In the wake of its agreement to buy McDonald Investments from KeyCorp, UBS AG's U.S. asset management arm says it will look to acquire smaller registered investment advisers in order to add share nationally.
Marten Hoekstra, the head of UBS Wealth Management USA, said he would love to find another broker-dealer the size of McDonald but that he is realistic about the slim pickings.
"There is really only a single-digit list of regional firms left that have the financial strength and quality" of McDonald, he said. "While it would be nice to look at any market where we have small market share and add a regional broker-dealer, we know that there is a scarcity of strong regional firms. Things just don't match that easily."
Mr. Hoekstra said UBS' wealth management division, which is to add McDonald's $30 billion of assets under management to its $630 billion when the deal closes in the first quarter, will continue to grow organically and by acquiring smaller firms with strong producers.
"In most markets there [is] at least an upscale RIA or two," he said. "That would be interesting for us."
Without specifying markets, Mr. Hoekstra said his unit would target registered investment advisers with $1 billion to $20 billion of assets under management in large and midsize cities. He said that he hopes to acquire RIAs but allow the firms to operate with "an appropriate level of autonomy."
Two weeks ago, UBS announced its plan to buy McDonald, which has 340 brokers and 51 offices, for up to $280 million in order to develop its footprint in Ohio. Mr. Hoekstra said three-quarters of McDonald's business is in Ohio, where "we had been under-penetrated from a market share perspective."
Analysts said UBS has been, and will continue to be, an active acquirer in the United States. In addition to the McDonald deal, it bought Piper Jaffray Cos. in August for $500 million. UBS also spent $2.6 billion to buy Brazil's Banco Pactual SA and $386 million for the futures and options business of ABN Amro Holdings NV.
But in order for the McDonald and Piper Jaffray deals to succeed, UBS must retain most of their brokers.
After closing the Piper Jaffray deal, UBS says, it was able to retain about 700 of the Minneapolis company's 800 brokers. KeyCorp announced last week that it would give the McDonald brokers a funded contribution to their stock-award plan should they stay with UBS once the deal closes.
Richard X. Bove, an analyst at Punk, Ziegel & Co., said he sees "an incredible battle" for the best producers in the industry. Companies are willing to pay extraordinary bonuses in order to keep brokers from jumping ship, he said.
By going after registered investment advisers, Mr. Bove said, UBS is seeking out the best producers without having to make another big deal.
Saying "they are going to buy an RIA firm is a bit of a misnomer," he said. "I think that they are recruiting. What is the difference if they pay a certain amount to buy a firm or sign a broker to a large signing bonus? They are still getting a strong broker and his book of business either way."
Mr. Bove said he believes that there are still "over a hundred" small and regional brokerage firms that are "nestled within insurance companies, asset managers, and banks." Small and midsize brokerage firms are going to have to sell eventually, he said, because the cost of the technology needed to compete keeps rising.
"The biggest firms have to keep acquiring," he said. "They have to get a huge amount of volume in order to offset the costs of this business. Firms have to acquire and continue to penetrate nationally. That is Merrill Lynch's strategy, that is Wachovia's strategy, and I think it is also UBS' strategy."
Mr. Hoekstra agreed that it is crucial to get the right people in place in order to keep growing.
"The best way to grow in any market is to have great local leadership and to hire talented people in order to attract clients," he said.
The UBS wealth management division had a presence in 12 markets before the Piper Jaffray deal, but now it is present in 30. Mr. Hoekstra said the company is in "every market in the United States that matters. Now it is a matter of developing scale in each of those markets."
"It changes the entire focus for a firm when in a community you go from being a leading provider to being the leading provider of wealth management services," he added.
