Puerto Rico debt depresses UBS Wealth earnings

Despite record revenue at UBS Wealth Management Americas, profits fell as the firm reported that it had to set aside $44 million for litigation expenses last quarter. The charge was mostly related to a rash of investor complaints stemming from the firm's investments in Puerto Rico, according to Sergio Ermotti, the chief executive of the parent company, Zurich-based UBS AG. The U.S. wealth management group reported a second-quarter profit of $238 million, down from $245 million—or 3%—from a year ago. Hundreds of arbitration cases and several class action claims have been filed on behalf of UBS clients who claim they were placed in unsuitable and highly leveraged municipal bond funds that plummeted in value last fall. UBS had said that it sold more than $10 billion of the closed-end funds by the end of 2012. Other firms, including Bank of America Merrill Lynch, are also facing litigation from Puerto Rico. The firm also posted a decline in net new assets as investors yanked $2.5 billion more than they deposited at the firm during the quarter. The firm chalked the net asset outflow to clients pulling money out to pay taxes. But the firm's wirehouse rivals did not experience the same sharp decline in net new money. UBS brought in $2.8 billion in net new money during the same quarter last year. The firm has a stated goal of bringing in $2 billion to $4 billion each quarter, but Mr. Ermotti said that it was a minor blip compared to overall performance. Despite that decline in new money, overall assets under management at the firm rose 14% from a year ago to $1.017 trillion, and average invested assets per financial adviser hit a record $143 million, reflecting strong market performance. “The quarter's results need to be put in the context of Wealth Management Americas' very strong net new money track record with nearly $60 billion in net inflows over the last 16 quarters,” Mr. Ermotti said. That dampened results on what was otherwise a strong quarter for the firm's roughly 7,100 advisers, who brought in record revenue of nearly $1.9 billion, or approximately $1.068 million of annual revenue per adviser. By that mark, UBS advisers were the most productive of the four wirehouse firms by a slight margin. Merrill Lynch, which previously held the No. 1 spot, reported earlier this month that its roughly 13,800 advisers brought in approximately $1.058 million on average in the second quarter. UBS said its advisers are benefitting from growth in recurring fee income, which rose 13% from last year to $1.16 billion. Tom Naratil, chief financial officer at UBS AG, said focusing on ultra-wealthy clients, who have higher margins and greater propensity for wealth creation, is paying off. “We've just been exceptionally successful in the [ultrahigh net worth] segment,” Mr. Naratil said. “That's a segment that has a better profit margin than the high net worth segment.” Still, Mr. Naratil said the firm remains focused on cutting costs. The firm's Americas' unit trended away from its stated goal of hitting a cost-to-income ratio of 75% to 85% by 2015. The firm's ratio rose to 87.4% from 86.2% in the second quarter last year. “While we're focused on reducing costs, we continue to invest in key strategic areas of our business such as lending, technology, infrastructure and financial planning,” he said. Total operating expenses of $1.66 billion were up 8%, as financial adviser compensation rose 5% from the second quarter last year to $742 million. Loans and commitments related to recruiting rose 8% in the quarter to $184 million from $171 million a year ago. The firm reported total outstanding recruitment loans to financial advisers of $2.985 billion, a number that declined 2% from last year as older deals were forgiven. Overall, the firm's headcount remained relatively steady at 7,119, a net gain of six advisers over the quarter. “Our focus on [financial adviser] retention remains relentless and financial adviser recruiting will continue to be highly selective,” Mr. Ermotti said.