UBS Bosses Lay Down New Profit Goals for U.S. Brokers
UBS’s U.S. wealth management unit should be able to raise its profit margin by 56% over the next three years without relying on hiring advisors from competitors to pump up revenue, a senior executive said on Thursday.
The business that on Thursday reported a margin of 16% will aim for 25%—a level reached by Morgan Stanley—by the end of 2021, UBS Global Wealth co-president Tom Naratil told analysts during an “investor update” following release of the Swiss bank’s third-quarter earnings.
“Our strategy no longer relies on weighing down the balance sheet with costly multi-year recruitment expenses,” he said, referring to a multi-billion-dollar overhang of forgivable loans that was extended by some of his predecessors at the former PaineWebber U.S. brokerage unit.
Rather than offering recruiting bonuses, UBS has changed its compensation formula to reward longevity and to reduce its attrition rate among experienced brokers. The U.S. wealth unit aims to cut attrition from its current 3% level to under 2% by 2021, UBS said in slides accompanying the presentation.
In the tug between cutting expenses and increasing revenue to goose the profit metric, Naratil said UBS can pull both levers.
Revenue will grow by helping brokers attract customers to fee-based advisory accounts, by having them employ new practice management technology and by placing more of them on teams where some will specialize in prospecting and others in gluing customers to the firm by developing financial plans and specializing in bank and insurance products. It’s a course that UBS and most of its competitors have been promoting for years, but UBS on Thursday said it is spending heavily to improve broker productivity through upgraded technology.
The program centers on an advisor “desktop” developed with Broadridge Financial Solutions that UBS will install over the next three years in its U.S. branches, Naratil said. Management also expects to leverage productivity through specialization by having two-thirds of U.S. advisors work on teams within three years, up from about 50% currently.
Morgan Stanley earlier this year unveiled a broad suite of new “platform” tools aimed at growing client assets and liabilities (loans) through digital tools and artificial intelligence, and is linking broker bonuses next year to implementation of the tools.
Outlining other performance goals, UBS aims to have 45% of American clients’ assets in advisory accounts by 2021, up from 38.4% today. Raymond James Financial said Thursday that 48% its customer assets are in fee-based accounts while Morgan Stanley Wealth Management earlier this month reported holding 45% of its customers’ assets in so-called advisory accounts. Firms prefer charging fees based on account assets rather than transactional commissions because they generate revenue regardless of investors’ propensity to buy and sell.
UBS Wealth, like other big bank-owned competitors such as Merrill Lynch Wealth and Wells Fargo Advisors, is also focusing brokers on selling loans, deposits and other bank products to wealthy clients. UBS’s wealth investor clients borrow almost 70% of loans from outside banks, the Swiss bank said.
“The targets we have set for ourselves are ambitious and achievable,” Naratil, a former chief financial officer of UBS AG, told analysts.
The strategy of restraining compensation costs while improving productivity did not translate into new customer assets at the U.S. wealth unit last quarter. UBS Wealth Management USA reported a net outflow of $900 million in assets in the period, attributing the decline partly to customers who followed their brokers to other firms.
UBS employed 6,910 brokers in the U.S. and Latin America as of September 30, down a net 27 from the end of this year’s second quarter.
The company has dropped its previous goal of maintaining a U.S. brokerage force of 6,500 to 7,000 advisors, Naratil said in explaining his priorities of retaining top advisors and increasing revenue rather than focusing on gross recruiting data. The average U.S. broker at UBS was generating about $1.3 million of annual fees and commissions as of September 30, up 7% from 12 months earlier.
As part of its new incentives, UBS has changed the job description and performance metrics of its branch managers and “empowered” them to make more decisions affecting local clients and their brokers, Naratil said.
UBS’s global wealth unit, which expects to realize $251 million of annual cost savings from merging its U.S. and global wealth business earlier this year, also has new goals for attracting extremely wealthy families to its vaults. (The expense goals were more than doubled from the approximately $100 million level UBS outlined earlier this year.)
If U.S. advisers properly market UBS’s global bank expertise, they should be able to attract $70 billion in assets from the “ultra-high-net-worth” cohort over the next three years, Martin Blessing, cohead of the global wealth business, said during the presentation.
“The U.S. has the highest number of individuals with $100 million or more, and while we have relationships with 40% of these, our share of wallet is much lower than elsewhere,” Blessing told analysts. “This is a big opportunity for us.”