Taming An In-House Rivalry

As head of Citigroup's Private Bank, John Longley has to pull off one of the more vexingly stubborn organizational challenges of the modern financial era: getting private bankers and financial advisors to cooperate and help one another, to work together. That's no easy task. For more than a year now, the veteran Smith Barney FA and former regional director of the brokerage unit has been bringing together his roughly 200 private bankers with an equal number of Smith Barney's top FAs at cocktail party ice breakers and “meet n' greets.”

It's one thing to get bankers and top Smith Barney FAs together at a party, but getting them to work in teams inside Citi's 21 private bank branches is considerably harder. Although the two units are lumped together under the moniker of “wealth management” on the firm's annual report, they couldn't operate more separately. The lack of cooperation and teamwork between the two businesses is a good example of what CEO Vikram Pandit wants to change at Citi. And the potential benefits of the partnership are immense. After all, the private bank and Smith Barney offer different but complementary services — lending in the former, investment advice in the latter. Smith Barney's top FAs also serve and prospect to many of the coveted ultra-wealthy clients — those with $10 million and up in liquid assets — who represent the exclusive territory of Citi's private bankers. These top Smith Barney FAs are called Citi Family Office FAs, or CFO FAs, and have passed a special training course for high-net-worth issues. In some ways, combining the two seems so natural that it might have been done years ago.

If only it were that easy.

“Combining Citi Private Bank and the Smith Barney CFO types is absolutely a good idea,” says Aloise Pirker, a consultant with Aite Group. “But culture, particularly compensation, is the biggest obstacle to success.”

Corporate culture, of course, is the sum of an organization's operational philosophy, values, procedures and the general atmosphere (including employee emotions). It is built over time and therefore can be a complicated and entrenched beast. (Ask any FA at a brokerage firm recently acquired by a bank about culture.) In this instance, the cultural clash between private bankers and financial advisors is fairly sharp by virtue of whom they serve and how they are paid. Private bankers, by definition, deal only with multi-millionaires (and billionaires), or institutions like law firms, hedge funds and private equity firms. And while private bankers have Series 7 licenses, they are also often CFPs or CFAs, have earned an MBA in finance or have backgrounds in investment banking or another realm of “high” finance. It's rarefied territory, for sure. Financial advisors can be all of those things too, of course — and many are. But the FAs' sharpest skills are often in sales and the selection of individual investments such as mutual funds. Financial advisors “eat what they kill” in commissions and/or fees on assets; private bankers are paid a salary plus bonus, usually 30 percent to 40 percent of their base, according to one wirehouse executive.

Private bankers are different in other ways, too. A private banker may work an entire year to complete a single complex financing deal or rework one client's debt portfolio. These tasks generate millions in revenue and effectively provide his income for the year. A financial advisor, on the other hand, needs to be working on dozens (if not more) of client accounts simultaneously to meet his production expectations. That said, while the straight-up financial advisors may rank lower on the glamour factor, the very best FAs make far more money — as much as four times what the best private bankers make.

Their wildly different incentive structures also result in a different view of the client — and of each other. Where one is investing client money and splitting revenue with the firm, the other is lending firm money to the client and his bonus is largely up to the discretion of management. Different styles, different personalities, different jobs — it's why branding is another bump in the road to unity. Neither group is particularly keen on sitting under the other group's banner. In Citi's case, the planned opening of its first truly unified office, in Chicago, has been delayed because of both compensation and branding issues — no one can agree on what the office will be called, or how the revenue will be shared. New Global Wealth Management CEO Michael Corbat is now reviewing the plan, further delaying its opening.

At firms offering private banking and brokerage — not just at Citigroup — years of competing for the same clients and stories of failed attempts to work together are common; tales of intentional efforts (some successful) to steal clients from one another aren't unheard of either. It will be interesting to watch how this “coopetition” plays out among the recently merged companies that have both private banking operations and high-end financial advisors: Bank Of America's U.S. Trust will likely compete with Merrill's Private Banking & Investment Group FAs as well as First Republic; JPMorgan Chase private bankers already compete with some Bear Stearns reps; Wells Fargo bankers and Wachovia reps may go head-to-head. They will be watching Citi's experiment for pointers should they attempt something similar. If it works, FAs might want to invite their firms' bankers for a drink at the bar — one or two referrals from one of them could change a client book.

What's In It For Me?

Across the country for the past year, John Longley has been organizing occasional cocktail parties for 50 to 60 people — split evenly among a particular region's private bankers and Smith Barney CFOs. The idea is simple: There are people in the room who can help you expand your business — so get to know them. Drinks lighten the mood of the panel presentations, in which individuals speak about their businesses and their specialties. Even smaller group meetings take place afterwards, when FAs and bankers have had time to explore potential relationships.

After attending several of the parties, one Smith Barney CFO says Longley's approach is working. “I've picked up a couple of trusted relationships because of these events that I wouldn't have found otherwise,” he says. When asked why not, he answers, “There's a complete lack of trust or faith.” He admits bankers have a reasonable quibble: “If I'm a banker, why would I put my clients in investments you recommend when I'm doing fine lending them money?” he asks. “What incentive does the banker have? None.” Not only is the banker putting his reputation as the client's advisor at risk by recommending this FA, but the FA stands to make a lot of money off his client — too much risk for little reward.

