UBS scales back recruitment loans, boosts profits

More than a year after committing to cut spending on brokerage rep recruiting, the results are hitting the bottom line at UBS Wealth Management Americas.

The question remains, however, of whether the short-term spending cuts will have any longer-term negative impacts at the Zurich-based private bank.

UBS’ third-quarter earnings report Friday morning showed that the $2.7 billion spent during the quarter on recruitment loans to financial advisers was down 3% from the previous quarter, down 16% from the same quarter a year ago, and now at the lowest level since 2009.

For the quarter, UBS reported a 14% increase in net profits, including a 7% year-over-year increase in net operating income in Wealth Management Americas to $2.1 billion.

While UBS gets credit for sticking to a strategy it first unveiled in July 2016, the earnings report showed a year-over-year reduction of $2.3 billion of net new money into Wealth Management Americas, which the company attributed to “lower recruiting.”

SHORT-TERM THINKING

Industry recruiters, which rely on aggressive recruiting campaigns to fuel movement among brokerage and advisory firms, say dialing back recruiting efforts is foolhardy, short-term thinking.

“It’s a very smart short-term play, but I’m not sure how sustainable it is because the rest of the industry is still recruiting with abandon,” said Mindy Diamond, president of the recruiting firm Diamond Consultants.

“The big firms run on scale, so if they keep having attrition without replacing those reps it will be bad for them in the long run,” she added.

The reduced focus on recruiting represents an ideal scenario for firms looking to attract breakaway brokers, said Matt Sonnen, founder and chief executive of PFI Advisors.

“All wirehouse advisers have independence in the back of their mind, but many conclude that the recruiting checks are too good,” he said. “If they begin to fear those checks are going to disappear, their first calls will be to the large brand names in the independent channel: Hightower, Dynasty, and Focus Financial.”

UBS’ modified recruiting efforts have also been embraced by both Morgan Stanley and Merrill Lynch.

But the rest of the brokerage and financial planning industry continues to recruit without pause, according to Michael King, president of the recruiting firm Michael King Associates.

“Most of the industry is continuing to recruit,” he said. “But a few firms have decided to become very selective by looking for what I call, God’s first cousin.”

SPECIFIC FIRMS

By that, Mr. King means firms like UBS have started focusing on specific teams representing diversity, with lots of assets and squeaky-clean compliance backgrounds.

“They say they don’t want to recruit as many, because the pool they’re looking at is more limited,” he added. “If your gross production is $750,000, that’s too small, because they’re really looking for a million dollars and above. In the past that would have never happened.”

In terms of rep productivity, UBS reported that invested assets per rep increased 4% from the prior quarter to a record $175 million.

UBS executives were not available for comment, but a company spokesperson did email the following statement from Tom Naratil, president of UBS, Americas:

“These results demonstrate that strategic clarity and a focus on the most productive advisers are unlocking additional growth as we meet the needs of our largest client base of (high-net worth and ultra-high-net-worth) individuals and families.”

Despite the quarterly numbers, industry recruiter Danny Sarch said UBS will have a hard time keeping up with attrition as reps retire, leave to go independent, or are recruited by competing brokerage firms.

“Everybody is focused on short-term results, but how are they fighting the inevitable laws of attrition?” he said. “Ultimately, they will need to stop shrinking and find out how they’re going to grow.”

Related Topics: UBS Wealth Management