More On Legal & Compliancefrom The Advisor's Professional Library
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
- Advertising Advisor Services and Credentials Section 206 of the Investment Advisers Act contains the anti-fraud provision of the statute and ensures that RIAs advertising and marketing practices are consistent with the fiduciary duty owed to clients and prospective clients.
The former Morgan Stanley Stanley Dean Witter is set to become Morgan Stanley Smith Barney, as Citi and Morgan Stanley have announced a deal to combine Morgan Stanley's global wealth management group and Citi's Smith Barney, Quilter in the United Kingdom, and Smith Barney Australia into a new joint venture to be called Morgan Stanley Smith Barney.
It is to be lead by Morgan Stanley Co-President James Gorman, tapped as chairman of the venture, and Charles Johnston, president of Citi's global wealth management business, who has been named president.
"Let me say that these are very similar organizations in terms of the quality of their advisors," Gorman explains, "very high quality." And, he says, their payout structure is also "remarkably similar." "We are not doing this to change our payout structure," says the venture's chairman.
"We're in same industry, doing the same things with the same people and have often recruited from each other in past," says Gorman. "And we know each other."
Retention bonuses should be forthcoming. "We are working on that and will continue to do so," says Johnston, "as we are very cognizant of the current environment. "We have said we will put a plan in place and have yet to finalize it."
The venture will not include Citi Private Bank or Nikko Cordial Securities. But it should encompass more than 20,000 advisors and could help the business surpass - or at least match -- the roughly 20,000 financial advisors that are part of the Bank of American-Merrill Lynch merger. (Merrill's advisors number 16,800).
"This is a pretty unique transaction," says Johnston, "and it allows Citi to realize over time the value we see in the business. We felt there were limited partners with whom we could do this, and we felt Morgan Stanley was the right firm to be speaking to in this transaction."
According to the Morgan Stanley and Citi, the combined operations could have revenue or close to $15 billion, which would represent annual sales or production of $750,000 per advisor; total client assets are put at $1.7 trillion. The two firms also anticipate $1 billion in cost savings.
Under the terms of the deal, Citi is to exchange 100 percent of its Smith Barney, Smith Barney Australia and Quilter units for a 49 percent stake in the joint venture and an upfront cash payment of $2.7 billion. Morgan Stanley will exchange 100 percent of its Global Wealth Management business for a 51 percent stake in the joint venture. After year three, Morgan Stanley and Citi will have various purchase and sale rights, and Citi will continue to own a significant stake in the joint venture at least through year five.
As of January 13, the transaction had been approved by the boards of directors of both companies and was expected to close in the third quarter.
"Citi is selling because it needs the capital," explains Chip Roame, head of Tiburon Strategic Advisors. "Clearly it has had some issues with sorting out the role of Smith Barney within their firm."
And in Johnston's words, "We didn't want to sell the whole business."
As for Morgan Stanley, "It's a buyer because it is betting on retail," he adds.
In April 2008, former Fidelity executive Ellyn A. McColgan became president and COO of the Morgan Stanley's global wealth management group (GWMG). And in November 2008, Morgan Stanley hired two senior Wachovia veterans to lead its newly created Retail Banking Group -- Cece S. Sutton and Jonathan W. Witter.
"This says to me more broadly that Morgan Stanley is headed down more of the retail-banking path than the investment-banking path, not exclusively, but the bets are aligning in one direction, Roame shares.
Gorman seems to agree. "This is a key business for us. We wanted to increase scale, and we've done that. We will continue to look for opportunities to grow deposits ...," he explains.
"We're at day zero and have six months to put this together," shares Gorman. "Obviously, there are synergies, but this is also a growth story. We feel this business will take market share from the remaining competitors."
The market environment, he admits, is anything but friendly.
"Yes, it's a rough time," Gorman says, "and if you define things based on what you see in the short haul, you wouldn't be trying to run a 10,000- or 20,000- or 30,000-person organization. We are trying to build a business that will generate great value for our shareholders over the long haul, deliver what its needs to for our clients and is the place for the best and brightest in the industry to work.
"We were in a tough environment a year ago and seven or eight years ago. These things come back, and people don't stop investing over the long haul, he concludes.
The joint-venture's leadership team believes it is "bringing together two similar cultures that are very compatible and very like minded," in Gorman's words.
"What our competitors do we cannot control, so we don't focus on it. We compete furiously in the marketplace and will continue to do so."