Why UBS Brokers and Clients Fled

Jul.26.10 | About: UBS Group (UBS)

Since 2008, UBS (NYSE:UBS) has shed $220 billion in client assets and has suffered from a mass broker exodus from its Wealth Management unit. In an attempt to halt investor outflows and calm its battered and bruised clients, UBS’ CEO has taken to the road and is headlining events for the bank’s high net worth clients hoping his charm can stem the tide of resentment.

According to a recent Wall Street Journal report, UBS’ illegal tax shelters are largely to blame for client defections. But that’s only part of the reason for UBS’ problems: UBS also widely peddled dubious investments that blew up its clients’ portfolios and destroyed its brokers’ reputations.

The firm was one of the largest marketers of auction rate securities (ARS). And after the ARS market collapsed, regulators forced UBS to re-purchase $22 billion worth of the stuff back from clients due to misleading sales practices.

Then there’s the firm’s regrettable involvement with Lehman Brothers its “principal protected notes” (PPN). UBS was the chief seller of PPN’s issued by Lehman, having sold as much as $1 billion worth. UBS’ sales practices are currently under investigation by regulators and scores of investors have filed arbitration cases after finding out, much to their surprise, that their “principal investments” weren’t so protected after all.

UBS’ brokers were also caught off guard. They knew little about principal protected notes and their exposure to Lehman. Feeling misled, many brokers have joined competitors or have exited the business entirely.

UBS has lost every PPN case that has gone to arbitration. Full disclosure: I took the first case to trial and have dozens more.

Recently, UBS’ CEO Oswald Grubel summed it up pretty well when he told reporters,

We shouldn’t underestimate the reputational damage we engineered for ourselves.

I couldn’t have said it better myself.