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The trend toward fee-based business in bank brokerage got a jolt forward with Deborah McWhinney’s plan to create a fee-only advisory business at Citigroup.

McWhinney, the new head of Citi Personal Banking and Wealth Management plans to put the cream of the Citi’s bank brokerage crop in fee-based, fully fiduciary advisory teams, with the goal of eliminating commission-based business by 2011. Citi also plans to form a network of independent registered investment advisors who would receive client referrals in exchange for a 25% fee.

Bank-based advisors who are less experienced or have lower production will have the option to become gatekeepers. They will be the first point of contact for clients and will refer them to one of three options: Citi’s new advisory teams; affiliated outside RIAs; or; for those wishing to do self-directed investing, the Citi call center.

The Citi Personal Wealth Management Investment Teams, as the in-house advisors will be known, will be compensated on a grid as in the past. “Compensation will be a grid, and there will be no change in comp through 09,” says Citigroup spokesperson Alexander Samuelson. Payouts will be competitive with other advisory services in the industry. The gatekeepers or “investment consultants” will work in the branches and receive a salary and a bonus, according to Samuelson. 

How clients are divvied up among the three options will not depend on the level of assets that can be invested, says Samuelson. But, a rule of thumb is that only those with over $250,000 will be referred to advisors and not the call center. 

The strategy makes good sense on a number of levels. For one, without forming a network of affiliated outside advisors, Citi doesn’t have the nationwide scope to serve advisory clients. “We don’t have the scale to take on everyone, and we want to be national,” says Samuelson. “This inside force and outside RIAs help us do that.”

It gives Citi a way to expand without building out their actual physical footprint, says Heywood Sloane, managing director of the Bank Insurance and Securities Association. “If anyone has the rolodex to tap into independent channel on a cooperative basis, it’s McWhinney,” says Sloane. McWhinney previously served as President of Schwab Institutional. The new strategy also gives clients a clearer idea of how to work with Citi investment services, Sloane says.

The move also puts Citi in the sweet spot in terms of where a lot of brokerage and advisory services are headed. “It’s a bold step to switch totally to fee-based production all at once,” Sloane says. “But it’s a direction a lot of people headed anyway. The key to the move to me is going and taking the step to the fiduciary RIA approach.”

The effect should be positive for the industry as well. “It’s certainly a step in the right direction,” says Howard Diamond, managing director of Diamond Consultants, a Chester, N.J.-based financial recruiting firm. “I think it will help the bank brokers better serve their clients and be competitive with wirehouse and regional brokers. As a whole, the industry is moving away from the transactional model. It’s the wave of the future.” 

While John Houston, Managing Director of Raymond James’s bank brokerage division, is a big proponent of fee business and applauds Citi’s move, he adds that fees aren’t right for all investors all the time. “There are certain investments where fees are going to be higher than commissions, so it's in the clients' interest to pay commissions and not fees,” he says. For example, a wealthy investor with several million in short-term munis or Treasuries might be paying more in annual fees than they will make on low-returning investments. Likewise a wealthy client with a static bond ladder that doesn’t have to be managed shouldn’t need to pay annual fees. As a result says Houston, “I think they’re going to miss out on some business.”

Of course, Citi hopes that the highest net worth clients will develop a relationship with the private bank. “Citi has a private bank that would look to develop a relationship with a client with $10 million or $25 million,” Samuelson says.