More culture, less recruiting: How UBS plans to grow
UBS's ambitious growth strategy omits a traditional wirehouse tactic: recruiting.
While enticing away rivals' talent with potentially huge transition deals has long been a mainstay of the wirehouse space, it is not a pillar of UBS' strategy since Tom Naratil took command of its U.S. wealth management operations.
Instead, the firm is banking that a transformation in terms of policy and culture, as partly represented in its compensation plan, will sow the seeds of its future success.
"If you focus too much on recruiting as your main source of growth, people may ask: Where is there loyalty? We wanted to shift resources from recruiting to the people that are already here. And we wanted to focus on organic growth," says Brian Hull, head of the firm's client advisory group.
It's an approach that carries risk ― headcount could collapse as rivals could poach top talent ― but one that attempts to replicate elements that have made both fast-growing regional firms like Raymond James and the independent space so popular with brokers in recent years. In some respects, UBS is moving in a different direction than its wirehouse rivals.
"I think we'll need more time to see if this is a trend they are setting in motion," says Alois Pirker, research director at Aite Group. "Is it going to be a different model than the other wirehouses?"
Adviser demographics play a role in how UBS is positioning itself.. The average age of advisers is now 51 years old, according to research firm Cerulli Associates. Meanwhile, wirehouse advisers have an average age of 53.
UBS executives say their retirement program is critical to incentivizing brokers to end their careers at the wirehouse. Under ALFA Core, eligible advisers could earn up to 200% of their production by agreeing to transfer accounts to a younger partner. For example, a $1 million producer with 10 years at the firm could earn 130% in payments made over a 5-year period. The program also offers a survivor death and disability benefit as well as an upfront loan to eligible advisers, which can be up to 100% of their trailing-12.
"Did we give them an enhancement and a more generous package, yes we did. But we want to build loyalty and make this the best place for people to work at and retire from," Hull says.
Firms across the industry have been increasingly focused on advisers' succession plans. Building a solid succession strategy is not only beneficial to clients but prevents assets from leaving the firm — either when an adviser retires or leaves for another firm for the duration of their career, often earning a hefty recruiting payout in the process.
For some firms, recruiting remains the preferred method to replace dissipating assets.
It has become much more competitive, particularly for top talent, according to industry insiders. To get the same assets in the "open market" could be prohibitively expensive, Hull says.
Pirker says the recruiting process has become something of a horse race. "It's shortsighted and it's probably gone on for too long. And it impacts earnings," he says.
UBS executives also say there are compounding advantages to a focus on retention over recruiting.
"When you have long-standing employees, it has that powerful cultural effect as well," Dana Ritzcovan, head of human resources, says.
THE LONG PLAY
Cultivating a culture is no easy task.
"It's a noble aspiration, but it's a lot of work," says recruiter Jeff Bischoff. "I think it takes 10 years to build it and 10 minutes to lose it."
To Bischoff, culture is comprised of those aspects of a workplace that are not easily duplicated if an adviser leaves for another firm. He notes that brokerages that historically had or currently have a reputation for an attractive culture, such as Raymond James, often have long-serving executives at the top.
"It's hard to keep the C-suite in place for that long," Bischoff says.
Of course, executives are quick to acknowledge that UBS' bid to foster a re-invigorated culture and stronger loyalty among its advisers won't happen overnight. Hull says they "wanted to put a stake in the ground."
"Culture is not just what you say, it's what you do," he says, adding that the compensation plan UBS unveiled last June reflects that.
The firm's comp plan, which was was rolled out months ahead of its rivals, was drastically simplified from the previous version, dropping to 8 pages from over 30 for the prior year. Rival firms presented their plans to brokers in late November and early December, the traditional period to outline adviser pay for the coming year.
"Now that I've seen where everyone else is, I feel very comfortable," Hull says.
In simplifying its plan, UBS also cut out a number of behavioral bonuses (and penalties), aligning it more closely with non-wirehouse firms, notes Andy Tasnady, a compensation consultant.
"A lot of the regional firms don't have the behavioral-based bonuses. It was the big firms, the wirehouses that [traditionally] had them," Tasnady says.
Because wirehouses tweak their comp plans annually, some brokers may turn a skeptical eye to positive changes, anticipating that they may be rolled back next year. But Hull says that barring unforeseen regulatory requirements, UBS will not be changing this plan.
