For the first time, starting in July,
Citigroup Inc.'s managed-account platforms will start advising Smith Barney reps and Citi private bankers on when to buy and sell specific money managers and mutual funds for their clients.
The new level of research on money managers and mutual funds available to the New York-based banking giant's network of 13,000 financial intermediaries is viewed by some in the industry as the most aggressive effort yet to help advisers build fee-based portfolios for their clients.
"Clearly, Wall Street firms are trying to do whatever they can to make managed accounts more attractive to producers," said Christopher Davis, president of the Money Management Institute in Washington.
However, Citi's so-called tactical-opportunities list, which will be constructed based on market cycles and other economic indicators, is also raising red flags among advisers and money managers.
"In theory, it makes a great deal of sense, but making specific recommendations is a hard thing to do well, and you could get it wrong," said Scott MacKillop, president of Frontier Asset Management LLC in Denver.
Mr. MacKillop, whose firm manages $800 million, warned that it could lead some advisers toward market-timing practices.
"I would imagine it will be presented well to advisers, but if it's not, it has a potential dark side," he added. "And I certainly think the money managers will take issue with something like this."
Beyond the standard lists of approved managers which have long been a staple of managed-account platforms, the tactical-opportunities category created by the research department within
Citigroup's Global Wealth Management division will function in a way similar to the use of "buy" and "sell" recommendations for managers and funds.
The initiative, which has not yet been announced publicly, is being described internally as a way to help advisers and investors get exposure to specific strategies and money managers ahead of the curve.
"I view it as very similar to what happens in the world of recommendations for stocks and bonds," said James Tracy, director of investment advisory services for the Global Wealth Management division.
"This is the next evolution of what our research team has been doing for years," he added. "It's a look into the future at how the manager is expected to perform."
Mr. Tracy and others acknowledge that such specific manager recommendations could turn off some money managers or put the re-search group in a position of defending its selections.
"If this rankles some investment managers, so be it," he added. "It's never been our responsibility to make investment managers our friends; our goal and core responsibility is to provide our best ideas to our clients."
Citi also addressed the potential problem of advisers' using the recommendations to try to time the market by more frequently moving in and out of certain manager strategies.
"We have always been willing to stick our necks out and put our opinion on the line, and I don't look at this as a liability issue but as a matter of sitting squarely on the same side of the table with the client," said Glenn Regan, director of investment adviser research at the Global Wealth Management unit.
The recommendations, which will include a mix of fewer than 100 money managers and mutual funds, will be updated regularly and could be turned over entirely every couple of years, he said.
The list will be available to the firm's 13,000 brokerage reps and private bankers, most of whom have not been informed of the details.
The enhanced research effort also will involve nearly doubling to 1,500 the number of separate-account managers that will come under the microscope of the research department.
The money managers available on the firm's fee-based platforms have not been officially informed of the tactical-opportunities program, and Citigroup was not able to make a manager available for comment.
"It's hard enough to find good managers, and when you do, you want to stick with them," said Frank Haines, chief investment officer at Christian Brothers Investment Services Inc., an Oak Brook, Ill.-based institutional money management firm with $4 billion under management.
"The fewer manager changes you make in a portfolio, the better off you are, and getting that sort of thing right is very difficult," he added. "This will upset money managers."
Even though Citigroup remains the dominant player in the $700 billion managed-accounts business, some industry observers said there are limits as to how much pressure can be placed on money manager relationships.
"I think it's awesome from an adviser's perspective, but the catch could be the relationship with the money managers," said Jean Sullivan, managing principal at Dover Financial Research in Westwood, Mass.
"This is certainly more pronounced than the kind of research on managers they're already doing," she added.
Another potential speed bump could be the matter of introducing a performance record for Citi's research department, according to Sam Jones, president of All Season Financial Advisors Inc. in Denver.
"I think it's great in theory, but how will they know what's going to do well in the future?" he said. "I guess we'll know in three to five years if their tactical opportunities list is worth anything."
Mr. Tracy acknowledged much of the criticism, including the association to market timing, but said he doesn't believe providing advance notice on which managers are likely to outperform over the next one to three years will lead to increased turnover of client portfolios.
"Advisers will continue to consider things like the tax implications of turning over a client's portfolio," he said. "Let's just assume it works; that would be a tremendous re-source for our clients. Nobody's demanding this right now because they didn't know it could exist, but there is demand for resources to help clients."
E-mail Jeff Benjamin at [email protected].
