By Lawrence White
HONG KONG (Reuters) - Sipping coffee, a group of advisers to Asia's wealthy sit in pairs in a Hong Kong training room of Swiss bank UBS (VTX:UBSN), trying to solve a riddle.
Each pair of advisers must first imagine that each of the other pairs in the room has chosen a number between 1 and 100, and then guess what number would represent two-thirds of the average for the whole group.
The riddle, presented at a company-run master program, requires guessing what everyone else in the room is thinking, a challenge that mimics the task of understanding market behaviour. That challenge is now key to UBS's efforts to reinvent one of the world's oldest and biggest private banks.
"The wealth management industry is in the midst of a paradigm shift, from being about relationships to being about advice," said Kathryn Shih, chief executive for wealth management in the Asia Pacific for UBS.
UBS wants its advisers to break from its traditionally passive approach, where they would present clients with a range of investment ideas, and adopt a more active stance by giving them a clear recommendation.
UBS hopes the new approach, which has taken hold over the past few years, will reinvigorate its wealth management business after most of the industry suffered an exodus of funds during the 2008-09 global financial crisis.
In UBS's case, the outgoing tide in that period totalled 200 billion Swiss francs ($214 billion), or a fifth of the bank's total, though it began to turn in 2010. This year UBS reclaimed top spot as the world's largest private bank, with 9.7 percent growth in assets to $1.705 trillion, an early sign that the new strategy was working.
But UBS still needs to squeeze higher returns from that size advantage, in order to meet its goals of generating the bulk of group profits from wealth management within three years and returning gross margin to pre-crisis levels.
In the second quarter, UBS wealth management's gross margin - revenue on assets under management - stood at 90 basis points, below its goal of 95-105 and lagging peer Credit Suisse's (VTX:CSGN) return of 111 basis points for the same period.
MAKING THE CALL
The world's big asset managers like BlackRock Inc (NYS:BLK) and Pimco have long presented clients with a house opinion on markets which goes against the consensus.
But for UBS, it is relatively new.
UBS cites several calls it made for private bank clients that paid off since 2012: including buying six-month bonds of Spanish region Catalonia in September that year after the debt had been sold off on fears that Catalonia would cede from Spain.
It has not always been smooth sailing, however. Early this year, UBS helped finance Thai firm CP Group's $9.4 billion purchase of a stake in Chinese insurer Ping An. People familiar with the matter said at the time that part of the financing package was sold to UBS's wealth clients.
UBS spokeswoman Fiona Chan declined to comment specifically on the Ping An deal but said internal barriers between UBS's investment bank and private bank eliminated conflicts of interest and that neither division shared information unless the client consented.
UBS's soul-searching over wealth management comes amid rising external pressure. Regulators from around the globe are trying to weaken the same secrecy laws in Switzerland that have helped the bank attract wealthy clients. UBS is also under pressure from activist shareholder Knight Vinke Asset Management to quit investment banking and focus primarily on wealth.
One of the first wealth strategy changes UBS instituted was the creation of a chief investment office (CIO) in 2011, whose charge was to distil institutional knowledge down to recommendations about every asset that clients could invest in.
"UBS has been too cautious, and dominated by too bearish a view in the past, so I think the new CIO strategy makes sense," said Eric Knight of Knight Vinke, which owns almost 1 percent of UBS. "You can't manage money by committee, someone has to take a view and take personal and financial risk."
UBS hired Alex Friedman, the former chief financial officer of the $36 billion Bill & Melinda Gates Foundation, as the CIO. Friedman has final say on the bank's views on markets and oversees the global operation, with Asia a strong focus.
According to the 2013 Capgemini/RBC Wealth Report, Asia Pacific is expected next year to overtake North America as the region with the world's biggest population of high net worth individuals. Asia's wealthy currently hold $12 trillion in assets, behind North America with $12.7 trillion.
UBS has more than 1,000 client advisers in the region, having hired 100 this year alone, it said. With all the promise, the region also has many challenges.
Asian clients are often entrepreneurs fond of risky stock investments and are wary of the notion that a banker knows best.
"First-generation wealthy clients in China are tough, confident," said Camilla Chen, a former journalist who runs the bank's Ultra High Net Worth division in Hong Kong, overseeing funds for individuals who are each worth more than $30 million.
"When I started as a junior banker I just wanted to entertain them, and they just wanted to trade equities."
The financial crisis served as a lesson for those clients, enabling advisers to educate them on risk management, said Chen.
(Additional reporting by Michael Flaherty; Editing by Mark Bendeich)