"If you look at how transparent it is, it was clearly meant to be durable. And by that I mean that our expectation is that this is something that people could look to, understand completely and be sustainable going forward. I don't think I'd be credible to say we'd never make a change, but it's certainly not our intention. And if we did, it'd be clear why," Hull says.
If that promise is kept, it will also align UBS' strategy more closely with the regional BDs than the wirehouses. For example, it's been four years since Raymond James & Associates last made changes to adviser pay.
"We have very infrequent changes in terms of compensation," President Tash Elwyn says. "In stark contrast to that, our competitors have a constantly changing model of compensation. That creates uncertainty and angst for financial advisers. It also creates great opportunities for our recruiters at Raymond James."
The fiduciary rule's emphasis on transparency is an additional factor now in how adviser compensation is designed, according to Aite Group's Pirker.
"We've seen a trend in the past where compensation plans were too complex," Pirker says.
In an environment where regulators and clients increasingly expect transparency around fees and compensation, having greater clarity on pay is critical for all parties, including the adviser.
UBS also says it's moving forward on plans to decentralize decision-making, moving more power back to the branch level.
"In the past there were multiple levels of approval to hire support staff for advisers. We've removed that," Ritzcovan says.
Now, branch managers can "manage their branch like a business owner. They are empowered to hire as they see fit," she says.
An adviser at the firm who generates $2 million in annual production says he appreciates the move to cut bureaucracy. He asked not to be named because he wasn't authorized to speak publicly.
"Advisers generally don't like lots of management layers," the adviser says, though he also cautions that individual experiences can vary because "it depends partially on your local management team."
UBS is exploring additional ways to empower branch managers and advisers in an "ongoing process," according to the firm. Though, they admit that the home office will maintain control over some factors.
"We couldn't let someone pay their advisers differently," Hull says. "Some things need a level of consistency."
He estimates that about half of the decisions that need to be are now made locally. "Over time we'd like to see that percentage increase."
Obviously, every firm loses some advisers through natural attrition; retirement, death, career changes and so on. UBS is no exception. Executives say they can fill empty seats through selective recruiting as well as the firm's training program, which counts approximately 400 trainees, according to a company spokeswoman.
A spokeswoman says UBS has "selectively" recruited, but declined to name specific brokers that recently joined the firm.
Still, those efforts might not be enough in the short term. For the fourth quarter, the firm reported that headcount dropped to 7,025 advisers from 7,087 for the prior period. It now fields a smaller brokerage force than Raymond James, which counts 7,128 employee and independent advisers.
However, UBS' leaders are quick to highlight that adviser productivity continues to rise to new records, reaching $1.162 million per FA for the fourth quarter, up 10% from $1.061 million for the year-ago period, according to the firm. That makes the Swiss firm's adviser force the most productive among the wirehouses; Morgan Stanley and Merrill Lynch reported $1.01 million and $960,000, respectively, for the same period.
And given that UBS' target range for its adviser headcount is 6,500 to 7,000, executives believe they can let headcount gently drift downward in order to let their strategy play out.
"I would be more comfortable being at 6,500 and having a $1.5 or $2 million [in average] production than having 7,000 [with lower revenue]. We don't want to recruit for recruiting's sake," Hull says.
The $2 million adviser who asked not to be named credits UBS's leaders with being "pretty transparent" on their strategy. He joined the firm over a year ago from another wirehouse, and says he feels that management at Merrill, Morgan and Wells Fargo have been degrading their brands or chipping away at broker pay through their comp plans.
However, he also thinks that none of the firms quite compare to the reputation that Merrill Lynch, E.F. Hutton and other long-gone brands once had for broker loyalty.
It will take time to see if the strategy UBS leaders are pursuing bears fruit.
"What we created was an environment was that you could grow into most of these changes. You can grow into a team. You can grow into the ALFA program," Ritzcovan says.
A recruiter, who has worked with UBS and asked not to be named, issued a note of caution about trail blazers: "Sometimes the pioneers are the ones with the arrows in their back, and not the ones with the gold."
And yet currently, UBS doesn't appear to be bleeding brokers to rivals, giving them the time they need to see their strategy play out. Michael King, a New York-based recruiter, says retention appears to be strong so far.
"Other recruiters may tell you that it's easy to get people out of there. I'm not seeing that."