Morgan Stanley, Smith Barney to Combine

Morgan Stanley, Smith Barney to Combine, Joint Venture Should Have 20,000-Plus FAs

The former Morgan Stanley Dean Witter is set to become Morgan Stanley Smith Barney, as Citi 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. It is to be led 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 the same industry, doing the same things with the same people and have often recruited from each other in the 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 America-Merrill Lynch merger. (Merrill’s advisors number 16,850).

“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 Morgan Stanley and Citi, the combined operations could have revenue of 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.”