Citigroup’s recent announcement that it will convert most of the brokers in its bank-based network into fee-based advisors has many of them wondering how they will be compensated and what they will be selling.
Deborah McWhinney, head of personal banking and wealth management at the New York-based bank, said Monday, October 5, that she hopes to convert most of the approximately 600 commission-based financial consultants at Citi Personal Wealth Management into teams of fee-only financial advisors by 2011.
Left unanswered were questions on how the bank will split management fees with internal advisors, what will happen to trailing commissions from products such as mutual funds and annuities, and how much Citigroup will collect from outside advisors for client referrals.
“Guys that are transactional realize they are out of there,” said a former Citi broker who left in August to join a California-based RIA. “The fee-based guys who think they can retain their Citi clients and reach into the bank for new ones are pretty sure their payout will be lower than what they keep by going independent.”
The advisor, who requested anonymity, said Citigroup faces the challenge of convincing both advisors and clients that the advisers are truly independent and exercising fiduciary responsibility.
In an interview on Monday, McWhinney—a former head of Charles Schwab Corp.’s RIA custody platform—said the advisory model will allow brokers to attract funds from wealthy clients at the bank who don’t currently use its in-house investment services.
“We’re probably half of where we could be” in managing such assets, she said.
McWhinney touted the referral program, which will be coordinated in part by salary-based brokers, as an open platform that investors are embracing. It will include not only internal and external advisors but also a National Investor Center for self-directed investors who prefer to pay for services on a transactional basis.
Outside advisors accepted into the referral program are expected to reimburse the bank about 25 basis points of the asset-based fee they charge referred clients on an ongoing basis, similar to what Schwab assesses in referral programs from its brokerage network, said a person familiar with McWhinney’s thinking.
A bank spokesman wrote in an e-mail that details of compensation and products for internal advisors are still being worked out, with plans for a full conversion to the fee-based system by 2011.
“There will be a new compensation plan, the details of which are not finalized,” Alex Samuelson wrote, adding that advisors will remain bank employees and enjoy Citigroup’s full complement of benefits.
Citi currently uses a revenue-based compensation grid designed for the branch-based brokers of its former Smith Barney unit. Under such plans, the percentage of commissions kept by brokers rises as they hit preset revenue production levels.
Generally speaking, brokers collect 20 to 50 percent of the commission charged to clients. Citigroup earlier this year transferred its Smith Barney business and most of its approximately 13,000 brokers to a joint venture majority-owned by Morgan Stanley.
McWhinney said she expects Citi’s fee-based model to attract not only more bank clients but also brokers from other firms who are looking for a fee-based model that places their clients’ interests ahead of their own.
But some independent advisors believe she may have a hard time promoting the bank RIA channel as an alternative to a truly independent firm where advisors keep all of their fees even as they absorb expenses of their operations.
One advisor who contacted the bank for information about participating in the referral system said he was asked if he’d be interested in working as a full-time Citi Wealth Management advisor.
Samuelson wrote that 2010 will be a transition year for determining how 12b-1 mutual fund fees and other ongoing commission income will be accounted for under the new model. But thereafter, Citi will retire sales of funds that pay trailing commissions, offering no-transaction-fee fund platforms for advisory clients.
“Any transactional business via the National Investor Center will feature no-load funds,” Samuelson wrote. As for annuities and similar products, he wrote, Citicorp “will work with our third-party vendor partners to customize certain products to eliminate the up-front commissions.”