UBS to Temporarily Adjust Broker Pay to Comply With Fiduciary Rule
June 2, 2017 by Michael Wursthorn
UBS Group AG is temporarily revamping how it pays its U.S. brokers to comply with new retirement rules taking effect next week, a stopgap that minimizes the impact on clients as a review of the regulation plays out.
The Swiss bank, which has been critical of the new rules and their impact on clients, is effectively wagering that the Labor Department’s fiduciary rule requiring brokers to act in the best interest of retirement savers will change in its favor and require less-sweeping changes than rivals like Merrill Lynch and Wells Fargo & Co. have made.
The rule takes partial effect June 9, but a Labor Department economic-impact review is being conducted before the rule takes full effect on Jan. 1, 2018.
“The review is still ongoing so you could potentially find yourself with a rule partially revoked, fully revoked or fully implemented,” said Tom Naratil, head of UBS’s U.S. operations, including its brokerage unit, in an interview with The Wall Street Journal last week.
UBS’s change reflects its fundamental antipathy toward the rule. Over the past six months, the bank’s executives have stepped up their criticism of the rule, saying it will limit investors’ choices around how they pay for advice and that the industry would be better served by a broader rule, led by the Securities and Exchange Commission, that governs both retirement and nonretirement accounts.
The establishment of the rule came after a long fight between the financial industry and the Obama administration. The Obama administration said conflicted financial advice costs American families $17 billion a year and pushes down annual returns on retirement savings by a percentage point. Critics, including many financial-industry leaders, have said those figures are inflated.
Most rivals have announced compliance plans over the past year, but UBS avoided making any specific pronouncements on how its brokerage unit would comply with the rule. Merrill Lynch and J.P. Morgan Chase & Co., for instance, said they would largely abandon commissions in retirement accounts in favor of charging a recurring fee. Edward Jones and Wells Fargo cut back on client offerings in commission-based accounts.
While some brokerages’ moves are restricting client choice, firms are capitalizing on the rule. Both Bank of America Corp.’s global wealth unit, including Merrill, and J.P. Morgan, for example, gained billions of dollars in new fee-based assets, pushing revenue higher.
UBS’s silence was driven by uncertainty around the rule, Mr. Naratil said, and was an effort to avoid confusing investors and brokers with new policies and restrictions as the Trump administration debated the rule’s future.
Still, Mr. Naratil says UBS is attempting to chart a compliance path that minimizes the impact on clients. “Some people chose to restrict choices for clients or advisers or products. Some people chose to only deal with retirement accounts” for a fee instead of a commission, Mr. Naratil said. “We decided to minimize the impact on relationships and remove conflicts.”
Starting June 9, UBS will temporarily modify how it compensates brokers for the retirement assets they oversee in an effort to curtail conflicts that could cause a broker to recommend a more costly investment product, Mr. Naratil said.
Specifically, UBS will no longer rely on the traditional pay formula used to calculate the bulk of a broker’s pay when it comes to the work they do with retirement assets. Usually, brokers receive a scaled percentage of the fees and commissions they generate off all the assets they manage, with bigger producers usually keeping more.
Instead, UBS will base monthly payout on retirement assets after the June 9 deadline on the broker’s average return on retirement assets in 2016, Mr. Naratil said.
The change means brokers won’t receive more or less compensation based on the amount of fees and commissions they generate off those assets as they normally would. Instead, a broker’s compensation on retirement assets will go up or down depending on the overall value of those assets, added Mr. Naratil. Brokers will continue to be paid as they usually are on nonretirement assets.
Clients, meanwhile, won’t face many changes beyond some product restrictions in commission-based retirement accounts that come with the rule, such as initial public offerings and proprietary structured products.
UBS’s waiting game could pay off, analysts say. “There is definitely potential for the rule to be changed,” said Michael Wong, a brokerage expert with researcher Morningstar Inc.
He added there aren’t any downsides to UBS’s approach for clients, but brokers could feel jittery as they wait to see UBS’s next steps, especially when it comes to how they are compensated.
UBS’s more than 7,000 brokers learned about the change on Thursday afternoon.
A UBS spokesman declined to say how much of the brokerage’s $1.2 trillion in client assets reside in retirement accounts. But almost every UBS client has some retirement assets with the firm, “so the vast majority of our clients are affected by this rule,” the spokesman added.
The changes to broker pay on retirement accounts will remain in effect until Jan 1, 2018. By then, Mr. Naratil said, UBS will decide on how to proceed longer term, taking into account any changes that may come out of the Labor Department’s review.
“We always thought it was going to be a challenging process,” Mr. Naratil said. “None of this is something regulators explain to clients.”
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
