Citi Frames New Advisory Model; Will Pay Per Service VS Commission Based Work?

Citigroup Inc. (C) is planning a strategic shift in its investment advisory business by bringing qualified advisors from Citibank branches to provide fee-only investment advisory services instead of commission-based transactions.

The new strategy will give clients who want wealth management services through Citibank branches the option of working with Citi’s own financial advisers, or of choosing external independent advisers with whom Citi will begin to form relationships, and who will pay Citi a referral fee.

Citigroup has a relatively small branch network and is starting off with a small brokerage. Citigroup is starting the business with 600 advisers who sit in 1,000 Citibank branches in the United States . Citi plans to eliminate all commission-based compensation by 2011.

The changes are expected to be implemented next year. Apart from providing clients with more transparency, a smaller risk of conflicts of interest and wider geographical footprint, this move will have practical implications for Citi’s customers. Financial advisors levy fees based on the assets held by each customer while brokers charge commissions depending on the number and value of trades they execute and products they sell. Hence, the fee-based pricing structure would remove incentives for brokers to push specific products.

Through the new strategy, Citigroup is planning to manage clients’ overall financial portfolio apart from accepting deposits and giving out loans to them. To build up a network of trusted advisers, Citi will need to invest a good deal of time and effort.

Combining the two businesses will provide Citigroup the access to more of their client’s finances, thereby potentially generating higher revenue. But several banks in the past have attempted to bring these two cultures to work together but have failed. Bank of America Corporation (BAC) and Wells Fargo & Company (WFC) have large U.S. retail bank branch networks, and large retail brokerages.

Last month, Citigroup indicated that the company will eventually divest its remaining stake in the Smith Barney joint venture with Morgan Stanley. Morgan Stanley paid $2.75 billion to Citigroup as part of the deal.

Citigroup will release its third quarter 2009 earnings on Oct 15, 2009 with a conference call scheduled later in the day to discuss its results. Ahead of its results, we maintain our Neutral recommendation on the stock.

Subscribe by RSS Subscribe by Email