Morgan Stanley and Citigroup Inc have started their retail brokerage joint venture at least a month ahead of schedule, but have already lost more than 1,500 brokers.

As part of the venture, Morgan Stanley is paying $2.75 billion to Citigroup. Morgan Stanley owns 51 percent of the venture, with Citi owning the rest.

The brokerages had originally planned for the venture to start in the third quarter, but moved the date up in part to reassure brokers and customers unsure about how they would fit into the combined brokerages, said James Gorman, co-President at Morgan Stanley and chairman of the joint venture.

The departure of brokers is something we anticipated and something we are not concerned about, Gorman added.

The venture allows Citigroup to boost its capital levels by essentially selling a controlling stake in its Smith Barney retail brokerage business. It also allows Morgan Stanley to diversify its mix of businesses, which could reduce fluctuations in its earnings. Morgan Stanley is entitled over time to buy the portion of Smith Barney it does not own.

The venture will be known as Morgan Stanley Smith Barney.

Gorman said expediting the deal helps the joint venture remove anxiety from employees and bring clarity to clients.

In January, Morgan Stanley and Citigroup said the combined business would boast more than 20,000 financial advisers, $1.7 trillion in client assets and $14.9 billion in combined revenue.

The companies lowered those projections on Monday, saying the new company would employ 18,500 advisers and have $14 billion in revenue.

Figures from the Financial Industry Regulatory Authority show the number of registered representatives has fallen by 1.75 percent since 2008, compared with the 7.5 percent drop by the joint venture.

In addition to industry trends, Gorman said cutbacks in training programs also impacted the number of financial advisers.


Anton Schutz, president at Mendon Capital Advisors in Rochester, New York, which invests in Morgan Stanley and Citi, said the companies likely expedited the completion of the joint venture, at least in part, as a signal to regulators.

It was a timing issue for Citi to really move up the timing to tell the fed, 'We have this capital, and (the joint venture) is in fact going to be happening in an expedited fashion,' Schutz said.

Citi was told last month it needed to raise $5.5 billion in capital as a result of a stress test by the federal government. Citi and Morgan Stanley were among major banks that accepted loans from the U.S. Treasury's $700 billion Troubled Asset Relief Program, or TARP.

The $2.75 billion upfront that Morgan Stanley will pay Citi is higher than the $2.7 billion announced in January. Morgan Stanley has the right to increase its stake beginning in three years, and Citigroup will continue to own a significant stake through at least mid-2014.

The companies said on Monday that Citi would recognize a gain of $6.6 billion after taxes and create close to $7.8 billion of tangible common equity.

That is up from the bank's prior estimate of a $5.8 billion pre-tax gain and $6.5 billion of tangible common equity.

Because the bank is essentially selling a portion of its retail brokerage business, it can increase the value of the rest of its Smith Barney unit on its books, boosting its capital and allowing it to realize a gain.

The companies have said they each expect to realize $1.1 billion in savings from the joint venture after full integration.

In a filing with the SEC on Monday, Morgan Stanley and Citi said they had entered into an amended agreement, which requires Citi to transfer its managed futures business to the joint venture for $214.2 million. That business was not part of the original transaction.

The filing said the transfer was expected to be completed in the near future.

(Reporting by Steve Eder; Editing by John Wallace, Andre Grenon and Richard Chang)