UBS Wealth Americas Flaunts Benefits of Recruiting Pullback
UBS Wealth Management Americas is realizing the benefits of its withdrawal from high-stakes recruiting wars, its parent company said in its first-quarter earnings report released on Friday.
Outstanding “forgivable” recruiting loans paid to new hires fell 9% to $2.946 billion as of March 31, down from $3.254 billion in the first quarter last year, the company said.
Kirt Gardner, chief financial officer of Zurich-based UBS Group AG, highlighted the drop on an earnings call with analysts, pointing to it as a key milestone in the U.S. brokerage unit’s battle to cut expenses and bring profit margin closer to the levels enjoyed by competitors such as Morgan Stanley Wealth Management and Bank of America’s Merrill Lynch wealth businesses. (Although Morgan Stanley’s forgivable loan balance remains the highest at $4.9 billion.)
“We’ve refocused on retention rather than recruiting,” Gardner said. “You’ll continue to see these loans come down, and you’ll see an actual benefit to our expense line that will show up in the fourth quarter this year, and that will be quite an attractive benefit.”
UBS’s almost 7,000 brokers, meanwhile, collected $1.9 billion in net new money from clients in the first quarter. In its presentation, UBS attributed the strong number in part the “strategic focus on retention over recruitment.”
The strategy change has been engineered by former UBS AG CFO Tom Naratil, who became head of the bank’s American businesses and its U.S. broker-dealer in January.
Under his predecessor, Robert McCann, UBS had spent heavily to recruit top-producing brokers, paying bonuses largely in the form of forgivable loans that were as high as three times the seven-figure revenue numbers they had produced for their previous employer in the previous 12 months.
The potentially negative downside of the new strategy is that UBS Wealth Americas’ headcount is falling, meaning overall revenue production could be affected. The firm’s brokerage force as of March 31 totaled 6,969 brokers, down 2% from 7,145 a year ago. Its count of new hires plummeted by 54% last year as it brought in just 178 veteran brokers, down from 293 in 2015.
Gardner dismissed concerns about the falling size of the sales force, noting that UBS’s U.S. advisors are beating competitors in per-broker production. Based on first-quarter results, they are generating annualized revenue of $1.2 million on average. Morgan Stanley’s 15,777 brokers in the first quarter averaged annualized revenue of $1.03 million while Merrill Lynch’s 14,484 brokers produced a per-broker annualized average of $960,000.
“We expect that to continue as we look at focusing on the productivity of our FAs rather than the number of FAs we have employed in the business,” Gardner said.
Pretax profit at the U.S. brokerage unit, which UBS acquired in 2000 with its purchase of PaineWebber, soared 32% in the first quarter to $324 million from $245 million in the year-earlier period. Total revenue at UBS Wealth Management Americas grew 8% to $2.053 billion from $1.9 billion in the comparable 2016 quarter.
Still, Gardner said, UBS Wealth Americas needed to improve on its loan sales to its wealth clients in order to bring down its still-to-high cost-to-income ratio of 84.2%. That would help add revenue while the recruiting pullback reduced expenses.
“We don’t tend to be the primary bank to our wealth clients in the U.S.,” Gardner said. “Whereas others like Morgan Stanley, Wells Fargo and Bank of America tend to have much larger penetration of banking products.”