Marten Hoekstra, the man at the helm of UBS' American brokerage operation, Wealth Management US, has spent a lot of time on airplanes and pressing the flesh since taking over the position in June 2005. No wonder: Having completed an acquisition of Piper Jaffray's brokerage network in mid-August — a deal that was roundly praised for how smoothly it went — Hoekstra announced the impending purchase of another firm in early September: Cleveland-based McDonald Investments, KeyCorp bank's brokerage unit. Both deals will bring much-needed assets and headcount to the firm.
Meanwhile, UBS, with a strong brand name among the wealthy in Europe and Asia, continues to try to stoke some brand awareness among the wealthy here in the U.S. (see the clever “You and Us” ad campaign). All of this amounts to a firm that Hoekstra — and analysts — say is in a “growth” mode. Registered Rep.'s Senior Editor John Churchill spoke with Hoekstra, who was in Cleveland meeting with the people of McDonald Investments.
Registered Rep: One acquisition just completed and another on the way, that's pretty aggressive. What is UBS' plan for the U.S. retail force?
Marten Hoekstra: The basic objective is to have the fastest asset growth per financial advisor in the business. That means when we have the opportunity to acquire firms that are both financial accretive and talent accretive — and by that I mean that we really think that it's a great cultural fit and the people have the right orientation toward the client — then we're interested in doing it.
RR: How does McDonald and its reps compare to UBS reps?
MH: The seller [KeyCorp] doesn't want revenues disclosed for this business until the deal closes, but McDonald has arguably the highest productivity of a regional franchise in the country. They have about 300 people with an average of $88 million [AUM] per FA — which is a huge number — and most of them have a very long length of service. McDonald FAs do more recurring revenue as percentage of revenues than most national firms. And again, the parent doesn't disclose the details, so I can't speak about it. But I'm very comfortable saying that McDonald is — from a fee-based business and a recurring revenue perspective — head and shoulders above every other regional firm. Geographically, in Ohio, it is the leading franchise. It's a much stronger business in Ohio than we have. Ohio was not ever a strong state for us, so this is really complementary in that sense. We have big markets like New York City, where we're well over 20 percent market share, but in Ohio it's barely a single digit sort of situation.
RR: UBS profit margins are drastically better in the international wealth-management and private banking operations than they are in your unit, Wealth Management US. How will you change that?
MH: The two players that everyone benchmarks off of have 20 percent-plus margins [Smith Barney and Merrill Lynch]. But they also have significantly more assets generating revenues, with essentially the same size core capability infrastructure that we have. So just to put it in perspective, we have the fifth most financial advisors, the third most revenue and the highest revenue per financial advisor. However, we have the same infrastructure everybody else has to pay for, and we have only 8,000 financial advisors.
So what we've decided — and you can see this in the investor relations section of our Web site if you're interested — is we could go one of two ways. We could start to squeeze costs out to raise margins and be a business of about the size that we are. Or we could invest in the business, which means profit margins won't expand for another couple of years, but we'll get to a greater asset scale and, therefore, be generating profit margins off of a larger number.
We want to be in the same kind of position in the states that we are elsewhere. We're No. 1 in Europe, we're No. 1 in Asia, but we're not No. 1 here. And so we want to do it in a way that is accretive, not dilutive, and where we're adding assets in a way that allows us to continue to invest in quality. It's a fair question. The answer is we could go for wider margins now but we're going for growth.
RR: With the development, or shall we say commoditization of the industry, aren't all firms, especially the large ones, offering the same thing? What does UBS have to offer customers that others don't?
MH: I just think this is the core point. Our primary business is wealth management and nobody else's is. And that means that we sit on the same side of the table as the private client. For example, we're the only firm that sources about 25 to 30 percent of our structured products globally from other investment banks, because we want price and innovation and competition. Secondly, we have over 170 analysts around the world that work in our business — it's called wealth-management research — and they only work to either structure portfolios or select securities for private clients. So no one could ever accuse us of being the distribution arm of an investment bank or an asset-management company. We come to work every day to work for private clients.
RR: Increasingly firms are focusing on the ultra-high-net-worth retail investor, which is in the firm's wheelhouse in Europe. Tell us how it's going so far here.
MH: Well, we have 111 people who specialize in ultra high net worth. We call them private wealth advisors. All of our advisors are eligible to participate in the program. It's a relatively intense training and development program. It does have some prerequisites. For instance, reps need to have four $10 million relationships to get in the program. But those advisors are really becoming the important part of the growth engine of our business, and I think what we're trying to do as fast as possible is put in products and services for all of our advisors, including those that are specialized upscale, to promote that vision. So for instance, you mentioned Europe. We're the largest provider of hedge funds in the world, but in the United States we're not No. 1. And so we're basically taking a lot of the structures, relationships and hedge fund managers, most of whom are American anyway, and then offering them now into our U.S. wealth management business.
So I think first of all, just from an economic perspective, we're on schedule with that initiative. We've had 20 percent-plus growth in that category of households that have $10 million or more with us. The total assets are now about $90 billion. Two-and-a-half years ago, based on our own internal rankings, we were ranked 13th in the $10 million-plus household assets [segment], among banks, trust companies and brokerage firms. Today we think we're ranked seventh, so it's actually going very well.
RR: So what's next, are there more acquisitions on the horizon or will it be organic growth from here?
MH: I'm thankful, actually, that you asked that question, because one concern I have about announcing a second acquisition, even of a firm as strong as McDonald's: I don't want to send the message that we're not in the game to continue to have the fastest growth per financial advisor in assets. Look, the crisis in the industry is that the have's and the have-not's are getting more disparate. There's a large groups of FAs who are having the fastest net new money growth that they've ever had in their career. And you have the large groups of FAs that are in liquidations. And one can argue all day about what the issues are, and maybe people are trying to rely too much on individual transactional business and those sorts of things. But we're investing at the highest level we ever have in broker coaching, broker development, practice-management tools — all sorts of nuts and bolts. It's critical to get that done in order to create the kind of place that everybody can be proud to be associated with.
As for acquisitions, we've said publicly we're interested in three kinds of acquisitions. We're interested in acquiring trust companies, we're interested in acquiring retail brokerage firms, if they have both talent and would be financially accretive. And we're interested in acquiring the right kinds of registered investment advisors.
