UBS Wealth Profits Plummet 94% on Recruiting Spree, Litigation

UBS Wealth Management Americas reported that pretax profits plummeted 94% year-over-year as the firm racked up millions in litigation and recruiting expenses.

Pretax profits fell to $13 million for the fourth quarter from $217 million for the year-ago period, the firm reported on Tuesday. Excluding provisions for litigation, UBS said its wealth management unit brought in $300 million in pretax profits.

Expenses rose rapidly during the fourth quarter, climbing 9% to $1.86 billion. UBS said that client complaints related to its sale of Puerto Rico bonds and closed-end funds have cost the firm approximately $284 million in the form of settlements or arbitration awards.

The legal bills may continue to add up as UBS also said that aggregate client complaints add up to $1.5 billion – some of which has already been resolved. UBS has also faced regulatory scrutiny around the sale of Puerto Rico bonds and closed-end funds.

"We also understand that the [Department of Justice] is conducting a criminal inquiry into the impermissible reinvestment of non-purpose loan proceeds. We are cooperating with the authorities in this inquiry," the firm said in its earnings release.

Meanwhile, UBS expanded its advisor ranks by 151 FAs during the fourth quarter, raising its total advisor force to 7,140. Many of the new recruits joined from rival Credit Suisse, which is exiting the U.S. wealth management market.

That kind of aggressive recruiting raises expenses. And UBS said recruitment loans to financial advisors increased 9% to $3.179 billion. There is often a lag between when advisors switch firms and when the assets follow.

UBS said that recruiting and strong growth from existing advisors helped boost net new money for the quarter, which rose to $16.8 billion from $5.5 billion from the year-ago period. Net new money including interest and dividend income rose to $26.2 billion from $15.9 billion for the year-ago period, the firm reported.

Client assets increased to $1.084 trillion, up from $1.042 trillion for the prior quarter but down from $1.087 trillion for the year ago period.

The firm also faced headwinds from market volatility during the quarter; recurring net fee income fell 2% to $1.16 billion while transaction-based income dropped 16% to $376 million.

Rival firms have also seen their profits slump, in part due to market volatility. For example, Bank of America's wealth management unit, which includes Merrill Lynch, said net income fell 13% year-over-year to $614 million.

Lending and banking services to clients continue to be a growing profit area for the firm. Net interest income grew 16% to reach $326 million. Gross loans increased to $48.7 billion from $44.6 billion for the year-ago period.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER