More On Legal & Compliancefrom The Advisor's Professional Library
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The latest scandal at UBS (UBS) shouldn’t financially impact its U.S.-based financial advisors, experts say, but it could weaken the wirehouse firm’s recruiting and retention efforts. This is because the trading loss of $2.3 billion comes on the heels of a host of other issues that have negatively impacted the Swiss-based firm, causing embarrassment for some advisors, they note.
The latest development means UBS loses further “credibility with big and small clients,” said recruiter Rick Peterson of Peterson & Associates in Houston in an interview with AdvisorOne.com. “I hear that from brokers, because clients are asking, ‘Is my money safe with this firm?’ And that makes brokers vote with their feet and move out.”
While there will not be any compensation changes for financial advisors with UBS due to the losses, Peterson explains, it will get "sticky" in other ways: "It has to do with the same issue that’s affected the firm for a long time: They are constantly and negatively in the press.”
In terms of retention and recruiting, Peterson says, the latest bad publicity should hurt them. “UBS is like the gang that can’t shoot straight,” the Texas-based recruiter said. “Plus, they continue to shoot themselves in the foot,” Peterson explained. “They’ve sold the wrong products, tried to take advantage of certain Swiss banking laws and then got caught doing that. Either they don’t understand due diligence or something. This is a problem.”
UBS wealth-management operations in the Americas are led by Bob McCann (left), formerly of Merrill Lynch, and include about 6,860 advisors. They have the highest average assets under management per FA of the four wirehouse firms as of the second quarter of 2011 at roughly $113 million.
News that there were losses from unauthorized trading at UBS worth an estimated $2 billion emerged on Thursday. On Sunday, though, UBS said that these losses totaled $2.3 billion and that “no client positions were affected.”
“The loss resulted from unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months,” the company said in a press release. “However, the true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader. These fictitious trades concealed the fact that the index futures trades violated UBS's risk limits.”
Peterson is not the only recruiter who's become very bearish on UBS over the past week or so. "A large percent of UBS advisors feel very strongly that this is the straw that broke the camel’s back,” said Mindy Diamond of Diamond Consultants, which works for Morgan Stanley and other firms. “I’ve spoken to large teams at UBS who feel it’s not choice. They need to leave because their clients are asking questions … and their prospecting [success] is now a concern.”
Not all experts see it that way, of course. “I think that an issue like this of a rogue trader, who operate outside the brokerage world, fades in several months,” said Andy Tasnady, a broker compensation consultant, in an interview. “Client anxiety is bigger, though, when there’s the matter of the whole company at risk as a going concern.”
Like Peterson, Tasnady says clients "want to know their money safe.”
The shenanigans with the rogue trader, however, could hurt cash flows for UBS’ wealth management, says Patrick Burns, a broker-focused attorney in Los Angeles. “I don’t see that the bonuses for advisors would be at risk, though they could be for executives and others (like traders),” explained in an interview. But a $2.3 billion hit to UBS could, at some point, “make less money available for future recruits and future retention deals.”
In separate news Monday, HighTower said it had recruited a UBS team with about $on 400 million in assets, the Leventhal Group, in Bethesda, Md. Recruiters, though, say this is a reflection of the overall trend of wirehouse advisors breaking away to go independent rather than advisors rapidly fleeing UBS due to negative press.
While UBS may not see advisors walk out tomorrow, Peterson says, the firm shouldn’t expect to have many advisors knocking on their door. “Yes, it’s way too early to say that brokers are leaving UBS because of the scandal,” he said. “But they won’t have many people coming in, in my assessment, because they’ve made one more blunder.”
And at least for one recruiter, the trading loss and its financial problems bring to mind a question that has lingered for some time, despite UBS' efforts to negate it. “Will they sell the U.S. unit?” asked Diamond. “Such a concern hurts both recruiting and retention. It’s hard to recruit in meaningful numbers until this goes away.”