UBS became the latest wirehouse this week to report an expected hit to its revenue from changes to its
In a second-quarter earnings call on Wednesday, UBS Chief Financial Officer Todd Tuckner said the Zurich-based wirehouse plans to adjust the sweeps deposit rates on its U.S. advisory accounts by the middle of its fourth quarter. The change, according to Tuckner, is expected to reduce UBS' "pretax profits by around $50 million annually."
"Cash sweeps" refers to firms' common practice of taking brokerage and advisory clients' uninvested cash and moving it to affiliated and unaffiliated banks, where it can be lent out at relatively high rates of interest. A growing number of lawsuits have accused big wealth managers like
The suits generally allege money managers could easily secure better returns for clients simply by putting their
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'Competitive dynamics'
In UBS' earnings call on Wednesday, Tuckner attributed the firm's planned sweeps change to "competitive dynamics." Sharon Yeshaya, Tuckner's counterpart CFO at UBS' rival Morgan Stanley,
Morgan Stanley later confirmed reports that it was raising its sweeps rates to 2% for clients with $250,000 or more in certain accounts. The firm has paid as low as 0.01% on sweeps holdings.
On Wednesday's earnings call, the JPMorgan analyst Kian Abouhossein asked Tuckner if UBS was considering a similar change to Morgan Stanley's. Tuckner said it was too early to know, partly because it's impossible to tell exactly where interest rates will be in the fourth quarter.
"And all I could say, get anything further on the rate is, as mentioned, competitive dynamics will ultimately feature in how we ultimately settle on a price for the sweep deposits," Tuckner said. "So as I said, I gave some views on considerations that we will factor in. But as far as an absolute price, that's not at this point something that we have settled on."
Like most firms, UBS pays varying rates depending on how much money clients are holding in sweeps accounts.
Sweeps policies' cost to the bottom line
Morgan Stanley has yet to put a number on how much its sweeps changes will lower its revenue, only saying it expects any losses to be made up by gains in investment portfolios.
In a report on UBS' earnings, analysts at Wolfe Research said they think the expected profit hit from the firm's sweeps changes is a sign that industry bottom lines aren't being put at great risk by the need to raise rates. A group of Wolfe Research analysts led by Steven Chubak noted that UBS is managing $12 billion in clients' uninvested cash in U.S. advisory accounts.
A $50 million profit reduction from the management of those assets, according to the report, "implies only modest pricing adjustments."
Americas wealth business
UBS' announcement about its cash sweeps came in a quarter that saw the Swiss banking giant report stumbling results for its wealth management business in North, South and Central America. Its Americas wealth unit had $247 million of profit on $2.76 billion in revenue in the second quarter. The profit figure was down nearly 15% year over year, and the revenue number declined 7%.
The results were "mainly driven by higher recurring net fee income and transaction-based income, as well as the consolidation of Credit Suisse revenues, partly offset by lower net interest income," according to the firm's earnings statement.
Global wealth
For all of its global wealth units, UBS reported $871 million in profits on just over $6 billion in revenue for the second quarter. The revenue figure was up 15% year over year, but profits were down by the same percentage.
That hit to the bottom line came mainly from a 27% year-over-year increase in operating expenses, which rose to nearly $5.2 billion. That was driven primarily by expenses related to
"The remaining variance was due to an increase in financial advisor compensation reflecting higher compensable revenues," according to the firm's earnings report.
Assets under management
UBS also reported slower asset gathering in its Americas wealth management business. The unit brought in $6.2 billion in net new assets in the second quarter, down from $13.7 billion in the previous three months.
Still, the Americas unit reported managing nearly $2 trillion in invested assets by the end of the second quarter. That came to nearly half of the $4 trillion in assets UBS was managing in all of its wealth management units. UBS has set itself a goal of having
Advisor headcount
UBS reported having 6,002 advisors in its Americas division at the end of the second quarter. That headcount figure was down by 69 net year over year. Even so, U.S. wealth managers made up the bulk of the 10,068 advisors the firm reported having globally.
Wealth reorganization
UBS' wealth units provides roughly half of the firm's total revenue. All told, UBS reported a 25% year-over-year increase in its total revenues, which rose to $11.9 billion in the second quarter. Its net profits, though, fell 96% to $1.18 billion, again mostly owing to markdowns related to the acquisition of Credit Suisse.
Remark
UBS' Americas wealth management division has long struggled to lower what it calls its cost/income ratio — essentially the percentage of its revenue eaten up by expenses. That ratio rose to 90.9% in the second quarter from 88.5% in the previous three months.
Tuckner said on the earnings call that he doesn't expect the coming change to sweeps rates to greatly hinder efforts to lower that percentage.
"Nothing has changed on that. We're focused on that. We know what we have to do," Tuckner said. "The sweep deposit issue is a modest hit on that, of course, because it's something we're saying is adverse to [profits before tax]. We think it's manageable, and now we're getting on with the work of improving the margins on the basis of how we've described that in the past."
