UBS Slashes Bonuses for Fee-Based Brokers, Raises Industry Eyebrows

(Updates with comment from McLagan consultant in 19th and 20th paragraphs.)

Beneath the payout and management shifts unleashed by UBS AG’s U.S. broker-dealer last week are fundamental changes in the way the firm expects brokers to work with clients, say some advisers and consultants.

UBS Wealth Management Americas had arguably advanced farther than any of its rivals in transforming  brokers from commission-earning stock-and-bond jockeys to fee-collecting “wealth managers” who develop financial plans addressing clients’ life-cycle needs.

The shift had the multiple benefits of helping UBS sell loans, insurance and retirement advice in addition to traditional investments, book fees even when markets keep customers from trading and dissuading brokers from trading excessively to earn commissions. Regulators generally blessed the behavioral change.

The 2017 compensation plan and management reorganization unveiled by UBS Americas President Tom Naratil, however, calls into question the firm’s commitment to the new model, several people inside and outside the company say.

The broker-dealer last week gave pink slips to David McWilliams and Pete Tedesco, the veteran sales managers who since 2012 were in charge of the behavioral shift toward financial planning. UBS has not to date indicated if it will replace them, and officials would not comment on reasons for their departures. At least one person close to the dismissals said no reason was offered.

Emphasizing the importance UBS put on their former roles, McWilliams had the unique brokerage industry title of “head of wealth management transformation” and reported to Brian Hull, boss of the firm’s force of about 7,000 brokers.

Tedesco, as head of “wealth management consulting,” was responsible for marshalling staff in the field and at support desks to advise brokers on how to pitch financial plans and help clients make appropriate product choices. He had been with UBS and predecessor firms since 1994, and reported to Jeff Miller, who is head of “advice and platforms” at UBS Wealth Management Americas. Miller, who did not return a call for comment, reports to group managing director Paul Hatch, head of products and managed accounts.

A UBS spokesman did not respond to questions as to whether the pair’s Pygmalion roles will be filled, whether UBS believes that transformation of the broker-client relationship is still needed or why its 2017 plan drops incentives to put clients into advisory accounts when new Department of Labor rules encourage such accounts.

“Look at the Comp Plan”

The 2017 plan that Naratil trotted out last Wednesday, about six months ahead of the usual schedule for annual compensation tweaks, answers some of the questions, according to some brokers.  

“It takes away basically every incentive to work with clients on ‘wrap’ business,” said an adviser in the Midwest who spoke on condition of anonymity, using industry jargon for single-fee investment plans. “It does away with all those things they said would help us do the right thing for clients and which made us compliant with fiduciary standards.”

UBS is eliminating its two bonuses, or “strategic objective awards” in UBS-speak, that rewarded fee-based behavior for the past several years—the “wealth management award” bonus and the “financial planning” award. The former,was particularly lucrative for brokers who bought into fee-based planning, and may have been victimized by the tight budgets that UBS’s Swiss parent is imposing across the bank, some brokers said.

Here’s how the wealth award works for 2016. Brokers who generate 75% or more of their annual production from fees, loans and financial planning products pocket 6% of that revenue in deferred cash and stock.The bonus phases down in 50 basis-point stages to 0.5% for brokers generating as little as 5% of annual revenue from wealth management strategies.

The “financial planning award” hitting the dust next year offers brokers 1.5% to 4.0% of half of the revenue generated from households who work under a financial plan. UBS will continue to let brokers keep 50% of any fee they charge for financial plans, although many brokers create them gratis, viewing them as smart client-solicitation and client-maintenance tools.

An advisor with just over $1 million of production and a strong fee-based book would supplement his or her payout by around $80,000 pretax, according to the plans in place in 2015 and 2016, several advisers said.

A Bone for Commission Brokers

In another indication of its shift from encouraging fee-based planning, UBS’s 2017 plan offers a bone to brokers who make commission trades for customers. It eliminates the $12-$15 per trade “ticket charge” brokers were charged to ostensibly cover execution costs and to modify their commission-generating behavior. 

“It’s a pat on the butt for FAs (financial advisors) who do transactions,” one broker said.  

A branch manager who has spent the bulk of his career at UBS and its predecessor PaineWebber said few of the approximately 20 brokers at the firm he has talked to in the past week are sensitive to any cultural shift and are embracing the simplicity of the 2017 plan. (The 13-page plan document is down from more than 30 pages in the past two years.) He believes they are missing an important signal, and are not paying attention to the deferred part of their compensation that includes the wealth awards.

“UBS has effectively closed the doors on the big bet it was making on wealth management,” he said.

To be sure, Naratil and other UBS executives have not explicitly endorsed a shift away from the wealth-management bias that the firm and most rivals have been embracing. Indeed, one consultant believes the argument for advisory accounts has become so engrained that firms may not need to spend as much on behavior-changing programs.

“Generally fee-based still has room to grow, especially considering the impact of the DOL rule and upcoming SEC fiduciary regulations,” Peter Keuls, leader of McLagan Partners’ wealth management consulting practice wrote in an e-mail. “FAs increasingly see the imperative to shift to a planning and advisory model from a more transactional approach with clients.  As a result, additional incentives to promote this shift are less necessary than before.”

Keuls said he was not commenting specifically on UBS or any particular firm.

Compensation plans are, nevertheless, meant to modify behavior, and UBS may be trying to send brokers who still like transactions another message with its new plan, according to pay consultants.

“They probably figure that the transformation to fee-based has stabilized and that they need to keep high-producing brokers in place,” said Johnson Associates founder Alan Johnson. “I’m guessing Naratil is sending a message to his big producers that ‘UBS loves you.’”

Johnson said UBS is not a client and that he is not familiar with its strategy.

Naratil has made it clear that broker retention has become more important now that he has cut recruiting targets by 40%. UBS Americas has more than $3 billion of recruiting loans weighing its books.

Morgan Stanley, Wells Fargo Advisors, Merrill Lynch and other UBS brokerage rivals will undoubtedly be running their own numbers to see if they should mimic its shift, or perhaps dangle their own wealth management-like awards to lure disenchanted UBS brokers, Johnson said.