From the November 2009 issue of Investment Advisor • Subscribe!

November 1, 2009

B/D Briefing: Citi Brokers Switch to Fees

Will also build alliances with independent RIAs

It hasn't taken long for Debbie McWhinney to make her mark at Citigroup. On October 5, Citi Personal Wealth Management announced that the brokers who operate in Citibank branches will change their compensation models immediately from commissions to fees, embracing a fiduciary standard. McWhinney, the former chief of Schwab Institutional who became head of Citi Personal Banking and Wealth Management in April 2009, said in an interview on October 6 that there are "four million households that do business with Citibank North America," and that the bank was taking the step to "align us with where the markets, and clients, are going." The move will also allow Citibank to have a "deeper relationship" with its existing customers. Would the new approach also attract new customers to Citi? "Absolutely," McWhinney says with a laugh, "You don't think I'm going to run something that's a slow-grow business, do you?"

As part of the initiative, McWhinney said the bank will put together teams "rather than 550 individuals," referring to the brokers who remained in Citigroup's bank branches following the merger of Smith Barney with Morgan Stanley's brokerage force, to better serve the "type of clients Citi has--urban households, many of whom are professionals and business owners," with whom the bank could do "much more business."

In each bank, she explains, there would be an investment consultant who would perform an initial needs and risk assessment, and who would then steer potential clients to either those in-house teams, to a Citi online or call center, or to an independent RIA. Having presented the client with those options, the investment consultant would then take the step of even accompanying the client to the first meeting, telling the client, she said, that "I'll go with you and help you ask the right questions."

McWhinney said the Citi teams would use either Fidelity or Pershing's custodial platforms--"I'm talking to Charles and Mark," she said, referring to Charles Goldman at Fidelity Institutional and Mark Tibergien at Pershing Advisor Solutions. Those Citi brokers would become investment advisor representatives of Fidelity's or Pershing's RIA, depending on which firm Citi chooses.

While at first "we'll be using the SmithBarney platform," she said, "we want to move off that platform," she said, onto a more open, "institutional-style" platform that would "accommodate their fiduciary business" in an ongoing "partnership with the bank."

According to a statement by the bank, Citi was in "advanced discussions with some of the nation's top independent RIA businesses and expects to announce agreements in select markets in the near future." McWhinney said that Citi was already conducting serious due diligence on the RIAs who would be in the referral program, making sure these were large, successful firms that would be able to meet the needs of Citi's customers and be a cultural fit with the bank. The RIAs who get the referral business would pay to Citi a percentage of the AUM fee they charge each referred client.

McWhinney said she also expected many brokers at competitive firms "who were already embracing the advisory model" and were contemplating independence would be interested in joining Citi's in-house teams.

Tim Welsh, president of the consulting firm Nexus Strategy, who knows well both the wirehouse and RIA worlds from previous stints at Schwab Institutional and Merrill Lynch, called the Citi broker and referral plan a "brilliant" move that "strategically absolutely makes sense." Welsh said McWhinney has the "RIA connections, knowledge, and charisma to pull it off"--noting that earlier in her career she spent 17 years at Bank of America, and she is working now at Citi with several of her former colleagues from BofA.

While Welsh argues that it makes "complete sense" for Citi to "fill the gap in its offering that was created when Smith Barney exited," he voiced concern over the differing cultures in a broker/dealer and a bank. "B/Ds, RIAs, and even wirehouses," Welsh points out, are "typically much more entrepreneurial and embrace change more quickly," while banks tend to be "much more bureaucratic, inflexible, and highly resistant to change." Thus he suggests that "the practical realities of Citi may impede progress."

McWhinney resigned from Schwab in 2007 after being passed over as Charles Schwab's successor as CEO; before her tenure at Schwab, McWhinney was an executive VP at Visa International and as mentioned had a long stint at Bank of America.

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