And that's the issue. An FA could easily experience a similar type of boomerang effect if he refers a top client in need of financing to a private banker who then decides the client is unworthy of the loan. Bill Bachrach, founder of Bachrach & Associates, a professional development firm in San Diego, says trust and understanding of the other professional's role are both key for whoever is “quarterbacking” the relationship. The “what's in it for me?” thinking that pervades the industry prevents true advisors — whatever their professional title — from doing what's best for the client.

“Whoever owns the relationship should be the quarterback and get paid a fee for providing advice,” says Bachrach. “Whether the quarterback is the banker, the FA or the CPA, he gets paid to find and recommend those other individuals to the client and wrap it all together. That's included in his advice fee. The professionals he refers his client to get their fee for playing their role,” says Bachrach. “If the client isn't the focus and instead it's ‘whether I'm getting my piece,’ it's like two kids that end up tearing the head off the doll they both want to play with.”

At Citigroup, two private banking executives were recently let go after they interfered in the business of some top Smith Barney FAs. According to a source familiar with the events, Damian Kozlowski, former CEO of the private bank, was fired by GWM chief, Sallie Krawcheck, when FAs complained that Kozlowski had deliberately tried to nick a new multi-million dollar account from Smith Barney and give it to the private bank. His temporary replacement, John Leto, the co-manager of the Manhattan private bank branch, was dismissed soon after for similar reasons, says the source. Asked about these events, a Citi spokesperson said, “I will not comment on rumors. Current CEO of the private bank, John Longley, had a long career at Smith Barney and the two units are working together better than ever.”

But under the current organizational model at most firms — private bankers competing with financial advisors for clients under different pay structures with no incentives to cooperate — there is plenty of distrust. A Bear Stearns broker who left the firm after the announced merger with JPMorgan says JPMorgan bankers wasted no time calling Bear clients and even family members of some executives. He says that first taste of the inevitable internal competition was enough to make him head for the exit. Another Bear broker says he's definitely lost business to the private bank which, according to him, competes more directly with Bear FAs in the way of investments — unlike Citi Private Bank. “And there's absolutely no incentive for these guys to help us,” he says, referring to their pay structure.

Pay, Pal

No doubt, competition is part of the problem. But changing the compensation incentives is only part of the solution, says Philip Palaveev, CEO of Fusion Advisor Network. He says a compensation arrangement that fairly — thought not necessarily equally — incents both parties would help the union between the two business models. “But the question is, ‘Do they have enough of a strategic reason to make it work?’ Referrals only flow if there's a good understanding of why the client needs that other person,” he says. If one doesn't understand well enough what the other person does, what his expertise and knowledge are, or trust him wholly, he's not going to refer a prized client to him.

That's why Longley is holding cocktail and dinner parties and the rest of it — so these in-house rivals can get to know each other better, learn more about one another's strengths and weakness, and hopefully sew the seeds of long-term trusted partnerships and big profits. Unfortunately for Longley, new management and some high-profile defections have slowed the process. Longley has had to contend with the departure of several Smith Barney CFO advisors that he had appointed to be part of his advisory committee on these topics as well as general strategy for the new unit. Those FAs included Curtis Brockelman, Rob Moon, Ellen Bailey and Richard Zinman — the firm's largest producer — all of whom left Smith Barney in April and May, taking with them more than $10 billion in assets. These obstacles aside, if there's one indicator of the potential for this venture, it's the firm's Greenwich office, where Citi has been conducting a dry run of the program since July 28. Two teams — four Smith Barney CFO FAs in one, four Citi private bankers in the other — work in adjoining offices in what was formerly Citi Private Bank's Greenwich branch — located only 100 meters from the Smith Barney office. David Cattrell, the lede Citi private banker, and Peter Chieco, the lede CFO FA, say the two teams have complemented each others' skills nicely so far. One recent example: A banking client came to Cattrell with a request. He wanted him to review his parents' fixed income portfolio and analyze in particular the fixed income investments that his parents' advisor had selected. “I told him that isn't my strength, but I have a colleague who's an expert on fixed income,” recalls Cattrell, referring to one of Chieco's teammates, who sits only steps away from Cattrell. He asked the client if he could invite the FA into the meeting, the client agreed and a conversation about the virtues of laddering bonds, different types of municipal issues and other investments ensued. That client has since opened investment accounts with Chieco's team. Clearly, the pairing is working for these two groups: In the past 90 days Chieco's team — which manages more than $600 million in client assets — has brought in $40 million in new assets directly related to private bank referrals.

“Collaboration and cooperation build with time, but you have to figure out how to at least tolerate each other first,” Palaveev says. “In the end, regardless of corporate action, it's two people that need to shake hands.”

THE “I” IN TEAM

Historically, Smith Barney and the Private Bank have operated largely independent of one another. Citi management is trying to change that.