June 1 (Bloomberg) -- Morgan Stanley paid $2.75 billion in cash to complete a joint venture that gives it control of Citigroup Inc.’s Smith Barney brokerage and the biggest U.S. team of financial advisers.

The final price, announced in a statement from the two New York-based companies today, was higher than the $2.7 billion disclosed in January. Under a revised agreement, Morgan Stanley is paying $214.2 million for 51 percent of Citigroup’s managed futures business, according to Citigroup spokesman Alex Samuelson.

The new venture, called Morgan Stanley Smith Barney, will be smaller than originally anticipated with about 18,500 financial advisers instead of the more than 20,000 in the January agreement because some brokers have departed. James Wiggins, a spokesman for Morgan Stanley, said broker attrition has affected the entire industry and “ours has been concentrated among the lower producers.”

“Given the combined resources and global platform at our disposal, we believe Morgan Stanley Smith Barney will become the employer of choice for other leading financial advisers around the world,” James Gorman, Morgan Stanley co-president and chairman of Morgan Stanley Smith Barney, said in the statement.

Bigger Gain

Citigroup, which received $45 billion of government aid, estimates it will recognize a gain of about $6.6 billion from the deal, higher than its original estimate of $5.8 billion. Alex Samuelson, a spokesman for Citigroup, said the amount could change slightly by the end of the quarter as the company adjusts its accounting.

Citigroup fell 3 cents to $3.69 at 4:02 p.m. in New York Stock Exchange composite trading. Morgan Stanley dropped 43 cents to $29.89.

Vikram Pandit, Citigroup’s chief executive officer, is paring businesses unrelated to branch banking, trading and investment banking to streamline the company and restore profits following last year’s record $27.7 billion net loss. He created Citi Holdings in January to manage units the bank plans to sell or wind down, including the CitiFinancial consumer-finance business and Primerica insurance.

“Today’s closing marks another step in the execution of the Citi Holdings strategy,” Pandit said in the statement. “Citi benefits from this transaction by monetizing its investment in its wealth-management business, while continuing to benefit from a multiyear earnings stream created by the larger firm.”

Competing With Rivals

Citigroup, the third-biggest U.S. bank by assets, and Morgan Stanley, the sixth-largest, agreed in January to create the venture to compete against Bank of America Corp., after its purchase of Merrill Lynch & Co., and Wells Fargo & Co., which took over Wachovia Corp.

Morgan Stanley will own 51 percent of the venture and Citigroup will own 49 percent for the first three years, after which Morgan Stanley has the right to increase its stake. Citigroup will continue to own a significant share of the new business through at least the first five years.

Morgan Stanley, which accepted $10 billion from the U.S. Treasury last year and has reported two consecutive quarterly losses, will become the industry leader in providing retail financial advice, a business that is perceived to be more stable than Morgan Stanley’s trading and investment-banking activities.

The venture is expected to have cost savings of about $1.1 billion after full integration in two years and about $14 billion in pro forma net revenue.

The companies didn’t provide an updated figure for total client assets, which were $1.7 trillion as of the end of the third quarter of 2008, or of pro-forma combined pretax profit, which was estimated at $2.8 billion in January. Wiggins said the company doesn’t intend to provide any updates until the end of the second quarter.

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net.

Last Updated: June 1, 2009 16:09 EDT