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.