September 29, 2011

Sale of UBS-Americas Would Be ‘Nuclear Option,’ Says Expert

UBS may need to consider spinning off its U.S. operations as a worst-case scenario, according to recruiters and others

UBS offices in New York. (Photo: AP) UBS offices in New York. (Photo: AP)

As uncertainty continues over how UBS’ new interim CEO will put the company and its finances back together, UBS financial advisors in the United States are facing a barrage of calls from upset clients and eager recruiters. Still, the likelihood that the U.S. wealth operations will be spun-off, though it does exist, is somewhat remote, experts and recruiters say.

The new CEO, Sergio P. Ermotti, who is a veteran Merrill Lynch executive, is likely to do all he can to keep the advisors calm and may even introduce some cost-cutting measures, says Ron Edde, a recruiter with Armstrong Financial Group. “Or there is the nuclear option of spinning off and selling the wealth-management operations” in the Americas, he said in an interview with AdvisorOne, “but the leadership of UBS will do all they can to prevent it.”

He and other industry insiders, however, acknowledge that if there is an exodus of clients or advisors, “This option will be back on the table,” said Edde, who adds that it has been a rumored strategy for some time.

chip roameChip Roame (left), head of Tiburon Strategic Advisors, a consulting group, agrees. “At a more radical level, and UBS repeatedly says its full-service brokerage business is not for sale, that may be its expectation. But capital constraints created by stumbles like this can change all strategies,” Roame explained in an interview.

UBS advisors are hearing from clients, according to Edde. “I just got off the phone with an advisor who said he’d spoken with a large client who said, ‘We don’t trust UBS.’ Right now, there’s a general flight to safety and security. And that prompts clients to ask, ‘If UBS can't manage its own money, what can it do with ours.’ ”

While such perceptions may be unfair to the advisor, “Fair or not, this is the perception [of the general public], and advisors are hearing it in significant numbers,” Edde shared.

“Financial advisors are tired of addressing their firms' investment banking business operations' mistakes; this is another example,” Roame said. “That said, many financial advisors are under contract, so they can complain but not easily move without loan issues.

(Clients, of course, do not face such constraints when it comes to moving their money.)

“Will this challenge UBS' ability to recruit?” asked Roame. “Yes. They may have to pay more.”

And, adds the consultant, the latest troubles at UBS will limit their investments in all the businesses, making higher signing bonuses and retention packages difficult.

Operational Issues

There are several key differences between UBS’ main operating units, financial documents show.

In the second quarter, for instance, UBS’ non-U.S. wealth management included about 4,200 advisors and 16,110 staff members. In the United States, there were 6,800 advisors and 16,240 advisors.

However, pre-tax quarterly profits for the non-U.S. wealth management unit has averaged about 660 million Swiss francs per quarter in the first half of 2011, while the U.S. counterpart has had average pre-tax quarterly profits of less than one-fifth that level: about 125 million Swiss francs in the past two quarters.

“This is a business with massive fixed costs,” said Mindy Diamond of Diamond Consultant in an interview. “If you’re less efficient and not as profitable as rivals, then you can’t invest and innovate as much as they can. The Swiss haven’t made it much of a secret that they’d like to see if they could get the right price.”

While speculation remains about such a strategy—since UBS would have to find a suitor with the financial means to buy and run the business profitably—the UBS advisors and clients are left operating with further stability, experts say.

patrick burns“UBS may see the U.S. operations as a strong component of their business and not think that selling the unit makes sense,” said attorney Patrick Burns (left) in an interview. While rumors continue, “Reps remain very concerned,” he stressed.

For its part, UBS says that executives Bob McCann and Bob Mulholland have "been very communicative" about recent trading losses and the CEO's departure. The message they've been convening is that while the recent events are frustrating, advisors should reach out to clients to let them know that the trading incident was in the investment bank and that wealth management Americas is "absolutely 100% business as usual," according to a spokesperson.

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