From the February 2007 issue of Research Magazine • Subscribe!

UBS' Take on Fee Work: 'A Lot of Clients Want It'

Marten Hoekstra, head of U.S. wealth management for UBS, gives his opinion on the New York Attorney General's recent lawsuit, acquisitions and plans for 2007. His views were shared with Research during a late-December 2006 interview in his office in Weehawken, N.J.

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What is your view on the recent lawsuit filed against UBS, alleging some $51 million in excessive fees paid for some 31,500 accounts?

The fee-based brokerage business is well understood by all those in the brokerage business, and there's now a subset of clients that want it ... Some would say that UBS does this in a more disciplined way than most firms do, meaning that the controls are strong.

Unfortunately, the staff under the former New York Attorney General's office has concluded that fee-based brokerage work is inherently fraudulent rather than an acceptable alternative method. The complaint says it was designed by the industry as a fraud, and that any client who chooses to pay a firm that way, and would have paid more that way than they would have paid otherwise in a given year, should have all their money refunded. If you take the [legal] filing literally, then you shouldn't even consider the client's wishes or even if the client saved money over the lifetime of the account relationship -- so over three years a client might have saved money, but in a given year, if they spent more money than they might have, then they should be refunded on that year.

We think the position is anti-client, because lots of clients want fee-based brokerage services. We think it is also anti-industry, because with fees based on assets everybody's interests are aligned.

How do you feel about what UBS paid for Piper Jaffray and McDonald Investments, and how do acquisitions fit into UBS' strategy?

After the deal was announced, most competitors offered the Piper Jaffray advisors more than 200 percent to not join UBS and go to them. And that is more than we paid. We paid about 1.7 times revenue. Time will tell if we paid too much for the 80 percent or so that stayed and joined UBS.

It's important to know that in terms of profits and losses, that did take some energy. But on a management level, we are committing significantly more resources to organic growth than we have been to acquisitions ... and this area has as big an impact on results.

We are really committed to having the best client experience overall, which we think will generate the most assets per advisor. And that's why we need our advisors to keep growing faster than our competitors. That is what's happening, but we have to sustain that for multiple years, which is a challenge.

The acquisitions are critical for a very simple reason: If we can bring very talented people in with good client relationships so their assets come with them -- whether they're recruited or whether they're hired -- it improves our margins.

How else is UBS focusing on improving its competitive position?

We have to get it right. We're the only major U.S. competitor in which the wealth-management business is bigger than the investment business.

All of our U.S. competitors take institutional-side equity research, repackage it and give it to [retail clients]. At UBS, we have 150 analysts who write for private clients ... we have to be in a position where we have independent people thinking about security selection.

Another example, right now we're in the market with a Deutsche Bank structured product, while our major competitors are selling their own structured products. Open architecture in structured products is something that you would only do if you were completely committed to the private-client experience and to private clients as your primary audience.

How does your global wealth-management expertise help advisors?

Something that gained momentum in 2006 but is not complete is that we're putting a lot more technical expertise in the field available for clients and ... these are experts with different kinds of incentives ...

We cut it down so that only about 30 percent of the compensation has anything to do with the volume of what their specialty is ..., and we built the incentives around total assets raised. We changed the reporting relationships ... and they're also evaluated on how other people in the region perceive them as adding value to the client situations. This basically says that you have technical experts out there who are paid to create a better client experience, which is subjectively judged and also judged by how many assets are raised rather than being product-centric.

What's new with your high-net-worth and ultra-high-net-worth programs?

We have an accreditation program for those who want to specialize in households with $10 million and up. There are 121 people who've gone through it ... Those people gather assets a lot faster than anybody else here.

We think we will have 400 accredited by 2010.

The high-net-worth business, $2 million to $10 million, is the other big driver of our assets right now. About 2,000 people have been through our wealth management education program.

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