Dec. 15, 2024 at 7:00 am ET

The U.S. wealth arm of UBS has $2 trillion in client assets. Photo: Stefan Wermuth/Bloomberg News

Scale is crucial in the wealth-management business, but it needs to be the right kind of scale.

Managing money for the rich is today’s golden goose in banking, because it generates stable fees and has low capital requirements. Many are eager to ape Morgan Stanley MS -0.40%decrease; red down pointing triangle, which has become a wealth mammoth following the acquisition of Smith Barney from Citi C -0.59%decrease; red down pointing triangle in 2009, and later Eaton Vance. Its American wealth business, which now amounts to $4.6 trillion in client assets, is so large that it yields a 29% pretax profit margin, according to estimates by Anke Reingen at RBC Capital Markets.

Meanwhile, the U.S. wealth arm of its main global competitor, UBS UBS -0.50%decrease; red down pointing triangle, only has $2 trillion in client assets and a 12% margin, even after merging with Credit Suisse last year. Globally, it has $4.3 trillion in assets and a 21% margin.

The U.S. is a difficult market for outsiders to penetrate. Top banks have a 48% market share, figures by Coalition Greenwich show, compared with a 32% world average. Retaining financial advisers is expensive, because they are increasingly thriving by going independent.

Last week, executives at the Swiss bank told staff that the business will be restructured, and that a new division will focus on less-wealthy individuals. Recently, UBS Chairman Colm Kelleher, formerly of Morgan Stanley, opened the door to eventually growing through acquisitions.

Yet catering to the ultra-rich, the rich and the merely well-off are very different propositions.

The financial industry usually places the cutoff between “ultra-high net worth” and “high net worth” or “affluent” at $10 million in investible assets. Below that, in the bracket between $100,000 and $1 million, are the “mass affluent.” According to credit-reporting agency Equifax, 35% of U.S. households count as mass affluent, and 10% are above that. But in terms of assets, the mass affluent account for just 27% of investible wealth, while the top 10% of the population accounts for 70% of it.

Though some mass-market brokers such as Schwab have gone upscale, high net worth remains mostly the turf of the likes of Morgan Stanley, JPMorgan JPM -0.66%decrease; red down pointing triangle, Citi and UBS. These clients pay big bucks for bespoke, one-to-one services. Of those, 59% are retired or pre-retired, compared with 48% of the mass affluent, and their needs are geared toward tax optimization and inheritance planning.

Big banks are particularly well suited to cater to ultra high net worth individuals who have complex needs, including complying with cross-border regulations, setting out strategies for their businesses and creating charitable foundations.

A leap from here to the mass affluent is a big one.

In 2022, however, then-chief executive of UBS Ralph Hamers attempted just that when he announced the purchase of “roboadvisor” Wealthfront as part of his plan to create a “Netflix of finance.” The move was controversial, as it involved a steep $1.4 billion valuation for a company that then only managed $27 billion in assets. In September of the same year it fell through, with Kelleher later saying that UBS wouldn’t have had a competitive advantage going downmarket.

Ever since, the lender has focused on luring in family offices by beefing up its U.S. investment bank. Initial public offerings, for example, are a great way to bring company founders through the door. And the ultra-rich benefit from having direct access to complex products: Goldman Sachs GS -1.04%decrease; red down pointing triangle has tied efforts to expand its wealth franchise to its ability to channel clients into exclusive private assets.

UBS is trying to build another cross-selling point by seeking a broader U.S. banking license that would make it easier to extend loans and take deposits.

Still, making larger moves would first require fixing the cost issues of its American wealth arm: At similar size, Wells Fargo WFC -0.51%decrease; red down pointing triangle and Raymond James are more profitable.

To be fair, the Swiss bank isn’t oblivious to this, which is why it is cutting compensation for lower-performing financial advisers. Nor is it attempting an in-house version of its failed Wealthfront takeover: The new division will still be adviser-led, and only service people with more than $500,000.

Nevertheless, Wealthfront’s success in the interim two years—it had $75 billion in client assets in October—does show that the name of the game in today’s mass-affluent market is doing everything digitally and automatically, be it financial planning or tax optimization. Big banks that try to grow in that direction risk finding themselves in a technology race they have so far proven ill-equipped for, and which is of little help to their core, high-end relationship business.

Yes, digitally onboarding younger, up-and-coming people might serve to eventually channel them to human advisers, where the bank can charge a 1% fee. But it might equally convince them that the roboadvisory tier that charged them 0.3% is a perfectly adequate place to leave most of their money.

And why would big banks want to do that?

Write to Jon Sindreu at jon.sindreu@wsj.com