It would be an understatement to say that when Robert “Bob” J. McCann joined UBS just under two years ago, the situation at the firm was incredibly complex. The Zurich-based parent company UBS AG suffered losses of $52 billion in the credit crisis, got hit by an international tax-dodging scandal related to customers' Swiss accounts, and the Americas division was caught peddling impaired auction rate securities. When McCann came on board in the fall of 2009, pledging to save a sinking ship, nervous clients in the Americas were pulling their assets — $13.06 billion alone in the fourth quarter of 2009. And UBS financial advisors, severely demoralized, were taking flight. FA turnover reached a heart-stopping 17.7 percent when McCann reported for duty.
But some 20 months into his job as CEO of the U.S. wealth management division, McCann says he is ready to declare a small victory in the turnaround he and his top management are orchestrating for the business. In the first quarter of 2011, UBS Wealth Management Americas recorded its first quarterly profit in a year. (Registered Rep. went to press the day before UBS' second quarter earnings came out.) FA productivity and satisfaction are way up. And McCann is supremely confident about the future — predicting much bigger profits ahead on an annualized basis.
“I said it two weeks after I came here, and I still believe it. This business is capable of making $1 billion a year in pre-tax profits within three to five years,” McCann says. That gives him just over three years to fulfill his pledge. Rochdale Securities analyst Dick Bove thinks the odds favor McCann hitting his $1 billion target as the wealth management industry picks up worldwide. “McCann is an expert who understands this business like a pro,” Bove says.
The first quarter did mark an important turnaround for UBS Wealth Management Americas: That $119 million pre-tax profit comes on the heels of a humiliating loss of $33 million in the previous quarter. But some positive trends had already begun. The division reeled in $8.4 billion of new money for the quarter, or $3.9 billion in net new client assets, excluding interest and dividend income, and that marks the fifth straight quarter of improving net new client assets. Total client assets managed by UBS Wealth Management Americas now sit at $761 billion, its highest since the first quarter of 2008.
Meanwhile, the number of financial advisors rose by a modest net 15 in the first quarter to 6,811. And yet, overall attrition, at 4.3 percent, dipped to its lowest level since before the credit crisis erupted in 2008, according to UBS. Even better, perhaps, in a recent J.D. Power survey of investor satisfaction, UBS Wealth Management Americas was the only U.S. wirehouse to score above the industry average of 772 points, out of a total of 1,000 points. At 778 points, UBS was up 19 points from 2010.
Despite — or perhaps because of — this improvement, the UBS brokerage house, purchased by UBS from PaineWebber for $10.8 billion in 2000, can't seem to shake off persistent rumors that it's on the block, being dressed up for an eventual spin-off by its Swiss banking giant parent. Many suspect it wants out of its troubled investment. Wells Fargo spokesman Tony Matera said there was absolutely no truth to growing rumors that Wells is in talks with UBS about a deal.
McCann, too, rebuts the rumors to Registered Rep. but offers an explanation that sounds a little bit like a caveat. “Not true,” he says. “If you say to me, are there people that would like to buy this business, I would imagine that there are a number, especially since the business today is better than it was about 20 months ago.”
But McCann adds that if there have been talks he has not been privy to them. And if it really were on the block, you would think he might have played some role. “In the entire time I've been here, I have not been a part of any conversation with anyone about selling this business. We made it clear since November 2009 when Oswald Gruebel (CEO of parent UBS AG) announced his strategic plan, that every part of UBS is an important part of the business and the future.”
At the heart of this turnaround story are the FAs at UBS. If they had continued to defect, and to take their clients with them, the wealth management division would have been in serious danger. McCann, who once ran the brokerage business at Merrill Lynch (and who hired a coterie of top ex-Merrill executives who then joined his “renewal” team), doesn't need to be reminded. “There would have been no turnaround if we couldn't convince the advisors that this was a place they wanted to be,” he says. “So we made it a place that people want to work again. The numbers bear it out.”
Bob Mulholland, former co-head of the Americas region at Merrill, a popular manager in his time with the “thundering herd,” and hired by McCann as head of the advisor force at UBS WMA, compares his early days at UBS to combat. “I can't say it was a pleasurable experience to come into work every day,” he says. His tune has now changed. “I smile when I see Paula Polito's FA satisfaction surveys. When you know FAs are on your team, you know you've turned it around,” Mulholland says, referring to internal surveys by the Americas' chief marketing officer that show a huge surge in FA work satisfaction. An FA comp incentive program, known as Growth Plus, contributed to that satisfaction, Mulholland notes.
