Citi Personal Wealth Management, the last vestige of retail brokerage at Citigroup Inc. following its spinoff of Smith Barney last June, plans to launch its long-awaited referral program to outside registered investment advisers this summer.
Citi Personal Wealth Management, the last vestige of retail brokerage at Citigroup Inc. following its spinoff of Smith Barney last June, plans to launch its long-awaited referral program to outside registered investment advisers this summer.
The unit, which operates primarily from Citibank branches, is led by Deborah McWhin-ney, former head of The Charles Schwab Corp.'s institutional brokerage division for independent investment advisers.
The pricing scheme for Citi's program will be different than the one she oversaw at Schwab, substituting a flat 20% of an RIA's fee on the re-ferred assets for the 0.25% of assets that Schwab collects on ac-counts referred to advisers, according to a person briefed on the details, who asked not to be identified. Schwab's fee drops as advisers' referred assets increase.
Citi plans to initiate the program with “a handful of highly qualified RIA firms” in New York and San Francisco within the next several months and expand the program into 2011, bank spokesman Samuel Wang wrote in an e-mail.
RIAs will be required to use Pershing Advisor Solutions LLC as the custodian for most assets of referred clients, said Tim Williams, director of field operations for Citi Personal Wealth Management.
The referral initiative is part of a strategic shift that Ms. McWhinney announced last October after Smith Barney and its 11,000-plus financial advisers were folded into a Morgan Stanley-controlled joint venture. She said that she would gradually eliminate commission-based compensation for the remaining branch-based advisers, transforming them into fee-based investment advisory representatives for wealthier clients, while shuttling self-directed investors or those with minimal investible assets to call centers.
Recognizing that wealthy bank clients could no longer be steered to some of the upper-level services and products of Smith Barney and that many of them would be uncomfortable with the déclassé image of branch-based brokers, Ms. McWhinney — who is also head of Citi's personal-banking activities — said that referrals to outside RIAs would complement in-house expertise and broaden geographic coverage.
Whether there will be many assets to refer is subject to debate.
“I'm not sure it's going to get much traction,” said Richard Stone, chief executive of Private Ocean, an RIA with about $658 million in assets. “Banks have enough trouble trying to cross-sell among their own departments, let alone go external.”
Mr. Stone, whose firm participates in Schwab's referral program, said that he hasn't been contacted by, or sought to participate in, the new Citi program.
Some advisers who expect to participate in the program said that they are confident that Citi is structuring it to all but ensure that clients with $2 million or more will be given the opportunity to pick an outside RIA. The key is that referrals will be made not by in-house brokers but by about 150 salaried “investment consultants,” who will guide bank clients and prospects to the call center, in-house advisers or external RIAs.
The variable part of the consultants' compensation is tied in part to customer satisfaction surveys to help ensure their impartiality, Mr. Williams said, noting that they are being trained on the meaning of the fiduciary standard to help make appropriate referrals. The first wave of consultants was hired in April, and a second group is being trained and will be placed in branches at the end of the month.
RIAs briefed on the program said that Ms. McWhinney expects that clients or prospects with between $300,000 and $2.5 million in investible assets will be sent to in-house brokers, those with about $2.5 million to $20 million to RIAs and those with more than $20 million to Citi's private bank.
“Asset tier thresholds are only a component of determining the right fit between a prospective client and an investment adviser,” Mr. Wang said.
Bank-owned brokerages have long struggled to capture wealth management business from their upper-tier clients, in part because of difficulties in motivating bank employees in competing channels to make referrals. A program at Citi in 2005 floundered because “personal bankers” in branches flooded brokers with low-level account pros-pects at the end of each month to qualify for bonuses, Mr. Williams said.
The executive, who oversees -primarily the in-house brokers, said that the program to convert them to team-based, fee-only investment advisers, even as they compete with bank-sanctioned RIAs, has suffered some rough stretches but is generally off to a strong start.
Citi's broker count has declined to about 275, from about 530 when the new strategy was announced, reflecting departures by brokers who didn't want to give up their commission business, as well as the firing of about 100 low-tier producers. Mr. Williams said that he expects to replenish his sales force by hiring about 175 additional advisers, for a total of 450.
Rather than worrying about recruiting prospects, he said, in-house advisers have plenty of opportunity to capture assets from current bank clients because “our penetration after 20 or more years of doing this is still just about 10% of our clients' net worth. Before I worry about the next referral, I'm focused on increasing wallet share [from current clients].”
The new fee-based approach is off to a strong start, with advisory assets year-to-date up 60% from an admittedly weak comparative base last year, according to Mr. Williams. More importantly, he said, Citi advisers attracted 9% more assets last month from top households — those with $250,000 or more of investible assets — than they did in May 2009.
Total assets under management at Citi Personal Wealth Management remain where they were last fall at about $30 billion, partly reflecting the sweep of all cash from the brokerage into bank accounts.
In another turnaround, money transferred to the unit from outside brokerage firms exceeded outflows in April and May, Mr. Williams said. A good chunk of flows in both directions have been with Bank of America Corp.'s Merrill Lynch unit.
To retain advisers, Citi is guaranteeing that their monthly compensation this year will at least match what they earned last year. But as of the end of April, the majority of advisers had surpassed their guaranteed 2009 production, Mr. Williams said.
Citi continues to pay advisers for selling mutual funds, annuities and other commission-based products but has removed the former Smith Barney-based production grids that encouraged sales. Advisers in individual practices are paid a flat 25% of their commission-based production; those in teams get 35%.
Advisers' split of fees that they generate begins at 41% and can grow to 57%. Citi offers a range of fee-based programs, charging from 1% to 3% for multimanager wraplike allocations at the upper end.
“There are still pockets of anxiety” among advisers regarding the new program and the RIA referrals, “but their levels of confidence are rising,” Mr. Williams said.
E-mail Jed Horowitz at jhorowitz@investmentnews.com.
