UBS's Berkery Looks to Banking to Bolster Wealth Management

Commercial banks are increasingly trying to turn themselves into wealth managers, fighting over each scrap of business from their most affluent customers. Now some big wealth managers are launching counter-attacks.

Swiss investment bank UBS, the world's largest manager of money for the superrich, has spent three years building up its U.S. commercial banking operations, which include credit cards, mortgages and personal loans. Rather than using the products to woo new customers, UBS is marketing them exclusively to existing wealth-management clients — and relying on them to help the company get and keep brokerage business.

"You want to be the one talking to your client about their mortgage, [because] if you're not having the conversation with them and solving for their mortgage needs, the odds are that one of these other big banks is," says Rosemary Berkery, vice chairman of UBS Wealth Management Americas and head of its U.S. bank.

Yes, UBS has a U.S. bank; federal regulators in 2003 granted its request for an industrial loan company charter in Utah. Even so, UBS has stopped short of building branches or giving toasters to new customers.

"We're not a bank for a bank's sake," Berkery said during an interview at the bank's U.S. headquarters in Midtown Manhattan. "We're really a bank whose purpose is to help grow a wealth management franchise."

In the three years since Berkery joined UBS from Merrill Lynch, her biggest challenges have stemmed from, and been a virtual mirror image of, what many of her traditional rivals are doing. Large and midsize commercial banks, from JPMorgan Chase (JPM) and Bank of America (BAC) to Fifth Third (FITB) and PNC, are all bulking up wealth management operations, hoping to increase their shares of their most affluent customers' wallets and keep them from looking elsewhere for fee-heavy investment services.

UBS and other entrenched wealth managers have little to fear from the regional banks scrambling to bank the "mass affluent," who are generally defined as clients measuring their wealth in the "hundreds of thousands" rather than "millions" of dollars.

Berkery's target customers are significantly wealthier. She declined to disclose the average net worth of UBS's wealth management customers but said many take out loans with the bank to acquire yachts, helicopters and third and fourth homes. Those customers continue to increase their business with UBS, despite a few public stumbles, including a $780 million settlement with the U.S. government in 2009 over charges of helping wealthy Americans evade taxes. U.S. clients had $892 billion invested with UBS Wealth Management Americas at the end of June, up 12% from a year earlier.

As the banking industry moves past the financial crisis, UBS is likely to face a growing challenge to its U.S. franchise from the biggest U.S. banks. Some, like JPMorgan Chase and Citigroup (NYSE:C), have well-established private banks of their own. Others, including Bank of America's (BAC) Merrill Lynch, have been acquired relatively recently.

Rather than merely play defense, Berkery is trying to cater to UBS clients' everyday banking needs so they won't go looking elsewhere and give the bank's rivals a shoe in the wealth management door as well.

Commercial banks are "no longer content simply to lend to that [wealthy] client," Berkery says. "They want that client's assets."

To get them, JPMorgan Chase, Wells Fargo (WFC) and others have been putting more financial advisers into retail branches and building private client and asset-management offices within existing branches.

Berkery acknowledges that the competition is stiffening. But she downplays the threat posed by traditional U.S. lenders who bolt fancy offices and "cookie-cutter solutions" onto ordinary branches.

"There are some banks that are trying to get into this business by populating their commercial branches with individuals who can both lend and advise on securities, who are dually registered," she says. "I have conversations with clients all the time that say, 'We're not going to talk to … them about our family trust that holds $100 million for the benefit of our children.'"

However the battle plays out, the top players in wealth management and traditional banking alike regard the marriage of the two as a strategic imperative, according to Teresa Epperson, a managing director at AlixPartners. The trend is driven in part by the desire to prevent rivals from gaining a beachhead and in part by the desire to cater to client demand, she says.

Bank customers "want to be in a place that's going to reward you for having more assets there … and that's going to provide you with an integrated view of your financials," Epperson says.

