The big bank wants to make business with rich Americans more profitable and larger. But UBS cut its teeth on US asset management during Ermotti’s first term in office.
Attack is the best defense. Instead of worrying about new regulatory requirements that UBS could face, Sergio Ermotti is focusing on growth. He not only wants to integrate CS and save costs, but at the same time expand the major bank into a globally dominant asset manager. In just a few years, UBS is expected to manage $5,000 billion in invested assets.
The way there is still a long one. Today the bank, together with CS’s funds, only manages around 3,900 billion. For UBS President Colm Kelleher, the new assets should not come from Switzerland or Europe, but primarily from the United States and Asia – these are the growth markets of the globally oriented UBS.
But in the USA of all places, the big bank has had a problem for years. Profitability in asset management is significantly worse there than in other regions of the world – Wall Street competitors Morgan Stanley, JP Morgan and Bank of America are clearly ahead.
It’s been a “sad game” for a long time
The situation has recently worsened. In the final quarter of 2023, UBS’s pre-tax profit in US asset management fell from $273 million to $102 million. UBS reported “shockingly low profitability,” says Andreas Venditti, an analyst at Vontobel. It is the lowest quarterly profit in 12 years.
A special payment of $60 million to the US deposit insurance agency was a burden, but even without it the profit disappeared. In addition, Wealth Management USA, with its more than 6,000 customer advisors, struggles with high operating costs. For comparison: In Switzerland, UBS earns three times more in private banking with fewer than 1,000 customer advisors and works much more efficiently. In this country and in Asia, advisors manage significantly more assets per client than in the USA.
For years and in several attempts, UBS has tried to turn things around, but in vain. “For UBS, wealth management in the USA was a tragedy for years,” says Venditti. But there is no way around the country. The US business is the most important wealth management division, in which the most assets are managed.
This makes America the most important region with enormous potential. According to the World Wealth Report published by the major bank, almost 40 percent of the world’s dollar millionaires live in the USA. Among the super-rich, the “ultra high net worth individuals” with assets of more than $50 million who are particularly sought after by private banks, the density is even higher: more than 120,000 of them lived there in 2022, and in the second largest market, China, there were a quarter as many .
But while the CS takeover has boosted UBS’ asset management in Europe, the Middle East and Asia, it doesn’t do much directly in the US. CS left American private banking in 2016 under CEO Tidjane Thiam. It was not successful enough and too expensive to run.
Marcel Ospel’s American ambitions
UBS has Marcel Ospel to thank for its strong presence in the USA. The legacy of the former UBS boss, who died four years ago, lives on in the big bank. Ospel was the architect of the original UBS, which was formed from the merger with the Bankverein. At the turn of the millennium, the controversial banker wanted to make a quantum leap in the American market.
For this purpose, UBS acquired the American brokerage house Paine Webber for the equivalent of more than 20 billion francs today. “This match was made in heaven,” Ospel said when the transaction was announced in New York in the summer of 2000. Almost at the same time, Credit Suisse bought the investment bank Donaldson Lufkin & Jenrette and significantly expanded its position in US investment banking – which later caused major problems and accelerated the bank’s decline.
To this day, the core of UBS’s US asset management team consists of Paine Webber. Although the name officially disappeared in 2003, the unit remained largely independent. Even today, UBS President Kelleher says that Paine Webber was never properly integrated. The business was moderately successful. Over the years there have been meager profits and two losses. There were also sales rumors.
The problem: With Paine Webber, UBS got a large American business, but it also brought the American brokerage model into the house: In contrast to Europe, in this business model it is not the bank that has the relationship with the customer, but the powerful financial advisors, the so-called financial advisors. They act similarly to external asset managers in Switzerland.
These financial advisors are regionally based and use a bank like UBS primarily for booking services and as a supplier of financial products. You are paid heavily based on success and share in sales. But if they are dissatisfied and switch to another bank, the wealthy customers often go with their advisors. The consultants do generate a lot of sales, but a lot of the income stays with them and not with the bank.
On the one hand, UBS must be an attractive platform for financial advisors. On the other hand, the bank also wants to retain customers and their assets more closely by selling them basic services and loans. Today, rich customers use UBS primarily for securities trading; they typically conduct everyday transactions through an American bank.
Khan more successful than Naratil?
UBS has tried several times in the past to change the brokerage model. So far with little success, notes Venditti. The former co-head of asset management Tom Naratil was tasked with revitalizing American business during Sergio Ermotti’s first term of office (until the end of 2020). Following the European model, he tried to break with the broker system and reward financial advisors with new incentives. There have also been initiatives to ensure that banks no longer poach customer advisors from each other.
It is now up to Iqbal Khan, who is solely responsible for global wealth management after Naratil’s departure, and the remaining head of US wealth management, Jason Chandler, to get the business up to speed. According to the industry publication “Advisor Hub”, Chandler has adjusted the incentives for financial advisors for 2024: The base salary remains the same, but there are new bonuses for financial advisors; not just for new customers, but also when they bring in new cash holdings and use basic banking services such as savings accounts or money market funds. A UBS spokesman confirmed the adjustments upon request.
In order for lending to wealthy people to become attractive, UBS needs a larger deposit base. In contrast to Morgan Stanley or JP Morgan, UBS has no retail channels that provide cash for refinancing and new customers for support. UBS wants to give more global customers access to the American market. According to reports, rich customers from the Middle East are very interested in using the USA as a booking platform.
Venditti believes that UBS could also benefit indirectly from CS’s remaining investment bank. She is very strong in the capital markets business and in advising on takeovers and has “access to the executive suites of Corporate America”. It is hoped that this will lead to new customers. That is said to be one of the reasons why UBS has retained parts of the CS investment bank. However, whether sharing customers between areas works is another question.
This time is different
But why should Kahn and Chandler succeed where Naratil failed? According to voices from UBS shareholders, unlike before, there is a clear admission that things were not going well in the USA. There is a different tone and therefore a stronger will to improve the organization. There are also great hopes for Iqbal Khan, who no longer has to share power in wealth management with Naratil, Kelleher and the Americas boss Naureen Hassan, who know the market in depth.
But even if the business is improving operationally, UBS has a size problem. For the USA, $1.8 trillion in assets under management is rather modest. UBS will only be able to look for acquisition targets once the integration has been completed, i.e. in three or four years. The class leader Morgan Stanley only achieved its current supremacy through the acquisitions of the asset manager Smith Barney and the trading platform Etrade.
According to JP Morgan analyst Kian Abouhossein, UBS also has advantages over its American competitors. Morgan Stanley manages more assets, but outside the USA – i.e. in Europe, Asia/Pacific and Latin America – UBS is the leader. In this respect, UBS shares currently have more potential than Morgan Stanley. But as long as the size problem is not addressed, the Swiss will not be able to catch up in terms of evaluation.
Iqbal Khan admits that UBS is not aiming to be number one in the US, it needs to invest heavily first. Some investors are now assuming that getting America’s business ready is a “huge process” that could take up to six years. Just expanding the product portfolio is likely to cost money initially.
Venditti still assumes that the first quarter will be slightly better than the last for seasonal reasons. But no big jumps are to be expected. He generally dampens expectations: “The competition is extremely strong,” and in fact no European bank has ever managed to be truly successful in the USA.
