Trust An Advisor?

So, Bernie Madoff might finally plead guilty—but the fallout from his alleged fraud on the financial advisory business might not disappear for a long while. In our February cover story, we detailed how once-highly-regarded retail financial advisors—far from Bernie Madoff’s New York—discovered that their clients’ trust in them had eroded, through no fault of their own. Our story was, admittedly, based on our own anecdotal reporting and conversations with dozens of high-end advisors.

So, Bernie Madoff might finally plead guilty—but the fallout from his alleged fraud on the financial advisory business might not disappear for a long while. In our February cover story, we detailed how once-highly-regarded retail financial advisors—far from Bernie Madoff’s New York—discovered that their clients’ trust in them had eroded, through no fault of their own. Our story was, admittedly, based on our own anecdotal reporting and conversations with dozens of high-end advisors.

This weekend Barron’s (subscription required) claims to have more scientific proof: “Online brokers say they’re seeing new clients transferring entire accounts from full-service brokerages in order to take personal control of their own money in these tough markets.” The point of the story is not that Bernie Madoff-related fears are driving retail investors away, but, rather, that high-net-worth clients reckon they can do as well as a trusted advisor can; why pay top dollar to lose 50 percent of your net worth? Barron’s reports that, according to respondents to an online survey (the results of which will be published next Saturday), while ACATs filings have held steady for years, there was a “surge” in the fourth quarter of 2008.

Penny Wise, But Public Relations Dumb
Just what are executives at Citigroup thinking? Are Smith Barney FAs abandoning ship that fast? One can only wonder why 3,000 top-producing Smith Barney financial advisors were, about a month ago, given “gift cards” loaded with cash for them to spend any way they wanted. (See, Back-Door Bonus in today’s Post.) Naturally, taxpayers are angry. (See comments online after the Post’s story.) Citi has received $45 billion in government funds—and yet paid $13 million in fun money to top reps, goes the argument.
Remember that top Smith Barney reps will receive a retention package in January 2010 after the division was partially spun off to Morgan Stanley in a joint venture, with 51 percent to be owned by MS. The awards will be worth about $3 billion and will not be paid out of the firm’s TARP kitty, MS has announced; the deal is expected to close in the third quarter. (For more, see this Feb. 29 RegisteredRep.com story.)

A Citigroup spokesman confirmed that Citigroup executives approved a deal in which 2,000 advisors received “gift” debit cards loaded with either $1,000, $2,000 or $3,000 for the FA to spend on whatever he wants. Members of the Director’s Council (the top 500 FAs with $1.5 million and up in production) received a debit card worth $3,000; 500 members of the Chairman’s Council (next tier of 500 FAs with $1 million to 1.49 million) got $2,000 cards; and, the 1,000 members of the President’s Council (with $750,000 to $999,999) got cards loaded with $1,000.

The idea is to give the FAs—some of whom would have qualified for three all-expense-paid trips to resorts in 2009—a nod, a little something to make up for scrapping the corporate retreats. Says a Citi spokesman: “We will prudently balance the recognition-and-development needs of our best advisors with the need to manage our business during this difficult environment.”

Moreover, Citi says, “This program is funded by operating revenue of Smith Barney and achieves a nearly 80 percent cost saving over some previous recognition programs.”

But do reps care? A few reps we spoke to said they’ll gladly take the $1,000 debit card, but it can’t make up for all the losses they’ve experienced in their personal portfolios on Citi’s watch: They point to Citi shares—which are off about 96 percent from their 52-week high. A Citi spokesman declined to discuss FA attrition, saying numbers are not made public until quarterly reports are issued. But FAs say Smith Barney is “bleeding brokers,” as an East Coast SB FA told us. As for the “gift” debit card, “It’s just stupid,” he sneers.

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