Morgan Stanley Smith Barney is Born

Morgan Stanley agreed Tuesday to a joint venture with Citigroup, forming the largest brokerage in the world with 20,000 financial advisers and $1.7 trillion in client assets.

Under the terms of the agreement, Citi will exchange 100% of its Smith Barney, Smith Barney Australia, and Quilter units for a 49% stake in the joint venture and an upfront cash payment of $2.7 billion. Morgan Stanley will exchange 100% of its Global Wealth Management business for a 51% stake in the joint venture. After year three, Morgan Stanley and Citi will have various purchase and sale rights for the joint venture, but Citi will continue to own a significant stake in the joint venture at least through year five, the companies said in a press release.

The combined brokerage will outdo the number of brokers joined in the recent merge of Merrill Lynch & Co. and Bank of America (see “Bank of America Buys Merrill Lynch’ and “Merrill Lynch Stockholders Approve BoA Deal’).

Reports of talks about a possible joint venture between the two brokerages first began Friday (see “Smith Barney and Morgan Stanley May Merge Brokerage Units“).

Management Team

Morgan Stanley Smith Barney will operate as one fully integrated organization, with a management team drawn from both companies, the statement said.

  • Morgan Stanley Co-President James Gorman will serve as chairman of the new company and will continue to serve as Co-President of Morgan Stanley.
  • Charles Johnston, most recently President of Citi’s Global Wealth Management business in the U.S. and Canada, will serve as President.

Additional senior management will be drawn from the ranks of both companies and the new venture will be governed by a newly formed Board of Directors composed of representatives from both companies.

Some brokers will likely remain at Citi, but it remains unclear which brokers and how the retirement unit will be affected, Dow Jones reported. Recently, Citi and Smith Barney combined their various retirement units headed into one group. In an interview with in December, the group’s Managing Director Anne Greenwood discussed that future changes and initiatives were to come in the retirement group. She also mentioned that every adviser at Smith Barney does have at least one retirement plan as part of his or her business (see “Smith Barney Reorganizes Retirement Group’).

In September, Sallie Krawcheck exited her post as the head of Citigroup’s wealth-management unit, and reports alluded to changes in the institutional clients group (see “Report: Krawcheck to Exit Citi’). In November, Chief Executive Vikram Pandit assured brokers that Citigroup had no intention of selling Smith Barney as the company went into financial crisis mode with stocks plunging 66% in one week, Dow Jones reported.

Citigroup Shakeup

The Smith Barney sale represents part of major shifts at struggling Citigroup in an effort to boost capital. The bank is preparing to unveil a major reorganization that will further dismantle its financial conglomerate, the Wall Street Journal reported. The bank intends to slice about a third of the assets from its balance sheet, which is currently about $2 trillion in size. An announcement is expected when Citigroup reports fourth-quarter results January 22, the report said.

Citigroup was in the news frequently during 2008: In May, Citigroup Inc. and State Street Corporation sold their joint recordkeeping venture of CitiStreet to ING (see “CitiStreet Sold to ING for $900 Million’). In October, Citigroup was in talks to acquire Wachovia, but was left at the altar when Wells Fargo swooped in (see “Wachovia Leaves Citigroup at the Altar’).

Smith Barney

Smith Barney services about $1.3 trillion in client assets, according to information on its Web sites. The firm was founded in the 19th century by the merger of Charles D. Barney & Co. and Edward B. Smith & Co. Fast forwarding to 1993, Smith Barney became a wholly owned subsidiary of Traveler’s Group, which merged with Citicorp in 1998 to become Citigroup Inc.

It’s yet to be seen what the future will bring for brokers at Smith Barney. Bank of America’s retention package after requiring Merrill Lynch pleased some brokers but was met with some criticism for its lack of rewarding lower producers by others (see “BoA, Merrill Retention Package Rewards Top Producers’). The trend to slice compensation for lower produces was evident in both Merrill and Smith Barney broker compensation plans unveiled at the beginning of this year (see “Merrill, Smith Barney Change Broker Compensation’).