Brokerage joint venture partners may have challenges keeping producers put. Morgan Stanley and Citigroup are prepared to pour $3 billion into keeping their respective retail-brokerage forces around for the 20,000-rep, $1.7-trillion private-client joint venture the two companies are planning, according to a report in the Wall Street Journal that cites "people familiar with the matter."

Although this expenditure is likely to raise political hackles -- Citigroup has taken $50 billion from the U.S. Treasury Department 's Troubled Asset Relief Program and Morgan Stanley has taken $10 billion -- it may prove inadequate to the task of preventing a far more costly wave of departures.

Last month the two companies agreed that Citi would sell its Smith Barney retail-brokerage unit (and a couple of analogous offshore businesses) to Morgan Stanley for $2.7 billion and 49% of Morgan Stanley Smith Barney, the proposed name for Smith Barney with Morgan Stanley's Global Wealth Management (GWM) private-client partnership.

Token effort

As an example of the sort of payout Morgan Stanley Smith Barney supposedly has in mind, the WSJ says a broker who produced $1 million in 2008 (compared with the 2007 wirehouse average of around $720,000 a year) could expect to keep something between 50% and 100% of that -- depending on how he continues to perform -- in year one as a Morgan Stanley Smith Barney broker. Smaller producers would be offered less or nothing for sticking around.

If this is an accurate summation of the retention drive Morgan Stanley and Citi plan to mount for their joint venture, it might be thought that the companies are trying to drive brokers away.

In the run-up to its formal takeover of Bear Stearns last year, JPMorgan Chase offered Bear Stearns brokers who brought in more than $500,000 in 2007 100% of their annual take for staying -- an offer than several recruiters characterized as decidedly so-so. And though UBS is at pains to deny it, recruiters say the Swiss bank's U.S. retail brokerage is topping rivals with offers that can amount to 220% of an broker's trailing 12-month production.

Bye-bye

But there may be little Morgan Stanley and Citi can do to stop brokers from jumping ship in light of recent turmoil that has eviscerated the stocks and tarnished the brands of Wall Street's biggest names. In a fall 2008 survey of 1,200 independent, wirehouse, insurance, regional, bank, and RIA advisors (weighted to reflect industry compensation) by Fidelity 's clearing subsidiary National Financial, about 9% of the brokers polled said they were likely to switch firms by the end of 2009; about the same as in National Financial's year-earlier survey, but twice the 2006 rate. Two thirds of them expressed interest in moving to "another type of firm" -- with the notions of starting or joining an RIA finding favor with 30% of them (double the rate of RIA-inclined brokers seen in National Financial's 2007 survey). More startling, a fall 2008 poll by the Boston-based research and consulting firm Aite Group suggests that 16,500 wirehouse brokers - something like 30% of the total headcount -- were thinking of going independent. As we're always quick to say when we cite this finding, there's a big difference between thinking and doing.

Still, an exodus from Smith Barney and Morgan Stanley even a fraction that large would cost the firms far more than the $3 billion they're proposing to spend on retention -- it could, in fact, undo their efforts to function as a single competitive entity. -FWR

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