Citi-Morgue needs to break out the incentives and prove this venture isn’t too big to succeed

Smith Barney brokers have made what Citigroup might call a “forward looking statement.” They are taking more calls than ever from helpful head hunters. From what I hear, financial advisors who have been with the firm 20, even 30, years are talking about leaving the mothership.

Shareholders are also voting on what they think of Citi and the onslaught of deals — first the Morgan Stanley-Smith Barney joint venture and now the break-up of Citigroup into two units: The stock slipped near the close below $3.50. At the beginning of the 4Q08, the shares were plenty bruised but still in the $20 range.

In its news release, Citigroup explained it was dividing the financial behemoth into core and non-core units. What control Citi has over Smith Barney was tipped into the non-core half, along with consumer finance and special asset pool (i.e., toxic waste?).

Citi has yet to report on what if any kind of incentives it will offer its retail brokerage force to remain in the newly-formed Smith Barney-Morgan Stanley joint venture. Time is not on the JV’s side. Brokers are one of the last remaining profit centers on Wall Street. Competitors are willing to pay a great deal of money to woo big producers. The Citi-Morgue people will need to offer big incentives to keep brokers with them.

Even more important, Citi-Morgue will need to convince the brokerage force that 20,000 advisors is not too big. At some point — is it 12,000, 15,000, 20,000 or 25,000? — the business begins to cannabalize itself. There are just so many Fortune 500 clients who need high-net worth money management and maybe even fewer financial titans at large seeking high-end services (especially in this economy). How will the brokerage behemoth contain feudal flare-ups? Even if offered big financial incentives to stay at Smith-Barney/Morgan Stanley, some may choose to move so they can expand their businesses without fear of stepping on someone else’s toes.

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