In the garden scene, in #1, where Vito speaks to Michael about how to run the buisiness, he stresses that the one who will come for an arrangement meeting would be a traitor. That's why Michael realizes all at the funeral.

The line that "Tesio was the smart one" means, IMO, that he was the one requesting more than the family provided. At that time, with Vito dead and Michael not having left his mark already, it is rational that Tesio thought the Corleones were about to weaken. And as a "smart" guy, approaches the ones he thinks are gonna be the new bosses.