UBS Group AG's U.S. wealth-management arm is taking a step back from aggressively recruiting brokers, a common practice that is costly for the industry. It is also moving to thin its management ranks, while providing higher pay to selected brokers already with the firm.

The reorganization is being led by UBS Americas President Tom Naratil, who left his post as UBS chief financial officer to take over the Swiss bank's U.S. wealth operations in January, with the mandate to improve the unit's profitability.

Mr. Naratil described the shake-up as an effort to "eliminate the bad costs," or spending tied to management overhead, bureaucracy and recruitment. "We're shifting that into spending on technology, people closest to advisers and compensation for advisers who are here," Mr. Naratil said in an interview, describing spending to support revenue producers as "good." The news was expected to be disseminated internally late Wednesday.

The goal is to improve adviser retention, Mr. Naratil said.

His plan calls for cutting some senior and middle managers and shifting more decision-making to branch managers. UBS also plans a 40% reduction in the number of advisers it recruits annually.

Brokerages frequently hire brokers from one another. The four major brokerages—UBS, Morgan Stanley, Merrill Lynch and Wells Fargo Advisors—entice advisers to jump from firm to firm by offering hefty upfront bonuses given in the form of loans that are forgivable over as long as nine years. Executives have referred to the practice as a "prisoner exchange" and a "zero-sum game" as they all pay recruitment bonuses which can range up to millions of dollars for top-producing brokers.

UBS wants to break from that trend to spend less on enticing advisers to join—and to give bigger cash payouts to brokers who already work for the firm, especially those who work on teams. "The biggest payoff comes from retaining people," Mr. Naratil said.

The firm currently has more than 7,100 advisers. UBS will scale back its recruitment activities and work to keep its adviser force in the 6,500 to 7,000 range—less than the more than 14,000 fielded by Bank of America Corp.'s Merrill and the nearly 16,000 at Morgan Stanley.

UBS recently topped its target range after hiring numerous brokers from Credit Suisse Group AG's U.S. private-banking arm earlier this year. That hiring came despite an exclusive recruiting arrangement struck between Credit Suisse and Wells Fargo & Co. in October after Credit Suisse announced plans to wind down its U.S. private bank.

The aggressive recruitment of Credit Suisse brokers gave UBS the breathing room it needed to pull back from recruiting, Mr. Naratil said, calling the situation "unique." UBS's actions at the time led Credit Suisse to file a raiding complaint with Wall Street's self-regulator, the Financial Industry Regulatory Authority.

Glenn Shorr, an Evercore analyst who focuses on the brokerage industry, called UBS's new plan "potentially disruptive" at a time when yearslong retention deals handed out by Merrill and Morgan Stanley around the financial crisis have expired or are set to wear off in the months ahead. The other major brokerages will have to choose how to react, Mr. Schorr said.

Mr. Naratil's plan to retain advisers calls for a simplification of UBS's compensation plan from more than 30 pages to eight. The new plan, which takes effect next year, will increase cash payouts, mostly for teams of financial advisers and those who generate $1 million or more in revenue, while dropping the number of deferred bonuses they can earn to two from five. Those remaining bonuses will reward brokers for length of service and new assets gained.

Mr. Naratil said no adviser will get less cash under the new plan. But the slimming down of deferred awards could result in smaller bonuses that vest over time for some. Teams of advisers will now be paid based on the total assets they collectively manage, likely shifting many team members into higher compensation brackets.

UBS is also adding richer incentives to persuade experienced advisers to stay with the firm and hand off their clients to another UBS broker before retiring, versus going to a rival brokerage for a recruitment bonus or trying to launch their own advisory firms. Mr. Schorr said if UBS does get more advisers to stick with the firm through their retirement, "it's a fantastic thing for the parent company and the owners of the stock."

Broker compensation costs are likely to increase, Mr. Naratil said, but he declined to say by how much. UBS is planning to cover those higher costs with its management cuts and reduction in recruitment activity.

The Swiss bank will reorganize its U.S. brokerage into four divisions covering the Northeast, Central, Southeast and Western regions of the U.S., while rejiggering its "complexes" into 43 markets. Those market heads will oversee a total of 208 brokerage branches. Previously, it was structured as two divisions, with eight regional heads, 63 complexes and 189 branches.

Some support employees related to those managers and headquarters staff will also be reassigned or let go, but the plan is mostly aimed at a net head count reduction in senior and middle managers, Mr. Naratil said.

Brian Hull will continue to oversee UBS's divisions as head of its client advisory group. The management changes take effect July 1.

UBS's management reorganization follows similar efforts to slim management ranks by its rivals, such as Morgan Stanley, since the financial crisis. Brokerages have been focused on managing or cutting costs and tend to focus on reductions around employees who don't directly produce revenue.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

 

(END) Dow Jones Newswires

June 08, 2016 20:35 ET (00:35 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
UBS (NYSE:UBS)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more UBS Charts.
UBS (NYSE:UBS)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more UBS Charts.