgan Stanley expects its wealth management unit to achieve a pre-tax margin of 26 to 28 percent in 2018—a bar one analyst called “conservative”—but CEO James Gorman defended during the bank’s fourth quarter call with investors.

“I don’t think the range of 26 to 28 percent is conservative ... just for context, 29 percent would be the first time in the industry.”

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