New Citi chief must focus on investment advice

Bank is losing ground to competitors such as Bank of America, Wells Fargo and Morgan Stanley

Now that he is chief executive of Citigroup Inc., Michael Corbat eventually will be tempted to find a way for the bank to re-enter the potentially lucrative — but often volatile and bedeviling — business of high-net-worth retail investment advice.

But every day he delays, he is losing ground to such competitors as Bank of America Corp., Wells Fargo & Co. and, most painfully, Morgan Stanley, which continue to eat Citigroup’s lunch in this potentially profitable arena.

In a surprise move last week, Mr. Corbat, a Citigroup veteran since 1983 who began his career at the storied Smith Barney, was named to replace Vikram Pandit, who had steered the bank through the financial crisis only to lose the confidence of the board.

Mr. Corbat, 52, knows full well that Citigroup is an anomaly in the investment advice business. He is in charge of a global bank based in the United States with little or no meaningful presence in the vast advice arena.

Think about it: Ten thousand baby boomers are retiring every day, and Citigroup has no troop of investment advisers sitting down and planning those clients’ futures.

Indeed, some Citigroup board members think that the bank lost hundreds of millions of dollars when it sold a majority stake in Smith Barney to Morgan Stanley in 2009, according to reports last week analyzing Mr. Pandit’s ouster.

Mr. Corbat has his work cut out for him over the next 12 to 18 months just to get Citigroup’s house in order, said Marty Mosby, a banking analyst with Guggenheim Partners LLC.

But after Mr. Corbat cleans up, his background in commercial banking suggests he will look at “building out banking relationships with financial advisers in the markets where they were,” Mr. Mosby said.

“Pandit’s background was much more in investment banking and asset management,” Mr. Mosby said. “The new Citi will look at retail customers. In the longer term, one of those things would be wealth management and making sure you have those financial advisers.”

Citigroup spokesman Mark Costiglio declined to comment.

Competition in this marketplace is stiff and shows no signs of easing.

STILL SMARTING

Merrill Lynch consistently has supported Bank of America Corp.’s earnings since it was acquired for a song in January 2009.

Yes, BofA is still smarting in some ways from the Merrill deal. Last week, it said it had total litigation expenses of $1.6 billion in the third quarter, which included the cost of a Merrill Lynch class action settlement.

But the company also reported that over the first nine months of the year, Bank of America Merrill Lynch continued to rank second globally in net investment banking fees.

Likewise, Wells Fargo Advisors LLC, which Wells acquired in the fire sale of Wachovia Corp., has more than 15,000 financial advisers shoring up the bank’s balance sheet.

Citigroup, of course, made a strategic decision in 2009 to exit the retail-financial-advice business with the Morgan Stanley Smith Barney LLC joint venture. At the time, the company deemed the retail business of Smith Barney not part of its core.

And the bank maintains a leading private bank, with more than 1,000 bankers globally working with the very wealthy. Those bankers control $250 billion in client assets.

But the bank has lost the steady ballast of earnings from retail brokerage and investment advice on its balance sheet. In the dark days of January 2009, Citigroup decided to sell a majority of Smith Barney to rival Morgan Stanley.

Last month, Morgan Stanley dropped Smith Barney from the firm’s name and rechristened it Morgan Stanley Wealth Management. That firm has 17,659 advisers who manage $1.65 trillion in client assets.

Surprisingly, however, Citigroup is in the unique position to recapture a chunk of the retail-investment-advice business.

Questions about Citigroup’s presence — or lack thereof — in the U.S. financial advice business eventually will surface.

Will Mr. Corbat buy a broker-dealer or one of the networks of financial advisers known as roll-ups? That strategy, of course, is full of risks, particularly if the advisers don’t like the deal and walk.

Or will the CEO build from the ground up, perhaps mimicking the strategy of recent entrants such as HighTower Advisors LLC and United Capital Financial Advisers Inc., firms that offer advisers and clients unbiased investment advice? Building an investment advice arm at Citigroup in such a way could be slow and expensive — not the kinds of attributes shareholders and board members like to hear about.

STRANGE AFFINITIES

Chief executives of global financial institutions have strange affinities for networks of financial advisers. Some CEOs love the retail-financial-advice arena, while others simply can’t stomach the potential for thin margins in down periods and headline risk if products blow up and advisers go rogue.

Morgan Stanley CEO James Gorman, for instance, cut his teeth 11 years ago managing Merrill Lynch’s storied Thundering Herd. The deal for Morgan Stanley to acquire the majority of Smith Barney, made when he was co-president of the bank, was a natural.

Robert Benmosche, CEO of American International Group Inc., in 2009 at the last minute pulled the firm’s independent broker-dealer network off the shelf and nixed the sale of three firms with more than 6,000 affiliated advisers to private-equity investors. He prevented a fire sale, and now that network, called the Advisor Group, is looking to grow.

Where does Mr. Corbat stand on the high-net-worth and retail-investment-advice business? We will find out in the coming months.

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