From the November 2011 issue of Research Magazine • Subscribe!

October 26, 2011

UBS Sees Leaders Exit, Expects Profit

UBS said in early October that the co-heads of its global-equities unit resigned in response to the unauthorized trading that caused a $2.3 billion loss at the bank in mid-September. A former Bank of America-Merrill Lynch executive is now the sole leader of the unit. These shifts come on the heels of former UBS CEO Oswald Gruebel’s resignation in late September; Gruebel was replaced by interim CEO Sergio Ermotti, a former Merrill executive, prompting many recruiters to predict that the U.S. wealth-management operations of UBS could likely see some departures and weak recruiting.

“Carsten Kengeter, CEO UBS Investment Bank, has … accepted the resignations of Francois Gouws and Yassine Bouhara, co-heads of global equities, following the recently announced unauthorized trading incident,” UBS said in a press release. “Their resignations come as they assume overall responsibility for the effective management of the equities business.”

UBS also says that “appropriate disciplinary action” is being taken against other individuals in the equities business as a result of the revelation about the unauthorized trades and the mid-September arrest of UBS trader Kweku Adoboli in London. “UBS also expects to take disciplinary action against responsible staff in other functions,” the company explained in a statement.

Mike Stewart, who recently joined UBS from BofA-Merrill Lynch where he headed its global-equities division, is now the global head of equities operations at UBS. “He brings with him extensive market and leadership experience that is needed to ensure the sound management of the business and seamless execution of the firm’s global-equities strategy,” the Swiss bank said in a statement.

UBS also said in early October that, despite the trading losses and a $433 million restructuring charge tied to cost cutting, it should report a modest net profit for the third quarter of 2011. In addition, UBS expects to report net new money inflows in its wealth-management businesses “at levels broadly similar to those of the previous quarter,” it said. Global asset management, however, should report moderate net new money outflows.

UBS includes 11,065 advisors worldwide, about half of whom are in the United States. The bank said recently that it plans to continue with further cost cutting and job reductions through 2012. However, “UBS will continue to invest in growth regions, including Asia Pacific, the Americas, and the emerging markets, as well as in our global wealth-management franchise,” it said in a statement.

In the second quarter of 2011, UBS’ non-U.S. wealth management operations attracted $6.1 billion in net new assets. By region, the net inflows were roughly $3.4 billion in Asia, $3 billion in the emerging markets (including Latin America) and $1.6 billion in Switzerland. Outflows of $2 billion took place in Europe. And the group reported that $4.4 billion of net inflows worldwide came from ultra-high-net-worth clients.

In the United States, net new money inflows were $6.7 billion, including dividends and interest. Excluding these items, the inflows in the second quarter were $2.8 billion. (This unit is led by former-Merrill Lynch executive Bob McCann.)

“UBS’s capital position remains strong, and its capital base at the end of the third quarter of 2011 is expected to remain broadly in line with the balance at the end of the previous quarter, including the loss associated with the unauthorized trading incident,” the company said. “The BIS Basel II tier 1 capital ratio is expected to decline slightly compared with the second quarter due to the impact on risk-weighted assets of the unauthorized trading incident.”

As uncertainty continues over how UBS’ new interim CEO will steer the company, UBS financial advisors in the United States are facing 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.

Interim CEO Ermotti 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, “but the leadership of UBS will do all they can to prevent it.”

He and other industry insiders, however, are mulling 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 Roame, 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,” the recruiter shared.

“Financial advisors are tired of addressing their firms’ investment banking business operations’ mistakes; this is another example,” Roame added. “That said, many financial advisors are under contract, so they can complain but not easily move without loan issues.”  (Clients, he notes, 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, says the consultant, the latest troubles at UBS will probably limit its investments in all the bank’s businesses, making higher signing bonuses and retention packages difficult.

Operational Issues

In the second quarter, 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 have averaged about $712 million 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 $135 million in each of the past two quarters.

“This is a business with massive fixed costs,” said Mindy Diamond of Diamond Consultants 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. “UBS may see the U.S. operations as a strong component of their business and not think that selling the unit makes sense,” explained attorney Patrick Burns in an interview. While rumors continue, “Reps remain very concerned,” Burns stressed.

For its part, UBS says that U.S.-based executives Bob McCann and Bob Mulholland have “been very communicative” about recent trading losses and the CEO’s departure. The message they’ve been conveying 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-percent business as usual,” according to a spokesperson.

This situation can really hurt advisor efficiency, notes Diamond, “if you have to spend half your time answering calls from nervous clients about the stability of UBS, the stability of their assets and checks and balances at the firm.” In some ways, it’s reminiscent of 2008-2009, says the recruiter, who works for wirehouse rival Morgan Stanley and other clients.

As for what McCann can do to rally advisors in this climate, there may be little to nothing for him to say, according to Rick Peterson of Rick Peterson & Associates in Houston. “I don’t think McCann can tell the troops anything to put them at ease until a new [permanent] CEO is named and then can express plans for the future of the firm in the U.S. market,” he concluded.

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