After a year of seeing its reputation battered by lawsuits and controversy, UBS is taking steps to restructure its business in the US and show its commitment to the market. Charles Davis spoke to John Straus, head of the bank’s US Private Wealth Management business about the plans.
Having dispensed with a bevy of lower-tiered branch locations, UBS is set on expanding its high-end US wealth management business as it charts a comeback from a difficult year.
UBS sees great opportunity in its New York-based US Private Wealth management business, according to John Straus, the head of the division, adding that the bank senses the worst may be behind the venerable Swiss bank, which has spent the past few months coping with the furor from the auction-rate securities controversy as well as general investor anxiety over the market.
“Clearly, what happened in the markets has been unprecedented and in many cases people had a significant reduction in net worth as a result of the markets, and universally investors were unhappy,” said Straus, who refused to comment on questions about the bank’s ongoing dispute with US authorities.
“They had spent years thinking about diversification and then everything went to a correlation of one, and there was a tremendous amount of wealth destroyed.”
Straus said UBS decided some time ago to make the ultra high net worth and high net worth client segments its focus in the United States, which, in part, drove the decision to sell off 55 branches to St. Louis-based Stifel Financial (see PBI 247).
Straus said the deal, which is scheduled to close in the third quarter, fits UBS Wealth Management America’s desire to continue to move upscale and to work with bigger-producing advisers and offices.
“Where we are growing our business is in the high net worth and ultra high net worth segment, and we had a lot of advisers and offices in smaller branches with clientele who were not as wealthy – they need and deserve a great client experience, but we weren’t building out to that segment,” Straus said. “This allows us greater focus on our core wealth management business.”
While selling off branches serving the lower end of the wealth continuum, UBS is opening new locations serving the high end of the market. This year the unit has opened offices in Washington DC and Dallas and plans to open its 12th location in Louisville, with an office in south Florida a distinct possibility, Straus said.
Despite spending most of the past year with clients reeling from market volatility, Straus said UBS remained committed to its plans to double the unit’s market share of assets invested by wealthy individuals and families, even if the timeline for such growth has been altered by market events.
“There was a lot of wealth lost in the United States during this period, but there have been many periods where wealth was lost. Clients with a long-term strategy of diversification have seen their families weather these events,” Straus said.
“We see a lot of potential out there to grow the wealth management business.”
In order to help realise that potential, UBS has made a major recruiting push, doubling its number of client-facing financial professionals in its Private Wealth Management unit over the past year, to 280. Straus said UBS has had a lot of success in recruiting some of the best talent in the business in recent months.
“We’re putting a real emphasis on one-on-one client relations at the high end of the wealth management market, and that is very appealing to advisers,” he said. “We are investing in the advising piece of the business.”
UBS created the private wealth management offices for those with more than $10 million to invest. They combine brokerage, trust and private banking services in one location to provide these services seamlessly.
That one-on-one approach has helped UBS deal with a rocky period filled with tough headlines.
In August, UBS Securities and UBS Financial Services reached an agreement with the Securities and Exchange Commission to spend more than $20 billion repurchasing auction-rate securities from investors. The auction-rate market had collapsed six months earlier, leaving more than 40,000 UBS customers with illiquid securities, even though UBS had marketed them as cash alternatives, according to the SEC.
UBS moved aggressively to deal with the auction-rate issue, and today the bank feels that its clients are ready to move on.
“We see pockets of interest and people coming back to the market,” Straus said. “People are less fearful than two months ago, but they are still very, very cautious, and we are going to have to be much more transparent and honest as an industry to see investors return to the market in a big way.”
Straus said that in conversations with clients, he senses a willingness among investors to return to the market, but that willingness is tempered by the fact that so many investors who had done the right things – who were diversified, and who had relatively conservative exposure – lost money right along with the high-risk set.
“If you did everything right and still lost a lot of money, you have every right to be unhappy, but our clients can’t sit out the market, either,” he said.
“We’ve enjoyed a 20 percent gain in the past couple of months. The common theme is leverage, really. If someone else is dependent upon your investments doing well, then when things go bad, they may well want their money back.”
The key now, Straus said, is regaining the market confidence and entrepreneurial gumption that made so many of UBS’s clients wealthy in the first place.
“Simplicity and transparency will be the hallmarks of the wealth business moving forward,” he said. “The days of a new hedge fund locking up money for two years at a minimum are over.
“This was a frightening time for the investment world, and you don’t just move immediately out of that. We had investors asking really basic questions about the solvency of their institutions, really for the first time since the Great Depression, and that takes time to rebuild from.”
UBS’s Wealth Management Americas business had a mixed quarter, according to the bank’s first quarter results. While it made a CHF35 million ($31.5 million) pre-tax loss, which included a goodwill impairment of CHF19 million on the sale of its Brazilian onshore wealth management and investment banking business, UBS Pactual, there were strong inflows of client money.
Underlying results deteriorated from the fourth quarter of 2008, which made a pre-tax loss of CHF444 million because of the impact of settlements related to clients with auction rate securities. Ignoring that charge, of CHF717 million, the first-quarter loss of CHF35 million compared with a fourth-quarter profit of CHF273 million. Total net new money inflows were CHF21.1 billion, up from CHF8 billion in the fourth quarter.
The bank’s exit from the onshore market in Brazil, with the $2.5 billion sale of UBS Pactual, boosts the bank’s Tier-1 capital but restricts it to being a purely offshore player in what is considered to be one of the world’s most promising wealth markets.
The business is Brazil’s third largest private bank, according to PBI’s Latin America survey (see PBI 244). It is being bought by a company run by the original founders of Pactual, BTG, for the same price UBS paid three years ago.
UBS is holding on to Pactual’s offshore private banking business, the niche where the Swiss bank is considered to be most competitive in Brazil.