UBS Wealth Americas Lost $6.4 Billion of Customer Assets in Second Quarter
UBS boasted on Friday that its shrinking force of U.S. brokers registered “industry-leading” annualized average revenue per advisor of $1.2 million in the second quarter, but its Wealth Management Americas division suffered net outflows of $6.4 billion from client accounts.
The outflow was in sharp contrast to net new money that flowed into accounts at rivals Merrill Lynch and Morgan Stanley in the second quarter and to inflows of about $14.1 billion at UBS AG’s wealth business outside of the U.S.
In reporting its second-quarter earnings, the Swiss banking giant said the net new money deficit at its U.S. wealth arm reflected lower recruiting of experienced advisors, exacerbated by $3.3 billion that customers withdrew for “tax-related” reasons. In last year’s second quarter, however, UBS Wealth Americas attracted $2.4 billion of net new money.
The U.S. wealth unit overall reported a 17% jump in pretax profit to $330 million from a year earlier, which it attributed largely to a 20% year-over-year gain in net interest income to $429 million due to higher short-term interest rates and growth in customer loan balances. Operating expenses grew 9% in the U.S. to $1.8 billion—driven by a 15% jump in broker compensation to $830 million and a 34% increase in general and administrative expenses.
UBS Wealth Management Americas’ results missed consensus forecasts and surprised some analysts. Earlier this year, UBS executives said that the U.S. wealth division’s strategy announced last summer to cut recruiting and to change its pay grid to encourage advisor “loyalty, teaming and growth” was succeeding in boosting revenue and profit margin.
“The jury has been out on WMA since it was acquired in 2000 [when UBS bought PaineWebber],” London-based Atlantic Equities analyst Christopher Wheeler told The Financial Times after the Swiss bank reported results. “It continues to substantially underperform its U.S. peers.”
Net profit margin at the U.S. wealth unit remained stuck at 11 basis points, the same as one year ago and at the end of the first quarter. The margin was three times higher in the bank’s Swiss wealth management and emerging markets wealth businesses and more than twice as high in its AsiaPacific wealth management business, the bank said. UBS’s European wealth unit, its second largest wealth business as measured by its 1,237 advisors, generated 18 basis points of net margin.
The results rekindled talk among some analysts and brokers that the Swiss bank’s executives, including UBS Americas President Tom Naratil who was formerly chief financial officer of UBS AG, may consider a sale once UBS Wealth Management America’s valuable tax-loss “carry-forwards” begin to dwindle.
UBS Financial Services, the bank’s U.S. broker-dealer, had $1.85 billion of tax offsets on its books as of the end of last year, according to its filed in March. That includes $739.8 million of state and local tax-loss carry forward that begin expiring in 2020, $458.4 million of foreign loss carryforwards that begin to dwindle in 2024 and $640.7 million of U.S. federal tax offsets that begin to expire in 2031.
Spokespeople at UBS Wealth Americas did not respond to requests for comment.
The overhang of “forgivable” loans made to U.S. brokers as a result of ramped-up recruiting after the financial crisis fell 15% from a year ago to $2.75 billion from $3.23 billion, and the company said in a presentation to analysts that it expects loan amortization cost reductions to “accelerate into 2018.”
Its U.S. brokerage force fell by a net 54 during the quarter to 6,915 brokers as of June 30. Over the previous 12 months, a net 230 brokers left the company.
Compensation expenses at Wealth Management Americas grew by 15% from the year-earlier quarter to $830 million, reflecting higher compensable revenue and changes to grid-based compensation, the Swiss bank said.
Customer account assets in the U.S. grew at an annualized rate of 5.6%, despite the net new money deficit, as U.S. markets appreciated during the quarter. The growth rate fell from 10.3% in the year-earlier quarter and from 15.1% in this year’s first quarter.
UBS applauded the growth of money in managed advisory accounts, which it said represented 35.8% of its U.S. wealth customers’ assets, as of June 30, up from 34.5% a year earlier. The U.S. wealth unit generated $1.3 billion of “recurring” net fee income in the quarter, more than half of its total operating income of $2.1 billion.
Like its competitors, UBS has been encouraging brokers to convert clients to fee-based advisory accounts that generate revenue based on a percentage of assets as opposed to commissions from trading and other transactions in traditional brokerage accounts. Fee-based assets at Morgan Stanley rose by $19.9 billion during the second quarter while those at Merrill Lynch and its U.S. Trust private banking partner were up $28 billion.
U.S. firms consider advisory accounts more profitable than traditional commission accounts because the revenue is recurring whether or not customers trade and because discounting is less prevalent than in commission accounts.
The gross margin differential from advisory accounts over brokerage accounts at UBS Wealth Americas contracted to 53 basis points in the first half of 2016 from 55 basis points in 2016, UBS said.