Morgan Stanley scores big with SB Consulting Group

By agreeing to a joint venture with Citigroup Inc., Morgan Stanley may have bagged the crown jewel of Citi’s empire: the Smith Barney Consulting Group.

While Morgan Stanley of New York and Smith Barney, a unit of New York-based Citigroup, have plenty of overlapping operations, the Smith Barney Consulting Group is something that Morgan Stanley’s management will most likely want to preserve, observers said.

Indeed, the unit, which provides fee-based managed accounts, is widely regarded as “the envy of the Street,” according to one Smith Barney representative, who asked not to be identified.

Smith Barney Consulting Group, a division of Citigroup Global Markets Inc., provides investment management consulting to institutional and individual clients. The vast majority of Smith Barney’s sales force relies on the group’s services in some way.

What’s more, the nearly 40-year-old unit plays a pivotal role in Smith Barney’s dominance in the separately managed accounts industry.

The unit’s significance isn’t lost on Morgan Stanley’s management.

During a conference call with analysts this month, James Gorman, Morgan Stanley’s co-president, characterized Smith Barney as a “pathbreaker in the annuitized-managed-money arena.” He will be chairman of the new venture, Morgan Stanley Smith Barney.

So far, details of the integration of Morgan Stanley’s consulting unit with Smith Barney Consulting Group haven’t been discussed, said James Tracy, director of business development for the Global Wealth Management division at Smith Barney.

Both firms have strong consulting units and when “we put the best component pieces of each part together, I’m sure we’ll be a world-class advisory platform,” said Mr. Tracy, who runs the consulting group.

Smith Barney Consulting Group oversees some $160 billion in SMA assets, which accounts for about 25% of the total assets in that industry, according to Cerulli Associates Inc., a Boston-based research firm.

Merrill Lynch & Co. Inc. of New York is No. 2 with $147.5 billion in separates and a 23% market share. Morgan Stanley, meanwhile, has a 7.7% share with just under $50 billion in separately managed accounts.

These figures include the “subadvisory” separates business where the sponsor does due diligence and contracts with asset managers, as well as dual-contract accounts in which clients contract separately with money managers.

In just the subadvisory business, Citigroup this year has fallen behind Merrill. Merrill has a 25.5% market share, Citigroup 24.6% and Morgan Stanley 8.7%, according to Cerulli.

Citigroup may have fallen behind due to the loss of some significant Smith Barney advisers last year, observers said.

Losing high-end advisers is a big risk for the joint venture, and messing up the consulting group could spark defections.

Smith Barney has about 500 to 1,000 advisers with a “disproportionate market share” in separately managed accounts, said Stephen Winks, publisher of Richmond, Va.-based SrConsultant.com. “They don’t want to lose those guys,” he said.

“I just can’t believe James Gorman would be stupid enough to downgrade the [consulting] system,” said Frank Campanale, chief executive of Advanced Equities Wealth Management, a unit of Advanced Equities Financial Corp. in Chicago. He formerly ran Smith Barney’s consulting unit.

The consulting group has a history of running somewhat independently of the brokerage firm. In fact, an elite group of Smith Barney representatives, the Association of Professional Investment Consultants, is closely aligned with the unit and advocates internally for the consulting business.

Although he thinks the integration of the two firms will be difficult, “I think [the integration of the consulting units is] going to go pretty well,” Mr. Campanale said. Morgan Stanley itself has a respected consulting group and “a pretty competent group of advisers,” who should benefit from integration, he said.

But Smith Barney’s managed-money unit is tops in technology, due diligence and administration, Mr. Campanale said.

Smith Barney has been more “holistic” in incorporating different products under various fee-based platforms within its consulting group, said Jeff Strange, a senior analyst at Cerulli. That said, Morgan Stanley has been reorganizing its fee-based offerings along similar lines, he said.

In addition, these two firms’ names always come up as those willing to work with asset managers in a way that best fits the manager, Mr. Strange added.

Some investment managers have been struggling with fee cuts and loss of control as they migrate to a model-based structure, he said.

One downside, Mr. Winks said, is that Smith Barney reps might also experience more compliance restrictions on their consulting businesses.

“If anything, with the additional resources, the combination will create more flexibility and more product opportunities than what we can do by ourselves,” Mr. Tracy said.

E-mail Dan Jamieson at [email protected].

Related Topics: Merrill Lynch, Smith Barney