In the latest development in its two-year over- haul of its wealth management business, Citigroup announced that it would not send clients to independent registered investment advisors. Rather, the company said that it plans to beef up its own ability to provide financial advisory services to its clients by hiring more advisors, at least 30 in the next year, according to reports.
As part of the change, Citi is eliminating the role of investment consultant. This impacts 80 employees who worked in the branches funneling clients to Citi's own financial advisors. These employees were originally intended to refer clients to independent RIAs. Observers knowledgeable about the company said Citi never finished establishing relationships with these outside money managers, and the investment consultants ended up referring clients to teams of Citi's own financial advisors. Citi said in a statement it would let those employees apply for other jobs at the company.
The investment consultants were part of a restructuring orchestrated by Deborah McWhinney, an executive brought in from Schwab after Citi sold its Smith Barney brokerage business in early 2009. She switched the transaction-heavy bank reps from a commission-based to a fee-based model, and forced them to work on teams. Poor performers were let go. The result was large defections that left the sales force at 270, down from about 600 at the peak.
In the wake of the defections, McWhinney moved to another part of Citi in February.
Now, Citi will return to expanding its wealth management business by hiring more financial advisors and support staff. It also allows both fee-based and commission-based models now. One recruiter noted that now new advisors will be allowed to choose whether to be part of a team or work solo.
Consultants and analysts viewed the move as essentially a reboot, returning Citi to a traditional bank-based advisory model after an experiment that did not work. "I'm not surprised they stopped it," says Alois Pirker, research director at Aite Group. He and other consultants said the idea of essentially grafting Schwab's model onto Citi's operation was flawed. Pirker said that for Schwab, it makes sense to refer online brokerage clients to their own network of independent RIAs when those clients graduated from being self-directed to requiring advice. Rather than lose the whole relationship to a competitor, Schwab keeps the assets in its custody platform. "But for Citi, it's not the same equation; the economics don't work the same way. When they refer business to an RIA, they leave the assets to whoever the RIA custodian is," Pirker says.
Pirker allowed that in 2009 at the height of the financial crisis, when the company was pressed for cash and forced to sell its Smith Barney retail brokerage, it might have been the best of a lot of bad options. Rather than exit the mass affluent advisory business altogether, using investment consultants to refer clients to an outside advisor might have seemed like "an easy way of building up the wealth management network with a lot of young guys, middlemen who make the referral happen."
He added that the alternative, going with a third party-marketer was beneath a bank of Citi's stature. "For Citi, a bank of that size, you have to be more ambitious. You're not.... a small bank with no other choices."
He said now that the bank has recovered financially, the time is right to reestablish itself in the mass financial advisory business. (Extremely high-net-worth clients were always handled out of the private bank.) "It's logical they have more appetite to play in the wealth management space....You're leaving money on the table by not having a wealth management proposition," he says, noting that other large banks, such as Wells Fargo and Bank of America, have nationwide brokerages in their arsenal. "They're playing the cross-selling game. This is only the start of that. This will get a lot more competitive as the client will get used to having a holistic proposition in front of them, which Citi cannot offer right now. Citi has a blind spot on the wealth management side now. This is on the way back to regaining strength."
Industry consultants said that from a personnel management viewpoint, the changes are also a step in the right direction. Industry consultant Bill Willis said the idea of forcing advisors to join teams made some sense in 2009, when shrinking numbers meant fewer bodies to cover a bigger area. But he said in better circumstances, "it's almost impossible to grow and force new employees to join teams." He likened forced team formation to arranged marriages, saying they seldom worked. "A team has to happen a little more organically than by design," he said. He added that teams are an idea that can work in practice for bank-based advisors. "Ultimately the client gets three or four points of service for the same price, but it has to be the FA's idea for it to be successful."
Industry consultant Rick Rummage said, "The good news is they're turning it around now, and I feel strongly that in another year they'll be one of the top-tier bank advisory programs... As long as they execute on what they're saying they'll do now they should be good."