UBS Irks Wealthy Clients In Puerto Rico Over Millions In Losses

October 8th, 2013 by Trefis Team
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UBS (NYSE:UBS) is staring at a fresh wave of legal trouble with its wealth management clients in Puerto Rico crying foul over huge losses on investment products the bank’s brokers aggressively sold them without detailing the underlying risks. [1] These investments are linked to the island’s local municipal bonds that have lost a significant amount of value over recent months due to the region’s struggling economy.

The Swiss bank is likely to face significant legal backlash over the issue and could end up paying millions to settle subsequent charges. In any case, the incident does not bode well for the bank’s strong presence in Puerto Rico, where it manages assets of around $10 billion for clients – giving it a large share of the island’s wealth management industry.

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We maintain our $20 price estimate for UBS’s stock for the time being, though continuing legal issues could present a downside to this value.

See our complete analysis of UBS here

Puerto Rico’s tax policies have made it an attractive base for millionaires around the globe – also making it an important market for the world’s biggest wealth managers. UBS is one of the biggest players in the region, with its operations in Puerto Rico housed under its Wealth Management Americas business segment. The Swiss bank has 132 brokers running 5 branches on the island and managing roughly $10 billion in client assets. [1]

But if recent reports are to be believed, these brokers have gotten the bank in trouble by selling investment products to not just seasoned investors but also to smaller retail investors without highlighting the risks involved, and also by encouraging wealthier clients to take on additional loans – potentially illegally as credit lines instead of margin loans – to invest in these products. The proprietary products in question were closed-end funds which invested in Puerto Rican municipal bonds and were managed by UBS itself . As these funds were doing quite well in recent years, they found ready takers – until the region’s economy was hit. The funds quickly started losing value and resulted in millions in losses for the investors.

One problem for UBS is that it already has a bad history when it comes to Puerto Rico, with the bank settling with the SEC over charges of misleading investors for $26.6 million last year. [2] The legal backlash expected from the brokers’ misgivings will be lent support by that settlement. And while this could result in more payouts for the bank in the near future, the long term impact of this will be seen as a reduction in wealth management assets for the bank in the region. You can gauge how a smaller-than-expected growth in assets managed by its Americas operation will impact UBS’s share price by making changes to the chart below.

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Notes:
  1. UBS Brokers in Puerto Rico Create Headache for the Bank, The New York Times, Oct 2 2013 [↩] [↩]
  2. UBS Puerto Rico Unit To Pay $26.6 Million To Settle Fraud Charges, Fox Business, May 3 2012 [↩]