Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Sergio Ermotti is finding out the wealthy aren't as dependable as you'd think.

Fizzling Out
UBS's shares have tumbled in the past 16 months
Source: Bloomberg

The UBS Group AG CEO stole a march on his peers when he decided three years ago to cut his investment bank and focus on the less-volatile wealth management business. But the latter is now proving a headache.

UBS's biggest revenue driver is showing signs of running into headwinds even as the wider bank posted third-quarter profit that surpassed analyst estimates.

The Wealth Effect
UBS' wealth-management operating income before expenses
Source: Company filings

The wealth management unit's operating income before expenses fell to the lowest since at least mid-2014, as did the gross margin on invested assets. Rich clients aren't trading, interest rates are at rock bottom and asset prices are stretched across the board.

Net new money from the ultra-rich is growing faster than it was a year ago, but margins are suffering. The U.S. election, Brexit and weak economic growth are all reasons to hoard cash. There are structural changes hitting the industry, too, such as the rise of low-cost robo-advisors that are said to tempt even high-net-worth individuals.

Rich Valuation
UBS' profit power and dividend payout help the bank trade at a higher price-to-book multiple versus rivals
Source: Bloomberg Intelligence

Ermotti is now going to have to run harder to maintain the premium valuation UBS enjoys over its peers. The good news is he's starting from a stronger place: UBS is a profitable, dividend-paying bank that is at the end rather than the beginning of its post-crisis overhaul. The quarterly return on tangible equity was 7.3 percent, compared with 2 percent at Deutsche Bank or 3.6 percent at Barclays.

But unlike Deutsche Bank and Barclays, UBS is less able to capture the positive side of financial-market uncertainty at its investment bank. It has to live with its decision to pull back from balance-sheet-heavy fixed-income sales and trading, and has one fewer lever to pull on to boost performance.

Missing Out
Revenue growth in fixed-income (FICC) and equities trading in Q3, according to Bernstein estimates
Source: Bernstein

That means UBS has to rely on cost reductions to defend the precious 60-centime dividend that keeps investors sweet. Here, Ermotti's record is encouraging. He eliminated thousands of jobs in the wake of the financial crisis. The bank is already streamlining its European wealth-management operations, has imposed a partial hiring freeze and has cut jobs.

UBS says it's on track to cut 2.1 billion Swiss francs in costs through 2017. Optimists will hope that the macroeconomic outlook will help, with financial markets pricing in a reining in of monetary stimulus and a rise in yields that should help bank margins. But nobody's expecting fireworks.

UBS itself is a richly valued asset in markets that look vulnerable to a correction. Ermotti's toughest job looks like keeping up with his own track record.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Lionel Laurent in London at

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