UBS is trying to offer its clients attractive perks, like mortgage discounts for those who retain certain assets at the bank or bring them there when applying.

Berkery, 60, brings a wealth of financial services experience to her relatively new role at UBS. A Long Island native, she earned a law degree from St. John's University in nearby Queens. She began her career as a corporate and securities lawyer at Shearman & Sterling, where she advised big investment banks on M&A transactions. Then, in 1983, she joined one of those companies, becoming a staff attorney at Merrill Lynch.

Berkery stayed at Merrill for 25 years, running its research department and, eventually, investment products and marketing for its private client group. She became general counsel in 2001, and her power extended beyond the traditional boundaries of the legal department; the Financial Times in 2005 dubbed her "one of the most influential executives on Wall Street" and a "consigliere" to then-CEO Stan O'Neal.

Four years later, the financial crisis tarnished O'Neal's tenure and forced a financially distressed Merrill to sell to Bank of America. Berkery left afterward and says she was on the verge of accepting another job when longtime Merrill colleague Robert McCann, now chief executive of UBS Group Americas, pitched her on building up bread-and-butter banking at a company better known for truffles and caviar.

She took over a U.S. consumer finance business that had stuttered through previous efforts to expand — including four failed attempts to launch a mortgage business. Other banking operations were similarly lackluster. For example, UBS was struggling to recoup its cost of capital on a securities-based lending business, which collateralizes customer loans against investments held at UBS.

"We were essentially giving our balance sheet away," Berkery recalls.

UBS already offered a credit card to wealthy U.S. customers — but it was "hated" by 85% of them, as well as by UBS's own financial advisers, Berkery says. The card was issued and managed by Barclays, which like many other credit card issuers in the wake of the financial crisis was worried about mounting losses and, according to Berkery, was operating with an over-abundance of caution.

Barclays executives "had turned their fraud and risk tolerance down to zero, so you'd be stopped at every cash register," she says. "We actually had clients who were stopped 90% of the time" from using their cards. In the rarified world of wealth-management, where banks cater to customers' every financial whim and fixate on overall customer "experience," such rejections can be fatal.

Barclays spokesman Kevin Sullivan disputed Berkery's statistics: "Proprietary UBS customer research at the time showed 84%-plus cardholder satisfaction and actual authorization rates for the program above 98%," he wrote in an email.

Berkery has brought the card operation in-house and hired Frank Destra, formerly Goldman Sachs' (GS) head of residential lending, to launch a mortgage business. UBS claims more than 90% of customers and financial advisers now say they like the new versions of the card.

She has raised the interest rates the bank charges for securities-based lending- a process that, oddly, increased customer awareness of the service and their use of such loans, Berkery says. All told, she has grown UBS's securities-based lending portfolio to $23.5 billion in loans outstanding as of July from $13.5 billion in 2010.

UBS is succeeding in convincing more customers to come to it for mortgages as well; 26% of the company's financial advisers have sold a home loan to existing customers within the past 12 months, Berkery says.

For UBS, the consumer push appears to be bearing plenty of fruit for wealth management; roughly half the $22 billion the U.S. brokerage brought in from wealthy Americans last year came via banking transactions, Berkery says.

"Clients who bank with us, meaning they do a certain amount of direct deposit or mortgage or card transactions with us, are three times less likely to leave than those who don't," she adds.

Her next challenge will be familiar to many commercial bankers: deciding how big her bank should become. Berkery has almost doubled the size of UBS Bank USA's assets, to $47 billion this March from $29 billion three years earlier, according to Federal Deposit Insurance Corp. data.

The question now is "whether or not this should become a $50 billion-plus bank," which would make it subject to additional capital requirements and other regulations, Berkery says. "There are compliance costs and risk management costs associated with that … the $50 billion line is a very bright line, and you don't want to cross it inadvertently. If you're going to make that leap, you want to do it deliberately and with a lot of forethought."