By Montgomery G. Griffin
In a recent edition, the Wall Street Journal reported the UBS Yield Enhancement Strategy to be, “A complex investment strategy pitched as low-risk by stockbrokers at UBS Group AG” that has “triggered a backlash from clients of its securities unit.” The WSJ also informed, “In just one month late last year , the strategy had losses exceeding 13%.” However, the report further noted that a UBS spokesperson confirmed that as of late-August 2019 “only a small percentage of customers who invested in the [YES] program have filed arbitration claims over it.” (Quotations from the WSJ).
UBS is not the only firm to have encouraged clients to utilize a yield enhancement strategy. Reports have surfaced that firms such as Merrill Lynch, Morgan Stanley, and Credit Suisse recommended similar programs, such as a Collateral Yield Enhancement Strategy (“CYES”) managed by Harvest Volatility Management, to clients. The Law Offices of Montgomery G. Griffin is actively investigating yield enhancement strategies offered by Wall Street firms.
Read more about our Four Areas of Focus with the UBS YES Program
Montgomery Griffin is a longtime investment loss recovery attorney based in Newport Beach, California. He worked as a licensed financial advisor at PaineWebber from 1990-1995, during which time he attended and completed law school as a night student. Thereafter, PaineWebber, which had been in business for 120 years, was acquired by UBS, a large Swiss bank. Today, the merged entity is typically known as UBS Financial Services, Inc. (Herein, PaineWebber and UBS will be referred to simply as “UBS.”) In this post, Monty shares 3 things he learned during his on-the-ground work experience at UBS that today are invaluable to him and his team (including attorney Theodore Avery) when investigating investor claims for losses incurred at UBS, including most recently in the UBS Yield Enhancement Strategy (“UBS YES”) program. To summarize, they are: (1) Recommendations designed to increase a portfolio’s yield typically come with higher risk and added costs—neither of which are always understood by the investor; (2) Financial advisors sometimes seek to transform “dead money” accounts to produce greater revenues by introducing higher commission-producing programs (which are often unsuitable); and (3) There were likely bid-ask spreads in the UBS YES program’s options transactions that generated substantial effective costs for the program’s participants. Monty discusses details of each below.
3 Things I Learned at UBS That Help My Team and Me to Better Analyze
Investor Claims Related to the UBS YES Program
#1. Recommendations Designed to Increase a Portfolio’s Yield Typically Come with Higher Risks and Increased Costs
When I worked at UBS, interest rates plummeted during my first three years on the job. The federal funds rate declined from 8.22% in March 1990 (when I transferred my employment to UBS from Merrill Lynch) to 2.75% less than three years later—which, at that time, was the lowest federal funds rate in 25 years! Sound familiar? When this happened, financial advisors suddenly had to manage large bond accounts with depressed yields. Sound familiar? Investors, including many senior citizens who had become accustomed to receiving higher rates of interest on their “safe” money, became a captive audience for ideas on how to enhance the yield of their portfolios.
When marketing yield enhancement products in the 1990’s, elderly investors were (and, today, still are) some of the most trusting brokerage firm customers. They are often likely to authorize a broker’s recommended changes to their portfolio since they frequently depend on the yield generated by their investments to pay their monthly expenses. To fill this need in the depressed interest rate environment of the early 1990’s, UBS (often together with other Wall Street firms) marketed through its financial advisors a dizzying series of leveraged municipal bond funds (many managed by Nuveen). The brokers were paid handsomely to sell these new funds to their customers, often getting gross commissions of approximately 4.5% on each purchase regardless of order size. However, the gross commission amount for each transaction did not appear on the customer’s monthly statement or trade confirmation since it was classified as a “selling concession.” In time, however, the funds’ performances reinforced the old adage that there is “no free lunch,” as the funds often declined in value within just months due in part to the hefty selling concessions that were paid to brokers from the proceeds of each such offering. Later, when interest rates rose, the leveraged nature of these funds often caused larger declines in value than comparative non-leveraged investments. In my experience, little of this was understood by unsophisticated (frequently elderly) investors, who often (a) tended to believe that they had purchased these funds on a commission-free basis, and (b) did not understand the internal leverage used in the funds as a means to enhance yields.
In 2017, as interest rates remained low, UBS ramped up its focus on recommending the YES program to customers. Our investigation of the UBS YES program suggests that its use of the “Iron Condor” options strategy often increased risks and costs to participating customer accounts, just as UBS’s widescale marketing of the leveraged Nuveen bond funds had often done in the early 1990’s.
The Attorney-Client Interview — Were the UBS YES Disclosures Adequate?
