UBS Weighs Options as the Suddenly Smallest Wirehouse

UBS Weighs Options as the Suddenly Smallest Wirehouse

By Helen Kearney

October 1, 2009

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No one can deny it’s been a tough year for UBS’s wealth management business in the U.S. It started with the massive writedowns at the investment bank but soon hit closer to home with the auction-rate securities mess, which led to the agreement by the firm in August 2008 to repurchase $8.3 billion of the frozen securities from clients, as well as pay a $150 million fine by the state securities authorities, the largest fine imposed on any firm over ARS.



But all of that paled in comparison to the furor over the offshore tax evasion case, which brought two friendly nations to loggerheads and, at the very least, put a big dent in the centuries-old Swiss banking system.



Needless to say, for the average UBS advisor on the front lines, there’s been plenty of explaining to do to disaffected clients. And it’s certainly sent some marching—UBS lost 821 advisors, or almost 10% of its advisor force, in the second quarter of 2009, according to its quarterly results. It also said goodbye to a net CHF 5.8 billion ($5.5 billion) in client assets.



Grow, Shrink or Sell?



Given that ongoing rumors that UBS plans to spin off its troublesome American stepchild have persisted for a number of years, it’s perhaps ironic that it’s the only one of the major wirehouses not to merge or be acquired during the current crisis.



So now it faces a new landscape, in which its force of 7,939 advisors is dwarfed by the other three wirehouses, all of which have at least double that number. “UBS has to decide which way to go: Will they grow or will they sell?” says Alois Pirker, research director at Boston-based Aite Group.



If they opt for the latter, the list of potential buyers is short, says Chip Roame, principal at Tiburon Strategic Advisors. He suspects the UBS business has already been widely shopped around, but with the other major firms all settled into partnerships there seems to be few options. Pirker suggests that there may be some interest north of the border, with strong Canadian banks such as RBC or Toronto Dominion looking to strengthen their foothold in the U.S. market.



However, Catherine Tillotson, a partner at London-based consultants Scorpio Partnership, doesn’t believe that one of the world’s biggest wealth managers will be willing to abandon the world’s biggest market. She acknowledges that the U.S. market is more competitive with slimmer margins than in Europe, but the firm is willing to swallow that. “UBS is a global business and it thinks globally. The U.S. market is so different from the international business. You have to play by the U.S. rules in the U.S. market,” she says.



Her colleague Graham Harvey also doesn’t think that selling the U.S. wealth management business is high on the agenda of Oswald Grubel, the chief executive officer of UBS. Harvey looks to history as his guide. “From an empirical point of view, when Grubel ran Credit Suisse, the U.S. business had margins running 50% lower than the European business and he had no inclination then to exit. There’s no precedent for exiting,” Harvey says. Indeed, Grubel has indicated in press reports that he doesn’t plan to withdraw from the U.S. market.



Jamie Price, UBS’s Head of the Wealth Management Advisor Group, Americas, sees an opportunity for the firm in the new wealth management landscape, partly because it is now smaller than its competitors. “We’ve become more differentiated. Everyone else has become larger. We’re small in terms of head count but we’re more productive,” Price says. "And we don’t have to be all things to all people."



On that point, Pirker agrees, and notes that this leads to one more option for UBS—shrinking its U.S. wealth management operation to focus on its ultra-high-net-worth Private Wealth Management business. That unit caters to clients with investable assets of at least $10 million and currently has around 100 advisors in 12 offices. There’s already been some movement in this direction with its sale of 55 smaller-market branches to St. Louis-based Stifel Nicolaus earlier this year. Moving to the high end “would at least be getting their culture and strategy aligned globally,” says Bob Ellis a principal at consulting firm Novarica.



However, some of UBS’s acquisitions in recent years seemed to fly in the face of the idea of focusing on the high end.



UBS acquired Paine Webber in 2000 to enter the American market. It then bought regional firms Piper Jaffray and McDonald Investments in 2006. “Buying Paine Webber was probably one of the worst decisions they’ve ever made,” says Pirker. “They tried to remodel it but you can’t change a 9,000-strong advisor force.” He thinks that a smaller U.S. Trust-style business would be a much better cultural fit for UBS than a retail brokerage.



One former UBS advisor, who spent most of his career at Piper Jaffray before it was acquired by UBS, says the culture of the regional Piper and the Swiss-controlled UBS never meshed. “They should’ve started focusing on high-net-worth clients years ago and not gone and bought Piper Jaffray. It was all about increasing their assets back then, but Piper Jaffray was not a fit,” he says. As a result, adds this advisor, many of his Piper Jaffray colleagues felt they were treated like poor relations by UBS.



UBS’s Price maintains that the firm has already shifted its focus, but not exclusively on ultra-high-net worth. He says there’s still tremendous opportunity for the firm in the $1 million to $10 million segment as well as the ultra-high-net-worth segment covered by the Private Wealth Management division.



He adds that the firm has spent significant time and resources over the past two years providing training and advice on catering to high-net-worth clients. Price says that the sale of the branches in the smaller market segments to Stifel was part of this strategy to focus on the high-net-worth business. Now Price says, he gets far fewer questions from his remaining advisors about the future of the unit, "because we’ve shown we’re not just focusing on ultra-high-net-worth but also high-net-worth."



While acknowledging that focusing on these markets aligns the business more closely with its global operations, Price denies that this was the reason behind the decision to move in this direction. “It’s not a global imperative. We looked at the U.S. market holistically and were honest with ourselves. Based on who we are, this is where our opportunity is,” Price says. "But we also had the opportunity to leverage our know-how because our parent company is a global leader in this segment."



Boosting Morale



The firm’s recent problems, along with the fact that its advisors are the only ones from a major firm who didn’t get a retention deal, has led to a number of defections from its ranks.



One way to potentially stem the flow is if the rumored hiring of Bob McCann to head the brokerage force actually comes to fruition. McCann is still in a legal tussle over a non-compete clause with his former employer Merrill Lynch. But, if he does manage to get the UBS job it could send a message of strength to brokers, says recruiter Bill Willis. “It would say, ‘Look, we aren’t going to sell. We’ve brought in a high-profile guy to run the business,’” Willis says.



Price admits that he’s getting questions from advisors about leadership changes. “It’s very difficult with all the innuendos and press reports that you can’t factually speak to. We can’t give ultimate clarity,” he says. But, he adds, most longtime advisors are used to the constant rumors in the industry. “One former Paine Webber guy told me that Paine Webber was rumored to be sold for 20 years before it actually happened,” Price says.



Tiburon’s Roame, on the other hand, thinks the best form of motivation for advisors is simple-"pay them more."



And, the former UBS advisor agrees. He says payouts at UBS are lower for individual brokers than many of the rival firms. "It picks up on the back end with deferred stock, but that only works if stocks are going up."



But it’s not just advisor morale that’s of concern. UBS clients are also dismayed by the turmoil, says Novarica’s Ellis, and the firm needs to get busy rebuilding its brand with a clever marketing campaign. “They need to give clients a reason to be at UBS,” he says. "I don’t think there’s a compelling reason at the moment."



But before that occurs, Ellis believes some mea culpas are in order. “The firm has to apologize to clients, say you’ve been tarnished by our mistakes, we plan to get the ship steadied and give you a plan going forward,” he says. “And your loyal advisor had nothing to do with that so don’t take it out on him.”