Why UBS's Wealth Management Should Stand Alone

When I saw yesterday that UBS private-banking clients were expected to have withdrawn SFr5 billion from their accounts last quarter, I said the number seemed low to me. Amazingly, I was right:

Rich clients at UBS's wealth management units withdrew 17.3 billion francs more than they added in the quarter, triple the 5 billion-franc estimate of analysts. The division, which oversaw 1.84 trillion francs at the end of March, attracted an average of 37.9 billion francs in each quarter last year.

In an entirely sensible response, UBS is separating its wealth-management unit from its investment banking unit, giving it the freedom to sell one or the other entirely. Losing the private bank would leave the rump UBS with much more volatile earnings, but the value of a unit managing more than $1.6 trillion is mind-boggling. A bit like Neuberger Berman at Lehman Brothers, the buy-side is worth such an enormous percentage of the whole that at some point it becomes impossible for a fiduciary not to sell (or at the very least spin) it off.

If and when that happens, the private-banking clients will probably be happy to be rid of the investment-banking albatross: no one likes to wake up in the morning to see the home to his money has contrived to lose $38 billion on misadventures in mortgage-backed securities. Hardly gives one confidence that they know what they're doing.

And the chances are, too, that if investment banking and wealth management were separate, the problems in the auction-rate securities market might not have happened either. ARSs were sold aggressively "into retail" (private-banking clients) largely because they were so lucrative for the investment-banking side of the business, which got nice fees for structuring them and holding the regular auctions.

So if UBS wants to stanch the outflow of client funds, today's announcement is a very good first step.