| FEBRUARY 14, 2009
Citigroup to Give Brokers Big Retention Fees
Building the biggest brokerage firm on Wall
Street is proving costly to Morgan Stanley and
Citigroup Inc., which are planning to pay brokers about $3 billion to
keep them from being poached away from the joint venture, people familiar
with the matter said.
While the terms aren't expected to be
announced until later this month, the issue could grow politically
sensitive, because the U.S. government holds stakes in Citigroup and Morgan
Stanley as part of its bailout of the financial system. Morgan Stanley is
paying Citigroup $2.7 billion to take control of the joint venture, which
was announced last month and will combine its brokerage operation with
Citigroup's Smith Barney unit.
Broker payments have been a regular part of
Wall Street mergers for years, because rival firms see them as an
opportunity to poach top producers. The payments got little attention,
compared with big bonuses raked in by colleagues trading exotic securities
and negotiating big-ticket mergers at the corporate headquarters. But
once-booming businesses on Wall Street have fallen dormant, leaving brokers
as the financial world's new breadwinner.
Indeed, some brokers are getting flooded with
five or more calls a day to jump ship, says Darin Manis, who runs
broker-recruiting firm RJ & Makay in Colorado Springs, Colo. "The deals are
aggressive," he says, but necessary to keep the commissions and fees that
brokers generate for their firms.
The pay packages, ranging from 50% to about
260% of a broker's annual production, are rubbing some the wrong way,
especially at a time when financial-services firms have taken government
money and many of the brokers' clients are suffering losses. Depending on
the size of the individual broker's business, the payments can exceed $10
"I'm incredulous that the regulators" and
administrators of the government's bank investments "aren't focusing on
this," says Michael Campbell, head of boutique brokerage firm Dominick &
Dominick. "It's been a mindless recruiting war."
The House Committee on Oversight and
Government Reform is also looking into the issue, according to Ronald
Stroman, the committee's staff director. Another congressional staffer said
this past week that the presence of broker-retention payments "doesn't help"
convince Congress that Wall Street understands the need for change.
Morgan Chief Executive John Mack acknowledged
at a House hearing Wednesday that "the American people are outraged about
some compensation practices on Wall Street, and I can understand why." Mr.
Mack has declined to take a bonus during the last two years, and other top
executives at his firm also declined them in 2008. Citigroup CEO Vikram
Pandit has said he'll work for $1 a year until he can return the bank to
profitability, and Morgan has instituted a new pay plan that can claw back
Morgan Stanley, whose management will run the
joint venture, is planning to offer retention payments to top-producing
brokers who are joining the company's new wealth-management joint venture
with Citigroup's Smith Barney unit. Not all of the combined joint venture's
20,000 brokers are expected to get payments. One who brought in $1 million
in revenues for the firm last year would expect to get $500,000 to $1
million, though much of it is contingent on the broker producing revenue for
the combined Morgan Stanley Smith Barney in coming years.
"Our financial advisers at Morgan Stanley and
Smith Barney are getting heavily poached by competitors," says James
Wiggins, a Morgan Stanley spokesman. "We need to be able to retain" them "to
ensure the success of the joint venture."
Morgan Stanley has cut back on riskier
businesses such as trading, making its brokerage business more important.
Morgan Stanley officials plan to brief any government officials who ask
about the plan, but it is unclear how much concern there will be, according
to people familiar with the matter.
In a conference call earlier this month,
Morgan co-President James Gorman told brokers that the joint venture would
pay retention awards based on revenue generated in 2008, a generous position
if 2009 revenues for brokers drop sharply, as expected.
Among the biggest recruiters recently is
UBS AG. During the fourth quarter, UBS took about 100 brokers from Smith
Barney and 200 from Morgan Stanley, according to people familiar with the
Unlike a traditional Wall Street bonus, there
are some strings attached to broker payments. Brokers, who make most of
their annual pay directly from the fees they generate, often have to stay
seven to nine years to keep the whole payment. Firms regularly make part of
the payment contingent on asset or revenue targets, and spread the cost of
the plans on their financial statements over the life of the contract.
Aaron Lucchetti at
Printed in The
Wall Street Journal, page A10
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