Creation of broker giant could boost discounters

By Jonathan Spicer - Analysis

NEW YORK (Reuters) - The potential combination of Citigroup Inc's and Morgan Stanley's brokerage houses presents an opportunity for asset-hungry discount brokers to attract yet another wave of investors dislodged in the ongoing financial crisis.

Citigroup, the U.S.-based banking giant taking steps to disassemble itself, was approaching a deal on Monday to join its Smith Barney brokerage with Morgan Stanley's, according to sources.

The combination would create the world's top advisory house, but would risk disenfranchising both the financial advisers and their high-net-worth clients disillusioned at the structural shakeup and the past year of low investment returns, analysts said.

"When you do have changes like this it causes clients to re-evaluate who is handling their accounts," said Richard Repetto, an analyst at Sandler O'Neill. "And I expect the consultants that feel they might be disenfranchised will turn to independent platforms like Schwab.

"There's no way to quantify it, but this just continues the trend of volatility and turmoil at the traditional retail brokerage houses," Repetto said.

With brokerage king Merrill Lynch acquired by Bank of America Corp, the Citigroup-Morgan Stanley joint venture would mean the top three retail brokers are tangled in consolidation.

Merrill and Bank of America manage more than $2 trillion in combined assets, while Morgan Stanley and Citigroup manage about $1.8 trillion.

Charles Schwab Corp, the largest of the discount brokers with about $1.1 trillion in total client assets, is best positioned in the sector to take advantage of the reshuffling on Wall Street, analysts said.

San Francisco-based Schwab said in November that some 400 prospective advisers managing $35 billion are considering using Schwab's broker custodial service in addition to the current force of about 5,500 independent advisers.

Discount, or online, brokers typically cater to affluent investors with advice and Internet-based trading. Others such as U.S. No. 2 TD Ameritrade Holding Corp as well as mutual fund group Fidelity Investments, could also benefit if yet another big merger reshapes financial services.

"This is a real opportunity for a broker to call up his clients and say 'This is the time for me to go off alone,'" said Brad Hintz, analyst at Sanford C. Bernstein.

It may also be a time for investors, stung by the mortgage market-inspired stock sell-off, to re-evaluate the fine print on their broker contracts.

Adam Honore, senior analyst covering brokers at research and advisory firm Aite Group, said investors are starting to use this opportunity to renegotiate fee agreements.

"With all the change that's going on, it's probably a good time to evaluate what you're getting for your money," Honore said. "The real win for the online brokers is in the custodian space for servicing RIAs (registered investment advisers)."

Schwab, which among peers is most reliant on assets under management, derives about 30 percent of its pretax income from RIAs. With U.S. interest rates currently so low, an asset boost would help offset an expected decline in interest that online brokers earn from the assets.