UBS Financial Services: Is a spinoff in its future?

Questions are swirling about the future of UBS Financial Services Inc. and the brokerage industry is of two minds about what's next. One camp is convinced the New York-based firm is here to stay while the other believes it will be sold off.

Questions are swirling about the future of UBS Financial Services Inc. and the brokerage industry is of two minds about what’s next. One camp is convinced the New York-based firm is here to stay while the other believes it will be sold off.

Those in the first camp maintain that after Swiss parent UBS AG spent $10.8 billion to buy Paine Webber Group Inc. in 2000, it is not about to give up its principal foothold in the United States. The company’s current wealth management franchise grew from that acquisition and today employs some 8,182 representatives and financial advisers.

The here-to-stay advocates also point to the astounding broker re-cruiting deals the firm recently has made as evidence of the Zurich-based bank’s commitment to its U.S. operation.

According to industry sources, UBS Financial has enticed rival reps with almost two and a half times their previous year’s fees and commissions, making the broker recruiting packages among the most generous at wirehouses.

In the fourth quarter, the firm recruited 200 advisers from its competitors, and the U.S. wealth management group brought in $3.8 billion in net new-client assets.

Still, others believe that this is all window dressing in anticipation of a sale.

They highlight such downers as the U.S. wealth management group’s $653 million loss last year and charges related to auction rate securities that turned a pretax profit in the fourth quarter into a loss of $319 million.

JOINT VENTURE?

This leads them to believe that UBS is increasingly unlikely to go it alone and — like the competition, Merrill Lynch & Co Inc. and Smith Barney, both of New York, and Wachovia Securities LLC of St. Louis — UBS Financial eventually will capitulate and either become part of a joint venture or be sold outright.

They reason that without the scale of 15,000 to 20,000 reps and advisers, a wirehouse firm simply lacks the heft to stand alone in this market.

This month, the New York Post reported that UBS and Charlotte, N.C.-based Wachovia Corp., now part of Wells Fargo & Co. of San Francisco, were in preliminary talks about a joint venture for their retail-brokerage groups.

Whatever the outcome, some UBS brokers sound numb when asked about the future of their firm.

“We still talk to clients at the end of the day, regardless of whose name is over the door,” said one UBS broker on the West Coast, who asked not to be identified. “Everything else will fall into place — or fall apart.”

That comment comes in the wake of last week’s disastrous financial news for UBS AG. Last Tuesday, it posted a massive $18.5 billion loss for 2008 and said it will cut some 2,200 jobs.

The bank also said it will make a number of changes, including the reorganization of its global wealth management franchise.

UBS is creating two new divisions, one called Wealth Management and Swiss Bank, the other Wealth Management Americas.

Marten Hoekstra, who joined Paine Webber in 1983 and was based in Zurich for a few years after UBS became its owner, will lead the Wealth Management Americas group.

His strategy for running the group is unclear. Mr. Hoekstra had no time for an interview last week, and UBS brokers said the firm had given no indication of its intentions.

Indeed, his Swiss bosses are playing it close to the vest.

The bank in various press re-leases included an organizational chart of nine managers and bankers leading the Wealth Management and Swiss Bank side of the business, focusing on the experience and acumen of co-chief executives Franco Morra and Juerg Zeltner.

LACK OF DETAIL

On the Americas side, however, UBS listed scant information about its plans for Mr. Hoekstra, who was already in charge of U.S. retail operations. Without detailing any of his experience at the firm, where he started as a broker, UBS said his group “will continue to focus on gaining scale and market share in the domestic U.S. wealth management market,” as well as Latin America and Canada.

One former employee said UBS may have tipped its hand regarding its lack of commitment in the United States by calling home some of its Swiss employees weeks before the announced reorganization.

“The brokerage and wirehouse space has moved to the next level. How do they catch up?” said Alois Pirker, a senior analyst for Boston-based Aite Group LLC, who worked for UBS in London as recently as 2004.

He said that buying a true wealth manager such as U.S. Trust Corp. — now part of Charlotte-based Bank of America Corp. — may make more sense for UBS.

“Hiring brokers at [250% of their prior year’s fees and commissions] is quite costly,” Mr. Pirker said. “They are growing, but are they dressing it up for a deal?”

That’s a question that remains to be answered.

E-mail Bruce Kelly at [email protected].