Having a sound understanding of how the leverage and options trading was implemented in YES program customer accounts by UBS (for the purpose of enhancing yields) helps us at the Law Offices of Montgomery G. Griffin to thoroughly interview prospective new clients to probe whether the financial advisor adequately informed them upfront about the YES program’s added new risks and the additional costs to their portfolio.
#2 Financial Advisors Sometimes Seek to Transform “dead money” Accounts to Produce Greater Revenues by Introducing Higher (and Often Unsuitable) Commission-producing Programs
Most fixed-income accounts, by nature, have relatively low trading activity when handled properly. Wall Street firms compensate their financial advisors by sharing with them a portion of the fees, commissions, and margin interest generated in customer accounts. When large bond accounts become relatively inactive (such as, for example, when an account becomes fully invested in long-term bonds or bond funds), an advisor’s compensation can suffer. In the securities industry, advisors often refer to the cash and securities in such inactive accounts as “dead money” (since those securities are not actively generating commissions).
When I worked at UBS, various new programs, products, and strategies were devised and made available to the firm’s brokers which resulted in newfound additional commissions and fees for the firm and its brokers. Sometimes these new securities were used by firm brokers to convert “dead money” customer accounts to higher revenue producing relationships. One of those programs was the advent of fee-based accounts for retail branch office customers. FINRA and the SEC have cautioned that fee-based accounts can improperly force an unknowing customer with a relatively inactive account to pay considerably more compensation to a brokerage firm in the form of ongoing advisory fees when compared to a traditional commission structure for the same inactive account.
We believe that a comprehensive investigation of the UBS YES program, including of its deployment of options transactions and advisory fees, must include an analysis of whether the YES-implemented changes to an account resulted in a higher percentage of fees and other costs relative to the overall net equity in the account. A recent article in the Wall Street Journal reported that one UBS YES investor was charged a fee of 1.75% on a $3 million YES account. In our assessment, and as suggested by the Wall Street Journal, fees above 1% per year for investors with assets under management over $1 million are likely excessive. See our blog post on some of the ways brokers charge customers excessive fees and commissions.
Since 1996, Monty Griffin has represented investors in arbitration cases against UBS for alleged financial advisor misconduct, including securities fraud. We are investigating the UBS Yield Enhancement Strategy program on behalf of investors. If you believe your portfolio suffered losses in the UBS YES program, contact us for a free consultation.
#3 There Were Likely Bid-Ask Spreads in the UBS YES Program’s Options Transactions that Generated Substantial Trading Costs for Investors
By its own admission, the UBS YES program is an options strategy that uses a customer’s existing portfolio as collateral to attempt to generate incremental yield. In 1983, the Chicago Board of Options Exchange (“CBOE”) launched the trading of OEX index options, contracts based on the Standard & Poor’s 100 Index. During the 1990’s, when I spent over five years as a financial advisor at UBS, the popularity of index options trading exploded in the United States. Indeed, by 1997, the index had a 2-for-1 split. Financial advisors, including me, who included index options trading in the services offered to clients knew two things: (1) trading index options was a fast-moving, high-risk endeavor, typically only suitable for the most aggressive investors; and (2) options transactions typically had sizeable bid-ask spreads, which meant that purchasing and selling them predictably incurred a bid-ask spread trading cost that was ultimately born by the customer.
While the Iron Condor options strategy used by UBS with its YES program may have sought to substantially reduce some of the risks involved in options trading by selling an out-of-the-money put (or, short put) while simultaneously selling an out-of-the-money call (or, short call), each executed transaction nonetheless had its own inherent trading cost as a result of the bid-ask spread in existence at the time of the execution of the transaction. We have handled many options cases over the years, including some involving extremely large multi-million dollar accounts of elderly investors. These experiences have included situations where the trading costs alone have exceeded a million dollars. Although there can often be multiple categories of costs to an investor when trading options, it has been our experience that the largest cost category is often the cumulative total of the bid-ask spread from all of the options transactions combined. In our experiences, we have found that most retail investors are unaware of trading costs resulting from bid-ask spreads. It is our opinion that a proper forensic expert analysis of a customer account that was placed in the UBS YES program should include a complete set of calculations of the bid-ask spread trading costs incurred by the customer, as well as pointed attorney interviews of each client related to what, if anything, the financial advisor explained regarding this foreseeable category of cost to YES program participants.
If you lost money in the UBS YES program, contact us for a free consultation. We are especially eager to speak with you if your UBS financial advisor did not explain to you that the UBS YES program could, in some scenarios: (1) substantially increase the risks to your account, and/or (2) significantly increase the costs of investing to you.