UBS's U.S. Brokerage Nears Turning Point With McCann

(Dow Jones) UBS Wealth Management Americas is beginning to see some improvement under the new direction of Robert McCann, even as it still struggles with financial advisor departures and client asset outflows.

The unit's brokerage ranks fell to 6,760 financial advisors, according to UBS's quarterly earnings report. That's a 2% drop from the first quarter and a 15% decline from a year ago. UBS said it isn't interested in competing in headcount with the biggest brokerages; Bank of America Merrill Lynch, Wells Fargo Advisors and Morgan Stanley Smith Barney have each reached the 15,000 to 18,000 range through mergers and acquisitions.

McCann, who joined UBS in October after decades at Merrill Lynch, vowed to instead focus on having a smaller, more productive brokerage force.

Despite losing about 100 advisors in the quarter, McCann made headway in his push for productivity: The group increased annualized production to $793,000 in fees and commissions per adviser.

The production average is close to that of Merrill Lynch and tops that of Morgan Stanley, but it is still short of McCann's ultimate goal of about $1 million per adviser.

The Wealth Management Americas group spent $147.4 million on signing bonuses related to advisor recruiting in the second quarter. For example, if they recruit a $1 million producer, and give him a $1.3 million signing bonus as a nine-year forgivable loan, it would cost the firm about $36,000 each quarter. Those costs are down some from a year ago, when UBS was offering the industry's biggest bonuses, spending $164.9 million in the second quarter of last year.

With a less-aggressive recruiting campaign, there has been a slow trickle of advisors out the door. Losing brokers means losing client assets: UBS reported a net loss of $2.67 billion in U.S. client assets for the second quarter. And the unit's total client assets were down 3% from the first quarter to $683.7 billion.

Still, the net loss was a marked improvement from $6 billion in outflows in the first quarter. And the group also aims to reach about $110 million in assets under management per adviser. In the second quarter, it averaged nearly $95 million per adviser, which tops competitors.

"We want to be in a higher client segment. I think that's becoming very clear, and we see signs we are recognized there and that the strategy is working out," said UBS Chief Executive Oswald Gruebel on a conference call Tuesday. He added: "But yes, it took a long time. Bob McCann only joined at the end of October last year, and his changes are slowly coming through."

Another goal of McCann's is to achieve a cost/income ratio of 80% to 85%, meaning the group makes a profit of 15 to 20 cents on every dollar earned. With the restructuring costs incurred in the second quarter, the cost/income ratio was an unprofitable 104.4%.

Gruebel said that UBS Wealth Management Americas "will be a very profitable business going forward...but like with any business, we have to bring it into shape, and that's what we have done the last few months.

"It is a good business to be in, even with a high cost base, because it is very predictable, its costs are predictable, and if you run it properly, it can run quite well," he said.

The restructuring costs of $134.5 million included $17.5 million in personnel expenses and the remainder in real-estate expenses, as the division renegotiated leases, combined some branch offices and attempted to sublet extra space in a poor real-estate market.

With these costs, the second quarter resulted in a pre-tax loss of $61.7 million, following a $14 million profit in the first quarter.

Excluding restructuring expenses, the group brought a pre-tax profit of $72.8 million, which is still a long way from its goal of roughly $1 billion.

In its first-quarter earnings, UBS warned that these restructuring expenses would hit its books in the second quarter, but UBS has made no indication that it will incur similar costs in the third quarter.