Making client portfolios work harder

In an industry that fluently talks of “backwardation” and “swaptions”, it is almost refreshing to see a banking product enjoying renewed popularity more than six centuries after it was introduced.

But, with strong growth in volumes this year, that is what is happening with UBS’s Lombard loans business. A still common European term for securities-based lending, the name stems from the spread of Italian moneychangers throughout the Europe of the 1300s.

Now, UBS uses the Lombard loan as part of its holistic approach to wealth management. In short, UBS takes a hard look at both a client’s investments and their liabilities, and manages them as a coherent whole. As part of that, the Lombard loan can be used to make a client’s portfolio work harder – whether that means benefiting from an investment opportunity or optimizing the structure of their financial assets. The client advisor only makes the proposal, however, after thoroughly analyzing the client’s financial situation. The loans, offered at competitive interest rates, are available as a temporary overdraft facility for periods as short as one day, or as a fixed-term advance for up to several years duration.

Lombard loans can be employed when a UBS advisor, making a regular run through the advisory process, sees the need for additional diversification in a portfolio held by one of his or her clients. In that case, the advisor, when meeting his or her client, may recommend he or she use the loan to buy additional assets that have a low correlation to the current portfolio. For example, a client can acquire a 3-year capital protected note that diversifies assets by taking a similar term Lombard loan – with minimal refinancing risk. Doing that complements the client’s existing investment strategies as he or she does not need to sell other parts of the portfolio held with UBS.

Despite the resurgent popularity of the business, UBS is extremely cautious in making Lombard loans to clients. Applications are electronically filed by client advisors based on each client’s risk tolerance levels – with loans moderated to a client’s available lending potential. The advisors themselves undergo extensive training before they have the authority to make any lending decisions. Last year’s numerous client contact campaigns, one of which focused on lending, prompted a rejuvenated training program focused on Lombard lending – with the result that now more than half of advisors are qualified to make such loans.

The newfound interest in taking out collateralized loans has proved extremely beneficial to UBS’s wealth management franchise. The experience to date is that it is an ideal tool that allows advisors to extend the depth and quality of their client relationships.