McCann looks with pleasure, too, at FA productivity today at the UBS brokerage. It's shot up from $595,000 per advisor in the second quarter of 2009 (just before he joined), to $855,000 in the first quarter of 2011. Meanwhile, invested assets per advisor at UBS have jumped from $81 million in the second quarter of 2009 to $112 million in the first quarter of this year.
By contrast, in the first quarter of 2011, revenue per FA at Bank of America/Merrill Lynch (including its online brokerage Merrill Edge) was $908,000, a bit above the UBS average. At Morgan Stanley it was $767,000 and at Wells Fargo, $650,000, according to internal research by UBS reviewed by Registered Rep. and confirmed by the firms. The same research shows UBS had more invested assets per advisor than Bank of America's $96 million, Morgan Stanley's $97 million or Wells Fargo's $73 million.
McCann makes no bones about his goals for FAs — $1 million in average annualized revenue per FA. The brokerage today is focused heavily on high-net-worth investors ($1 million to $10 million in assets), and ultra-high-net-worth (think $10 million-plus). “I'm very outspoken about this,” McCann says. Marty Halbfinger, an FA with UBS on Park Avenue in Manhattan, thinks McCann's goal is realistic. “The growth will come from the increasing confidence clients have in our firm and the FAs,” says Halbfinger, whose 15-person team manages $2.5 billion in client assets. “It's an exciting place here,” he says. “The nail-biting days of two or three years ago seem like a lot longer ago.”
On FA headcount, McCann wants to grow it to 7,000, including an additional 400 financial advisors as well as 170 rookies in 2011. “I have to be competitive on compensation when I recruit. But I guarantee you I'm not the most aggressive recruiter,” says McCann. He doesn't want UBS to be a large-scale player like his peers, seeing benefits in its smaller size including more flexible management.
Turning the Corner
The UBS Americas brokerage business is certainly not out of the woods. If it does not reach its financial targets as outlined by McCann, the game changes. The possibility that Swiss parent UBS AG would sell or spin off the business, a rumor that has long been denied, would become a much more realistic possibility, according to Alois Pirker, an analyst at Aite Group. “Its cost structure is a big issue,” he says. “Cost efficiencies are the key. With under 7,000 FAs, I can't see UBS achieving the same economies of scale as competitors like Merrill.” McCann, who announced in April 2010 that the division is targeting profit margins of 15 to 20 percent within three to five years, acknowledges that there is room for improvement. First quarter of this year, the business had margins of 8 percent.
Pirker at Aite is skeptical that McCann can hit his $1 billion pre-tax profit target. “How can he do it? More assets? Higher quality assets?” he asked. “And it's going to be tough because of the cost pressures with the size of his business.” Bove, however, thinks McCann has a strong chance of succeeding, especially now that Wall Street is on the mend and because he has already positively shaken up UBS.
McCann is undaunted. In the past 12 months, he and his team have ruthlessly cut costs, shuttering offices, consolidating regions, trimming layers of management and overhead. It also scaled back event sponsorship. In April 2010, McCann also hired chief operating officer, Anita Sands, a Ph.D. in atomic and molecular physics, to propel technology-driven productivity. (For more on Sands, see page 36.)
And McCann sees growth from various sides of the business — from stronger cross-selling of investment banking activities, products and offerings of parent UBS and from UBS Bank USA, its own bank for customer deposits and loans. McCann said Bank of America generates 35 percent of its revenues from banking-related products compared with 12 percent for UBS Wealth Management Americas. (Bank of America declined to confirm the revenue it generates on this side of its business.)
UBS has also stepped up its focus on partnerships — teaming up FAs who have complimentary expertise to fill in gaps in their service and product offerings. The idea is to capture clients' assets that could be lost to competitors, or that sit on the sidelines away from UBS. Mulholland notes the number of partnerships among clients with a net worth of $10 million or more has jumped from 29 in 2009 to 350 last year.
To be sure, improving market conditions and the economy have also cooperated to lift UBS in the Americas. Will how that continues help set the course for the UBS brokerage, I ask? McCann nods in agreement. But he wants you, reader, to know he was always an optimist — or maybe he has the luck of the Irish — from the moment he stepped into UBS.