UBS Group AG's wealth management business in the Americas posted record profitability in the third quarter even as it saw the lowest third-quarter volume in client transactions since 2009.
The unit produced unprecedented pretax profit of $328 million, driven by record results in recurring fee and net interest income that's tied in part to lending, according to a UBS spokesman in New York. Total operating income increased to a quarterly record of almost $2 billion.
The Swiss bank's Wealth Management Americas unit has benefited from an increase in more predictable fee-based revenue from managed accounts, as opposed to commissions that swing with the rise and fall of clients' individual transactions. The drop off in transaction volume came amid macroeconomic uncertainty and geopolitical tensions, according to remarks made by UBS CEO Sergio Ermotti during the bank's third-quarter earnings call Friday.
“Fee-based assets are generally much steadier revenues than commissions,” said Michael Wong, an investment services analyst with Morningstar Inc.
Recurring fee income at UBS Wealth Management Americas rose to $1.24 billion in the third quarter, mainly due to higher managed account fees and higher advisory fees for institutional clients. Managed accounts represented 34.8% of the unit's more than $1.1 trillion of invested assets, Kirt Gardner, UBS Group's CFO, said on the call.
UBS Wealth Management Americas also benefited from growth in banking.
Net interest income increased 19% to $370 million on higher yields and continued growth in lending and deposit balances, according to the spokesman. The average mortgage balance jumped 9% and the average securities based lending portfolio balance rose 6%, year-over-year, he said.
On the earnings call, Mr. Gardner said that "higher net interest income and recurring net fee income more than offset lower transaction revenues, reflecting the lowest third-quarter transaction volumes seen since 2009."
While headcount fell, the unit's financial advisers increased productivity to record levels in the third quarter. They produced an average $1.12 million of trailing 12-month revenue, according to the spokesman.
“Our financial advisers remained the most productive among their peers,” Mr. Gardner said on the call.
The unit had 7,087 advisers at the end of September, down 29 from the second quarter.
UBS has not yet revealed its strategy for complying with the Labor Department's new fiduciary rule, which requires financial advisers to put their clients' interests first when making recommendations for their retirement accounts. Mr. Gardner said on the earnings call that the firm expects to make an announcement later this year.
Earlier this month, Bank of America Merrill Lynch said it would stop new commission-based IRA accounts because of the new regulation while Morgan Stanley said it will keep offering them to clients.
While the fiduciary rule doesn't prohibit brokerage firms from charging commissions, they must be documented and disclosed to clients under a best interest contract exemption when the regulation takes effect next year.