UBS AG (UBSN), the world’s largest wealth manager, said clients are shifting money to be managed directly by the bank or pay for advice in a reversal of previous outflows after it revamped services to boost profitability.
The mandates business had cumulative net inflows of more than 20 billion Swiss francs ($23 billion) in 2012 and the first nine months of this year after customers pulled about 15 billion francs in the previous two years, Chief Investment Officer Alexander Friedman and William Kennedy, who heads the unit that manages the business, said in a telephone interview. UBS doesn’t officially publish data on mandates.
UBS is expanding the business as part as of focus on wealth management to boost earnings, hurt by low global interest rates and clients’ reluctance to trade in volatile markets. With about 190 billion francs at the end of September, mandates accounted for 22 percent of assets the Zurich-based bank manages for wealthy clients outside of the Americas.
“Our goal is to at least double total assets in mandates,” Friedman, 43, said. “For the vast majority of our clients, their financial performance is significantly better when they’re in a mandate versus self-directed.”
The business is also more profitable for the bank. UBS’s gross margin on mandates, which shows how much revenue it makes on assets under management, exceeded 100 basis points on average as of the end of September, Kennedy said. That compares with a target for gross margins of between 95 basis points and 105 basis points for the whole wealth management unit outside of the Americas, which is headed by Juerg Zeltner.
That gross margin fell to 85 basis points in the third quarter from 90 basis points in the second amid lower client activity. A basis point is one hundredth of a percentage point.
Friedman, former chief financial officer of the Bill & Melinda Gates Foundation, joined in 2011 to oversee UBS’s creation of a new investment process to compete with firms such as Pacific Investment Management Co., manager of the world’s No. 1 bond fund, and BlackRock Inc. (BLK:US), the biggest asset manager.
At the same time, UBS promoted Kennedy, 43, to lead the investment products and services unit, responsible for matching products to CIO views, analyzing client portfolios and supporting customer advisers on topics such as wealth planning.
UBS declined to disclose the latest performance data for mandates. Clients are able to choose to invest in discretionary mandates, where the bank will make all investment decisions based on a pre-selected client’s risk profile, or into advisory mandates, which follow the same investment recommendations from the CIO but give customers the final say.
Assets under management in discretionary mandates are up about 15 percent in the 20 months through September since CIO views were first fully implemented into the management, while those in advisory mandates jumped about 60 percent. Assets under management increase as clients shift new or existing funds into mandates and as investment strategies deliver returns.
The introduction of a new offering, called UBS Advice, this year is helping drive growth in the mandates business, Kennedy said. Clients signing up are charged a fixed flat fee for advisory services and automated daily checks of their portfolios against their risk profiles and the bank’s market views.
“The whole way banks are getting paid, particularly on the advisory side, is changing,” Kennedy said, referring to demand for greater transparency with regards to what clients pay for. “The future is going to mean that this area has to grow and has to grow fast.”
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