UBS Group CEO Says Recruiting Deals Hurt Clients, Advisors and Shareholders
UBS Group Chief Executive Sergio Ermotti spelled out with stinging clarity on Friday why the company has directed Wealth Management America executives to retreat from the recruiting wars that have escalated expenses and eroded profits.
The U.S. broker-dealer said in June that it would cut its high-end broker recruiting budget by 40% and unveiled a compensation plan aimed at increasing retention of existing million-dollar producers.
“This will allow us to de-emphasize the aggressive recruiting practices prevalent in the industry, which are not in the best interests of our clients, advisors and shareholders,” the head of Switzerland’s biggest bank company said on a call with analysts to discuss its second-quarter results.
Wealth Management Americas was the second-highest producer of revenue among the bank’s five business lines but its second-lowest generator of profit because of personnel expenses.
UBS also is adjusting branch managers compensation plans to emphasize “economic profit growth, rather than the traditional incentive of meeting recruiting goals, it said on Friday. Tom Naratil, who took the reins of UBS Americas’ businesses from Bob McCann in January also is eliminating dozens of regional management and complex director positions.
UBS’s new strategy has set off a debate as to whether rival brokerage firms will follow with moves of their own to tighten signing bonuses or up the pressure on UBS by waving deals before its own top producers.For years, brokerage executives have complained that bonuses which can reach as high as four times the annual revenue that top brokers produce are not economical.
“Merrill and Morgan Stanley will follow suit,” said a Wells Fargo broker, who spent years at another firm as a branch manager. “We’ll follow suit, and deals will be less compelling.”
Spokespeople at Merrill and Wells Fargo did not respond to requests for comment.
“We continue to recruit selectively, as does UBS and all others in the industry,” said Morgan Stanley spokesman James Wiggins. “Recruiting bonuses, structured properly, can be accretive.”
UBS Americas’ broker headcount slipped by a net 29 in the second quarter to 7,116, but was up 2% from 6,948 a year earlier.
“You’re clearly on a very different trajectory from your competitors in terms of advisor hiring,” Autonomous Research analyst Stefan Stalman noted on Friday’s conference call. “Your major competitors are talking about windows of opportunity, and they are hiring like there’s no tomorrow.”
The compensation numbers that UBS Wealth Management Americas reported in the second quarter, however, told the story that executives are making.
Its revenue of $1.9 billion trailed only investment banking among the Swiss bank’s five main businesses, but its pretax profit of $281 million (a number that excludes litigation and regulatory expenses) was the second-lowest.
As of June 30, Wealth Management Americas had $3.24 billion of recruiting loans weighing its books, up 13% from a year earlier as the company spent heavily in late 2015 to recruit brokers from rival Credit Suisse’s crumbling U.S. brokerage operation.
UBS Wealth America’s second-quarter spending on compensation was 85% of its revenue. That’s lower than 88% a year earlier but well below the 75%-80% comp ratio that UBS executives have targeted, and the highest of all UBS’s businesses. In contrast, UBS’s wealth management business outside the Americas had a compensation-to-income ration of 67% in the second quarter.
“We prefer to invest to retain our current advisors rather than continuously recruiting new ones,” UBS Group Chief Financial Officer Kirt Gardner told analysts. “A retained advisor generates significantly higher economic profits compared with a recruited one over time, due in part to greater client retention and lower capital consumption.”