Von Aldo

FAs Disgruntled over New Comp Plan at Citi Personal Wealth Management

What's wrong with the hybrid model --- being both a Series 7 and IAR of an RIA? Citi Personal Wealth Management advisors want to know. Hybrid FAs there say they are being forced into a pure RIA model, even if it be more expensive for the client. The new comp plan (team agreement) has yet to be disclosed by management, say employees of the bank. But they did say that they know they will be penalized (i.e. lower payout) on transactions. Several large FAs have left last week, two CPWM FAs told me.

Citigroup executives will argue (although I haven't spoken to them; it's Saturday afternoon) that an RIA model is better for the client, and will reduce conflicts of interest and offer greater transparency. And, indeed, the RIA model --- with a fiduciary standard --- is ascendant. And, anyway, Washington may force a fiduciary standard on retail financial advisors. (But that would create problems for broker/dealers, particularly ones that do proprietary trading and investment banking.) If I were a client, and it made financial sense, I would prefer a RIA-fee-based relationship with my FA. But, on the other hand, I can see why an FA would prefer to be able to offer both options (transactions and fees).

The CPWM advisors I spoke to today say choice --- a hybrid model offering the client a choice between commissions and fees like other custodians offer --- is a fine model. (CPWM is the 500 or so bank FAs left over after Citigroup entered into a JV with Morgan Stanley.)

This rather dire posting on Registered Rep.’s forum is an accurate description of what’s going on at Citi, I hear via emails and conversations with two CPWM employees, who have been calling and emailing for, oh, weeks now. So, while, to be fair, I haven’t yet heard from our friends at Citi (although a Citi spokesman was working on getting me a response), I am confident enough in the accuracy of the post below to blog it. (The new comp plan -- teams and salaries! --- reeks of communism! says one poster on our Advisor Forum.)

Here is the most recent posting from our Advisor Forum, for the whole thread, go here.

“After firing 75+ of their lowest producers and some individual movement here and there, Citi is down to about 500 FAs give or take a few. Although some have already left here and there over the last 3 weeks, the bulk of the flow of FAs out the door is about to accelerate. It's been a month+ since Citi shocked the troops with news of their new platform, team concept and compensation plan. Most smart FAs are well into the due dilligence process and offers are happening. Moving sticky bank clients is always challenging, but those I'm hearing from believe it'll be much easier now vs. later once they've integrated themselves into new teams in 2010.

“Watch this Friday 11/20 and Wed next week right before Thanksgiving. Movement on those 2 key days will start the flow out that will continue up through 12/18 when FINRA closes for the Holidays.

“Where are Citi FAs going? The masses are moving in 3 directions. Wires like Merrill and Wells Fargo Advisors are aggressively pursuing the quintile 1 & 2 producers. Regionals like Stifel Nicolaus are also taking advantage of Citi's blunder. Wells Fargo Bank and PNC are by far the top destinations in the bank channel although lower producers are finding some love at local state and regional banks. Independents like Raymond James and others are also seeing some independent minded top producers heading in their direction.”

Oh, and don’t say we didn’t tell you this method of pay --- teams and salaries --- was a dream of some --- some, just some --- wirehouse executives. Here is an excerpt from an article we published last year:

“Should wealth management in the United States be even more profitable to firms and their shareholders? Compared to their European counterparts, the profitability of U.S. wealth-management operations has a long way to go. In September, a 100-page-plus research report by Bear Stearns International analyst Chris Wheeler took stock of the global wealth-management industry, specifically comparing the European wealth-management arms of firms like UBS, Credit Suisse and HSBC to those of the U.S. wirehouse firms. The Europeans are more profitable (as measured by pre-tax operating profit margins), according to Wheeler, who writes, “The European model continues to prove its worth’ and that European firms are ‘pulling away from their U.S. competitors.’ Wheeler did not return requests for comment, but he describes in his report a variety of reasons for this performance superiority: Chief among them is the U.S. compensation model itself, a model that allows the advisor to keep about 40 percent (in some cases more) of the revenue he generates.”

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