No one can deny it's been a tough year for UBS's wealth management business in the U.S. It started with the massive writedowns at the investment bank but soon hit closer to home with the auction-rate securities mess, which led to the agreement by the firm in August 2008 to repurchase $8.3 billion of the frozen securities from clients, as well as pay a $150 million fine by the state securities authorities, the largest fine imposed on any firm over ARS.

But all of that paled in comparison to the furor over the offshore tax evasion case, which brought two friendly nations to loggerheads and, at the very least, put a big dent in the centuries-old Swiss banking system.

Needless to say, for the average UBS advisor on the front lines, there's been plenty of explaining to do to disaffected clients. And it's certainly sent some marching—UBS lost 821 advisors, or almost 10% of its advisor force, in the second quarter of 2009, according to its quarterly results. It also said goodbye to a net CHF 5.8 billion ($5.5 billion) in client assets.

Grow, Shrink or Sell?

Given that ongoing rumors that UBS plans to spin off its troublesome American stepchild have persisted for a number of years, it's perhaps ironic that it's the only one of the major wirehouses not to merge or be acquired during the current crisis.

So now it faces a new landscape, in which its force of 7,939 advisors is dwarfed by the other three wirehouses, all of which have at least double that number. "UBS has to decide which way to go: Will they grow or will they sell?" says Alois Pirker, research director at Boston-based Aite Group.

If they opt for the latter, the list of potential buyers is short, says Chip Roame, principal at Tiburon Strategic Advisors. He suspects the UBS business has already been widely shopped around, but with the other major firms all settled into partnerships there seems to be few options. Pirker suggests that there may be some interest north of the border, with strong Canadian banks such as RBC or Toronto Dominion looking to strengthen their foothold in the U.S. market.

However, Catherine Tillotson, a partner at London-based consultants Scorpio Partnership, doesn't believe that one of the world's biggest wealth managers will be willing to abandon the world's biggest market. She acknowledges that the U.S. market is more competitive with slimmer margins than in Europe, but the firm is willing to swallow that. "UBS is a global business and it thinks globally. The U.S. market is so different from the international business. You have to play by the U.S. rules in the U.S. market," she says.

Her colleague Graham Harvey also doesn't think that selling the U.S. wealth management business is high on the agenda of Oswald Grubel, the chief executive officer of UBS. Harvey looks to history as his guide. "From an empirical point of view, when Grubel ran Credit Suisse, the U.S. business had margins running 50% lower than the European business and he had no inclination then to exit. There's no precedent for exiting," Harvey says. Indeed, Grubel has indicated in press reports that he doesn't plan to withdraw from the U.S. market.

Jamie Price, UBS's Head of the Wealth Management Advisor Group, Americas, sees an opportunity for the firm in the new wealth management landscape, partly because it is now smaller than its competitors. "We've become more differentiated. Everyone else has become larger. We're small in terms of head count but we're more productive," Price says. "And we don't have to be all things to all people."

On that point, Pirker agrees, and notes that this leads to one more option for UBS—shrinking its U.S. wealth management operation to focus on its ultra-high-net-worth Private Wealth Management business. That unit caters to clients with investable assets of at least $10 million and currently has around 100 advisors in 12 offices. There's already been some movement in this direction with its sale of 55 smaller-market branches to St. Louis-based Stifel Nicolaus earlier this year. Moving to the high end "would at least be getting their culture and strategy aligned globally," says Bob Ellis a principal at consulting firm Novarica.

However, some of UBS's acquisitions in recent years seemed to fly in the face of the idea of focusing on the high end.

UBS acquired Paine Webber in 2000 to enter the American market. It then bought regional firms Piper Jaffray and McDonald Investments in 2006. "Buying Paine Webber was probably one of the worst decisions they've ever made," says Pirker. "They tried to remodel it but you can't change a 9,000-strong advisor force." He thinks that a smaller U.S. Trust-style business would be a much better cultural fit for UBS than a retail brokerage.