CITI HAS RIVALS LOSING SLEEP: MEGAFIRM COULD CONTROL DISTRIBUTION GLOBALLY

If distribution truly is king, then Sanford I. Weill and John S. Reed will rule the financial services world.

That is, if their proposed deal announced last week — the largest ever, valued at $78 billion — comes to pass. The power these two men, the chairmen of Travelers and Citicorp respectively, would garner by forging an empire called Citigroup Inc., is enough to make any investment products vendor tremble.

“This could become the most powerful distribution channel for mutual funds ever!” declares Don Phillips, president of Morningstar Inc., a Chicago-based firm that tracks mutual fund performance.

Many agree the firms combined under Travelers’ umbrella logo — a $697.5 billion-asset company with more than 100 million customers in more than 100 countries — would be positioned to deploy a formidable, global force of financial advisers.

The marketing and investment powerhouse will pose stiff competition to independent financial advisers, not to mention big brokerages.

“This time next year you may start to see people going into Citibank and getting Smith Barney tax planning or setting up a Smith Barney IRA,” says Cathy Seifert, a senior investment officer at Standard & Poor’s Credit Rating Service. “They can almost do that immediately.

“What’s coming down that pipeline may not be the best, but it’s going to be marketed most efficiently,” says Ms. Seifert.

Smith Barney’s consulting group is far and away the leader in selling wrap accounts, in which advisers set up individual investment portfolios for customers and charge them a fee instead of a commission. The unit’s contribution to Smith Barney’s revenues — 27% in 1997 — has been growing each year, according to Frank Campanele, the consulting group’s president.

With Citibank in the picture, “You’re going to see us far more formidable on the lending side, as well as in our private banking and trust services,” he says.

expect a wave

Moreover, Citibank’s investment representatives are on salary, not commission, so they are perfectly suited to sell wrap accounts and provide comprehensive advice, says Kenneth Kehrer, a bank insurance and brokerage consultant in Princeton, N.J. Moreover, these advisers already advise on lending as well as investing, says Mr. Kehrer.

“Unlike any other bank that I know of, those brokers not only do a financial plan for you and sell you stocks and bonds, they can do all your banking,” he says.

The Citicorp-Travelers deal is expected to spark a wave of similar mergers. Fueling the trend is the notion that the bigger you are, the more you can pour into technology and marketing. “Financial service firms to a large extent sell commodities. To have low-cost distribution you have to have scale,” says Philip Treick, vice president of San Francisco-based Transamerica Investment Services, which has $400 million in fund assets.

But whether this merger is best for consumers remains to be seen.

“The common wisdom is because these firms are so large, prices should go down,” says Maria Fiorini Ramirez, an economist and president of MFR Advisers Inc., a $100 million asset fund firm in New York.”But when there are fewer companies competing, prices always go up.”

The Smith Barney client adds that she owns Citicorp stock in her personal portfolio and sees great benefits overall in this merger. “Citibank can now bring Smith Barney’s services overseas,” she says, as well as Travelers’ property and casualty and life insurance products. Of course, banks are not yet allowed to underwrite insurance in the United States under Federal law. Fund officials say performance will become more crucial than ever with fewer distribution channels.

“A fund on the shelf will only get noticed if it shines,” says Elizabeth Reagan, senior vice president of marketing at Cohen & Steers in New York.

Of course, the one who controls the distribution also owns a key outlet for in-house products.

Cynics envision a world in which even if Citigroup advisers are allowed to sell what they want, the flow of information about outside funds would be restricted.

Already, some big brokerages charge mutual fund firms as much as $100,000 just to make product presentations to reps, says Mr. Phillips.

As for the merger partners’ own mutual funds, he says, “Both groups have struggled and neither one is impressive.” Both companies’ offerings have taken a back seat to other priorities, but consultants say the firms are working diligently to improve their performance.

not a done deal

Travelers’ variable annuities, which aren’t sold much through banks, would get a boost from distribution to Citibank customers, says Patrick Reinkemeyer, editor of Morningstar Variable Annuities/Life.

Variable annuities, a mutual fund-type investment in an insurance wrapper, are a much more complicated sale than mutual funds, which may prompt reps to hawk what they know best: their parent’s product.

“People aren’t asking, ‘why are you selling me that Travelers annuity?’ ” Mr. Reinkemeyer says, adding that Travelers’ annuities are “solid,” with expenses slightly below average.

Of course, the very cross-marketing opportunities that spurred the deal could scuttle it. The merger might not pass muster with regulators worried over banking, brokerage and insurance being under one roof.

Financial supermarkets have failed in the past. Sears Roebuck and Co. tried it with its Dean Witter Discover & Co. subsidiary. American Express Corp. tried with Shearson Lehman Bros. It sold the brokerage unit to Primerica, which is now a part of Travelers.

For all the convenience one-stop shopping might provide, investors may fear putting all their money in one place. An umbrella can collapse in a strong wind.

ON THE SHELF

John Reed Sanford Weill

Performance of the largest mutual funds at

Salomon Smith Barney Holdings In.c and Citicorp

Name Assets ($b) 5-year return*

Smith Barney Prem Total Return $3.3 16.52%

Smith Barney Managed Municipals $2.4 8.17%

CitiFunds Large Cap Growth $0.28 18.52%

CitiFunds NY Tax-Free Income $0.08 5.92%

S&P 500 stock index 22.5%

CDA/Wiesenberger Muni Nat’l Avg 5.8%

*Average annualized return as of March 31. Source: Morningstar Inc.