UBS increases US exposure with the acquisition of Wealthfront

On 26th January 2022, Swiss financial services company UBS agreed to acquire Wealthfront, an automated investment service firm based in California, in an all-cash transaction worth 1.4 billion USD. The deal is expected to complete in the second half of 2022, with Wealthfront becoming a subsidiary of UBS’s US wealth management business. Wealthfront currently manages 27 billion USD of assets for customers and has over 475,000 accounts registered, using computer algorithms to choose investments based on the risk tolerance and financial goals of its clients.

This move demonstrates UBS CEO Ralph Hamers’ aim to continue to push for expansion in the US markets, as the acquisition of the Wealthfront business will allow UBS to target younger generations of affluent investors. In his upcoming first strategic review of the business since the start of his tenure as CEO, Hamers will discuss the firm’s intentions to launch a digital wealth manager in the US, targeting the mass affluent, generally those with assets between 250,000 to 2 million USD. UBS will be able to provide Wealthfront with its substantial knowledge and leadership team in wealth management, as well as access to a more extensive range of financial products. This will place UBS in direct competition with other large banking institutions that offer similar services, such as Morgan Stanley and Wells Fargo. UBS’s wealth management division has performed strongly in the US as of late, with assets under management up 21% at 1.7 trillion USD and wealth management profits up 34% year over year as of the third quarter of 2021.

Wealthfront has created a technology platform that not only provides automated investment advice but packages this together in simple, easy-to-use apps and websites that appeal to younger investors. The business has established itself as one of the leading robo-advisor services due to its huge offering of investment products and unique features such as tax-loss harvesting. It has raised just over 200 million USD in total capital as a private company, and the valuation of the business in this transaction represents an almost threefold increase in value since 2018.

The digital product developed and sold by Wealthfront will assist UBS in its plans for a digital wealth management product, complementing UBS’s current service to high and ultra-high net worth individuals. This will allow them to scale their wealth management solution to a wider market and utilise Wealthfront’s technology for both sectors of the market. Due to the nature of the technology, robo-advisors such as Wealthfront can charge much lower fees for wealth management services, at 0.25% compared to the traditional 1% for human advisors. This means that UBS will win on two fronts: they will attract lower net-worth clients who may have been previously deterred by higher fees, while also utilising Wealthfront’s technology in its existing services to lower running costs and increase margins. This strategy is different to other wealth managers such as Credit Suisse and Julius Baer, who have moved their focus to higher net-worth customers, insisting on greater profit margins for this end of the market. In contrast, the minimum deposit on Wealthfront’s platform is only 500 USD. UBS believes that attracting millennial and Generation Z investors via Wealthfront’s appealing platform will also bring more customers to their asset management division as their clients’ wealth grows over time.

This transaction is part of a wider trend, where large asset managers are focusing on smaller acquisitions that can boost the capability of the firms, rather than boost growth. Jeff Stakel, a principal at Casey Quirk, a Deloitte-owned asset management consultancy, said that “M&A activity has picked up and a number of deals this year have been focused on expanding the operating capabilities of asset managers”. Similar transactions include J.P. Morgan’s acquisition of Nutmeg, an online investment manager. This acquisition allowed J.P. Morgan to increase their exposure to the rapidly growing online investment market while offering its asset management products to Nutmeg, a result which UBS will be keen to replicate.

The acquisition will help UBS to grow a long-term customer base and take advantage of Wealthfront’s younger clientele. This will both increase its exposure to this fast-growing market sector and create a larger client base for its traditional wealth management business in the future. It will offer UBS a competitive edge in a market where many banks and asset managers are vying for clients’ assets with new digital offerings.

By Archie MacKechnie

Sector Head: Hortense Comon

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