Citi and UBS wealth units tough it out

Wealth management executives at Citigroup and UBS, two of the financial institutions hardest hit by the subprime loan crisis, are working overtime on damage control to protect their lucrative franchises. Executives at both firms say they are reaching out to their financial advisers and clients via a flurry of personal phone calls and letters, conference calls, webcasts, visits to branch offices and road shows. The banks are also pouring money into troubled funds to help wealthy clients stuck with losses or illiquid positions. Understandably, despite industry reports of fleeing clients and disgruntled advisers [see story, Page 6], senior wealth management executives at the two financial powerhouses express confidence in their businesses.
There has been "no huge impact on client attrition" as a result of Citigroup's recent problems, according to Charlie Johnston, president of global wealth management for New York-based Citigroup Inc., who said that adviser attrition was likely "to pick up for the entire industry." After JPMorgan Chase & Co. of New York in March agreed to buy The Bear Stearns Cos. Inc., also of New York, "all clients of all firms began to ask questions about how money is segregated and the financial structure of the firm," said Marten Hoekstra, New York-based head of wealth management in America for UBS AG of Zurich, Switzerland.
In the United States at the end of 2007, the UBS wealth management unit oversaw $743 billion in invested client assets. Over that year, UBS attracted $23.5 billion in net new assets. At the end of the first quarter, Citi's Smith Barney unit had $1.48 trillion in client assets and the private bank held $225 billion. But despite the size of both operations, client concerns are understandable. Citigroup has recorded nearly $41 billion in subprime-related losses since the beginning of 2007. For the first quarter of this year, it posted a $5.1 billion loss — on top of a nearly $10 billion loss in the previous quarter. Wealth management profits fell 33% in the first quarter, to $299 million, from $448 million in the same period a year ago and $523 million in the fourth quarter. What's more, the bank's high-net-worth clients have been hard hit by substantial losses in ASTA/MAT, two highly leveraged municipal arbitrage hedge funds, and Falcon Portfolios, a mix of municipal bonds and debt instruments. UBS has written off nearly $38 billion in subprime-related losses since the beginning of 2007 and will report its first quarter results tomorrow. The bank's risk management procedures have generated a steady stream of criticism since the beginning of the year, culminating in the fractious ouster of chairman Marcel Ospel, who was replaced last month by the bank's general counsel, Peter Kurer. After the market for auction-rate securities froze this year, many wealthy UBS clients who own the securities were angered to learn that the paper they were holding wasn't, in fact, the equivalent of cash. In March, UBS was hit with a class-action alleging that it had deceived investors by selling the securities as highly liquid and a "suitable alternatives to money market funds." Dealing with the auction-rate securities situation has been "very difficult" for both clients and UBS advisers, Mr. Hoekstra said, adding that the firm wasn't yet "out of the woods." According to some estimates, UBS clients hold some $20 billion in troubled securities in their accounts.
UBS is offering "some relief" to clients, according to Mr. Hoekstra, allowing customers to borrow the full value of their securities from the bank at 0.5% above the London interbank offered rate, or Libor, a widely used benchmark. At Citi, at least one Falcon investor has filed a federal lawsuit against the firm, and Smith Barney brokers are said to be furious over the blowup of the funds and at Citigroup senior management over how they handled the mess. Addressing the problems caused by the troubled funds has been challenging, Mr. Johnston conceded. "We're working with advisers and clients as best we can," he said. The bank has extended credit to clients and made a $1 billion capital commitment to the ASTA/MAT funds, directly investing $661 million into them to date, a Citigroup spokesman said. The bank "will now extend that support by sharing with fund shareholders the gains and income resulting from these measures," he said. After internal debate about how much to compensate clients for their losses in the Falcon fund, Citigroup has reportedly agreed to put up $250 million for investors to get out of the fund with only partial losses if they agree not to sue. Missteps with the funds and securities have put the most valuable — and vulnerable — of Citi's and UBS' assets at risk: their reputations. "We can't pretend there has been no reputational damage. Experience says it goes away after two or three years," Mr. Kurer told the Financial Times last month. "The question for these firms is how severely the brand has been hurt," said Alois Pirker, senior analyst for Boston-based Aite Group LLC. "Citi has not positioned itself as a safe haven for the ultra-wealthy, but UBS has, and they've spent a lot of money on their brand." The UBS wealth management brand, Mr. Hoekstra said, "is in very good shape." To be sure, the wealth management division of UBS has $3.1 trillion in assets around the world, more than anyone else in the industry, and brought in $152 billion in net new assets last year. But Mr. Hoekstra acknowledged that clients have become concerned about developments at the bank, especially after the Bear Stearns deal. As a result, wealth management executives have been reaching out to clients, including participating in "dozens" of presentations across the country. "Client contact is what's most important," Mr. Hoekstra said. "I just spoke to a client directly, and all our managers are doing it. Financial advisers are identifying clients who may be at risk." Mr. Hoekstra said. "It's all about communication and information," Mr. Johnston said. "That's what firms have to do now." Citigroup has held numerous conference calls and webcasts with clients and advisers featuring senior executives, including chief strategist Jeff Applegate, as well as outside managers William Gross, chief investment officer of Newport Beach, Calif.-based Pacific Investment Management Co., and Laurence D. Fink, chairman and chief executive of New York-based BlackRock Financial Management Inc. Both Mr. Hoekstra and Mr. Johnston said they expect their wealth management units to remain combined with other divisions in their respective parent companies, despite frequent speculation to the contrary. In March, Citigroup reorganized its wealth management unit into four divisions based on clients' net worth. The move put Smith Barney brokers and Citigroup private bankers under one roof, reporting to Mr. Johnston, who previously had been chief executive of Smith Barney. While the move was initially met with skepticism by Smith Barney brokers (InvestmentNews, March 17) and was criticized by some for commoditizing Citi's wealth management business, Mr. Johnston argued that the reorganization was designed to accomplish "quite the opposite." The bulk of the private bank's business was based on lending and deposits while Smith Barney was largely an investment and advisory business, he said. Combining the units would result in "an integrated approach to the ultra-high-net-worth market," Mr. Johnston said. The reorganization was also seen as an attempt to quell calls for the Citigroup units to be sold off as separate pieces. "I don't think it's going to happen," Mr. Johnston said, referring to a breakup. UBS also shot down a move by dissenting shareholders to break up its wealth management and investment banking units at its annual shareholders meeting last month. The bank reaffirmed its commitment to an "integrated model" of investment banking, private banking and asset management, Mr. Kurer said at the shareholders' meeting in Basel, Switzerland. In the United States, the bank plans to continue to grow organically and will open a private wealth office in Boston in the summer, bringing the total number around the country to nine, Mr. Hoekstra said. UBS has private wealth offices in New York, Stamford, Conn., Atlanta, Chicago, Los Angeles, San Francisco, Houston and Palo Alto, Calif. "We're in the fortunate position that there's no debate about strategy," Mr. Hoekstra said. "We're purely in execution mode." In fact, both executives said that they may benefit from the industry's current turmoil. Mr. Johnston said that Citi had hired several Bear Stearns advisers in major markets, and Mr. Hoeksta hinted that UBS was ready to pounce on disaffected advisers and clients from other firms. The bank hired 119 financial advisers from competitors in the first three months of the year, according to a bank spokesman, 17 more than were hired in the first quarter last year. "Financial advisers in the industry are on their heels," he said. "We want to take advantage of that by being proactive." E-mail Charles Paikert at cpaikert@investmentnews.com.