UBS Loses U.S. Brokers and New Assets for Second Straight Quarter
UBS Wealth Management Americas continues to suffer from its recruiting pullback, reporting on Friday that customers pulled more than $2 billion from their accounts on a net basis in the third quarter, its second consecutive quarter of big “outflows.”
The decline followed net withdrawals of $6.4 billion in this year’s second quarter and primarily relate to the steady attrition of financial advisors working at the Swiss bank’s U.S. broker-dealer, the company said in reporting quarterly earnings on Friday.
Net new money, or “flows” in the financial lexicon, is a key metric that brokerage firms use to evaluate their businesses that are increasingly reliant on fees tied to client assets. Bank of America’s wealth management businesses recorded $21 billion of net client flows in its third quarter while Morgan Stanley’s wealth management unit booked $15.8 billion of new money in its fee-based advisory accounts.
UBS executives conceded on a conference call with analysts that the outflows reflect a 3% decline in its U.S. brokerage force over the previous 12 months to 6,861 advisors, less than half of its “wirehouse” competitors at Merrill Lynch, Morgan Stanley and Wells Fargo Advisors.
However, they defended their strategy of paying up to promote retention of top experienced brokers in the U.S. rather than spending heavily to recruit new advisors from rivals. In the summer of 2016, UBS Americas head Tom Naratil cut recruiting goals by more than 40%. Earlier this month, the firm said it would lengthen the tenure that inexperienced brokers spend in its training programs.
“Our regretted attrition is down quite nicely year-on-year,” said Kirt Gardner, UBS AG’s chief financial officer, without giving specific numbers.
New assets gathered by experienced brokers at U.S. branches rose 50% in the July-September 2017 period over what they collected in the same quarter of 2016, he said.
The recruiting pullback created a net decline of 54 brokers at UBS Wealth Americas in the third quarter and of 126 since September 30, 2016, but the company’s payouts and incentives to experienced brokers contributed to a 12% jump in advisor compensation to $825 million in the third quarter.
Asked by HSBC analyst Al Alevizakos at what point investors should expect the lower recruiting budget to offset higher compensation-system expenses, Gardner said the benefits of declining recruiting bonuses will start to be seen in early 2018.
“Forgivable” recruiting loans that Naratil’s predecessor paid to build UBS’s brokerage force and that have depressed UBS’s balance sheet declined by 16%, or $500 million, over the past year to $2.7 billion.
“[T]he benefit of that reduction in terms of the amortization of the flow-through of P&L is not yet showing up completely into our results,” Gardner said. “We’ll really start to see that as we get into the first quarter of next year.”
While UBS brokers attracted fewer new assets, customer balances at the U.S. wealth operations grew 8% from a year ago to $1.25 trillion on “positive market performance.”
Overall, adjusted net income at UBS Wealth Americas fell 4% to $351 million in the third quarter from $367 million in the year-earlier period. A 7% jump in quarterly revenue to $2.13 billion was outpaced by an 8% increase in expenses to $1.8 billion.
Gardner attributed some of the expense growth to the hiring of bank “experts” in the U.S. wealth business to help brokers sell more loans and credit products to the investment clients. UBS Wealth Management Americas, like its bank-owned U.S. competitors, has been aggressively incentivizing brokers to sell mortgages and customized lending products to their wealthy customers to generate interest income.
“We intend to look to increase our penetration and our share of that business with our clients,” Gardner said. “As a consequence of that investment, we should continue to see very good lending growth in the U.S. going forward over the next couple of years.”