UBS wealth unit reports solid earnings, raises bar for advisers

After profits climb 30%, CEO challenges brokers to do more lending and boost margins

May 6, 2014 @ 12:09 pm

By Mason Braswell

Updated May 7

As first-quarter profits soared to $272 million at UBS Wealth Management Americas, chief executive Robert McCann raised targets for the firm's 7,100 financial advisers, saying lending and managed accounts would boost profit margins.

Speaking at an investor presentation in the firm's global headquarters in Zurich, Switzerland, Mr. McCann said that he was aiming for a cost-to-income ratio of 75% to 85%, lower than the previous goal of 80% to 90%.

The firm has struggled to get below the 85% mark over the past year, reporting a ratio of 86.3% in the first quarter of this year, compared to 85.9% in the fourth quarter and 87.6% in the year-ago quarter.

That's despite a first-quarter profit of $272 million, up 30% from $210 million in the year-ago quarter. While the firm benefited in the quarter from an 18% jump in fee revenue to $1.1 billion, commission revenue fell 11% from the first quarter of 2013 and expenses continued to rise.

Total operating expenses of $1.6 billion were up 7% from $1.49 billion in the year-ago quarter, driven by increases in administrative costs and incentive payments to newly recruited financial advisers.


Mr. McCann said that lending, which has high margins relative to brokerage products, would be “the single biggest opportunity we have over the next few years at UBS,” as the firm looked to hit new targets.

“In my view, lending is critical to top clients and the culture and the growth and profitability of Wealth Management Americas,” he said. “Lending to wealth management clients is a high margin business and a business that results in deeper client relationships.”

Lending has been something of a more recent focus for UBS in the past four years as the firm provided advisers with training on “how to better serve both sides of the balance sheet,” McCann said. Advisers can secure loans for clients through the firm's bank in Salt Lake City, Utah.

Mortgage balances rose from less than $100 million in the first part of 2010 to $6 billion at the end of the first quarter, he said.

Still, the firm has lagged behind some of its bank-owned competitors. Net interest income, a measure of how much the firm makes on its loans to clients, was $250 million, or around 14% of revenue. That compares with interest income of $1.4 billion, or around 33% of total revenue, at Bank of America's wealth management units.

A critical component was increasing the number of advisers providing clients with mortgages. Only 26% of the advisers are doing two or more mortgages in a year, well behind around 50% or 60% at some top competitors, Mr. McCann said.

Mr. McCann said that the goal was to get 50% of advisers originating mortgages.

“We're just getting started,” he said. “If this were a football match, I don't believe we're at halftime.”

That coincides with the firm's effort to push advisers to take a more “holistic” look at clients' wealth and do more financial planning, he said.

The firm has around $320 billion, or 32%, of client assets in managed accounts in which the adviser charges a fee for advice and investing decisions. The goal is to have more than 40% of client assets in managed accounts in the next three years, he said.


On the other end, Mr. McCann said that he expected to be able to reduce some expenses, including recruiting costs related to the hiring of veteran advisers.

Compensation commitments related to recruited advisers have been rising steadily, and regularly account for around 10% of the firm's total operating expenses. In the first quarter of 2014, UBS spent $180 million on costs related to compensation commitments for new advisers, up from $171 million in the year-earlier quarter. That money is generally provided as an upfront loan subject to vesting requirements.

But Mr. McCann said that because there were fewer competitors and the largest brokerage firms were bank-owned, that number would begin to tick downward.

“There will be less pressure in an upward sense on advice compensation, and clearly less pressure upward on recruiting packages,” he said. “I see that evolving in the next few years, and I am confident it's going to evolve that way in the next three years."

Mr. McCann also mentioned the Financial Industry Regulatory Authority Inc.'s proposed rule that would require advisers to disclose those incentives to clients when they are paid more than $100,000 to move firms. He did not predict how it would affect recruiting, but said that he supported the added transparency.

“There's a rule right now that would make it transparent to clients when an adviser moves,” he said. “I think that's good for the industry, and I think that's good for UBS.”

He said that the firm is looking to continue to add to its adviser force. UBS had 7,113 advisers at the end up the first quarter, up only slightly from 7,065 a year ago.

An earlier version of this story inaccurately reported the amount of money UBS spent on compensation commitments for recruited financial advisers. The original number reflected first-quarter expenses for existing financial advisers.

How UBS's private wealth unit contributes to its revenue and profits.


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