Citigroup on Monday announced that it would convert its small North American bank brokerage business completely to a fee-on-assets-based fiduciary advice system, and would stop collecting commissions on stock and fund sales. Citi says it will also begin courting outside RIAs and breakaway brokers with the help of Deborah McWhinney, the former Charles Schwab executive who the firm hired earlier this year.
When Citigroup sold its Smith Barney retail brokerage to Morgan Stanley earlier this year, the bank kept the division's Citicorp Investment Services, with its 600 bank-branch brokers. CIS has been rebranded Citi personal wealth management. The switch to fees will begin immediately, and the firm expects the conversion to be complete by 2011.
Deborah McWhinney said in a telephone interview that the firm is hoping to have RIA teams with as many as 20 advisors, to as few as 6 advisors on the new platform. Some of the more junior advisors now at Citi personal wealth management will work on salary and bonus inside the bank branches and guide Citi clients to Citi affiliated and independent RIAs. These advisors will be called called investment consultants.
The move to a fee-based fiduciary model is a bold one for Citi, but then again, Citi can afford to experiment. Retail brokerage no longer makes up a big chunk of Citigroup’s business--the Citi personal wealth management unit has about $30 billion in assets under management, according to the firm. And an advisor force of 600 is a lot easier to convert than, say, one of 15,000. What's more, even if some Citi advisors decide they don't like the new model, bank brokers are much less likely to take their client assets with them when they leave a firm, say sources.
The fee-based fiduciary model has been attracting the interest of financial advisors, clients and regulators in the wake of last year's market meltdown, in part because it is seen as much better aligned with client interests. Lately there has been a migration of wirehouse advisors to fee-based RIAs among both financial advisors and their high-net-worth clients. Meanwhile, the Obama adminstration has proposed requiring that all financial advisors and brokers adhere to the fiduciary standard, which currently only applies to fee-based RIA advisors.
The full-service brokerage industry has been marching towards the fee-based model for over a decade, but most of the big Wall Street wirehouse firms like Merrill Lynch, Morgan Stanley Smith Barney, UBS and Wells Fargo Advisors still get 50 percent or more of their revenues from commissions. Merrill Lynch has talked about building its own fee-only RIA platform in the past, and lately there has been talk that this plan will be revived.