Sallie Krawcheck Has Left the Building

When Sallie Krawcheck was brought in to run Smith Barney two years ago, she was hailed as a savior Mrs. Clean, the last honest research analyst and the best choice possible to turn around a company mired in the infamous WorldCom research scandal. By most accounts, Krawcheck did a great job as CEO of Smith Barney: Broker morale improved and so did broker production (see table). But last month, Krawcheck

When Sallie Krawcheck was brought in to run Smith Barney two years ago, she was hailed as a savior — Mrs. Clean, the “last honest” research analyst — and the best choice possible to turn around a company mired in the infamous WorldCom research scandal.

By most accounts, Krawcheck did a great job as CEO of Smith Barney: Broker morale improved and so did broker production (see table). But last month, Krawcheck was moved uptown to Citigroup headquarters, taking over as CFO of Citigroup. Todd Thomson, who was Citi's CFO, was moved downtown to Smith Barney's offices, taking over Krawcheck's job as CEO. Why the switch? Some say Krawcheck was promoted so that she could get familiar with Citigroup's global operations. Indeed, some say the juggling of Krawcheck and Thomson is a way for both executives to prepare themselves for the top spots at Citigroup someday.

Krawcheck's recent email to Registered Rep. explaining the move, seems to back up that assertion: “Actually, in this role I'll be meeting more people across Citigroup and then actively engaging outside our organization with investors and the analyst community.” The move makes sense, she added, because, “Chuck [Prince, Citi's CEO] and Bob Willumstad [president and COO] are committed to giving managers a broad range of experiences — my background as an analyst and Todd's background, having previously run the private bank, really made this a natural swap.”

Undoubtedly, hiring Krawcheck was a canny move by former CEO Sandy Weill, who saw his legacy tarnished in the wake of the Jack Grubman research scandal. To attract the researcher Fortune magazine called “The Last Honest Analyst” was a coup of George Steinbrenner-esque proportions. Weill brought her in with the understanding that she was free to clean house. And she did. Krawcheck's biggest achievement during her two-year tenure, according to advisors, was to restructure the research department, unteathering analysts' compensation from the investment banking unit's performance. She also simplified the equity ratings structure to simple buy, hold or sell ratings.

Although her “March to a Million” campaign (she wanted all Smith Barney advisors to produce $1 million a year) made some advisors gasp, those interviewed for this story respected her, largely because she resisted dictating massive changes. The payout grid was altered, but, to prevent conflicts of interest, advisors aren't paid more for doing, say, fee-based business over commissions. And mandates for a particular type of business, such as fee-based business, weren't imposed.

Achievements in Research

Her honest assessment of the research department won her praise from advisors and regional executives who had grown accustomed to rosy outlooks from top brass. She was brutally frank in meetings with brokers and managers, telling one group in Atlanta, “We messed up, and we need to make it better.”

Says one longtime advisor: “She took the biggest thorn in our foot and removed it. Because of that, we now have the confidence back in the research department.”

In her two years, Krawcheck reorganized the research department, firing some analysts and consolidating the group under the leadership of Bill Kennedy, global head of equity research, and U.S. director Jon Joseph, a former semiconductor analyst. Compensation for analysts was revamped and contact with bankers was heavily restricted. Now, around 19 percent of the firm's research ratings are sell ratings, higher than any other major Wall Street broker/dealer.

Krawcheck is pleased with her handiwork. “While we've said the quest for the best research on the Street never ends, we're pretty darn proud of what's been achieved so far,” she says.

Other experts agree. “It's taking a while to be completely implemented, but she cleaned up a lot of abuses,” says Guy Manuel, managing director at the CBM Group, an industry consultancy. “She got a lot of good, solid analysts working without too much star status, and she got the salesforce to appreciate research more.”

Indeed. Smith Barney reps who participated in Registered Rep.'s annual Broker Report say their own opinions of their firm have improved dramatically this year vs. last year. Reps say that the public image of their firm has improved too (see page 43).

The Rest of the Story

Early in her tenure, she said the firm needed to do better against competitors (particularly Merrill Lynch) in cash management, alternative investments and annuities sales. More broadly, Smith Barney needed to integrate with Citigroup more efficiently. Since then, the firm beefed up the private wealth management platform and introduced several innovations, including a portfolio-minder function reminding reps to create quarterly reports for clients. “More and more, us and the Citibank private bank are working together,” says one advisor.

As of third-quarter 2004, there were 12,096 reps at Smith Barney, down from 12,744 at this time two years ago, when her tenure began. By comparison, Merrill Lynch is hiring aggressively, with a goal to increase headcount by 5 percent this year, and the next two years as well. UBS isn't far behind, offering innovative deals with upfront money in the 100 percent range.

Smith Barney says it isn't going on a massive recruiting binge because management wants to invest more in the technological and branch management areas. That said, the firm's overall scores for Support in this year's scorecards shows them in the middle of the pack, worse than the regional firms, but better than some of the other wirehouses (see page 34). Like many other firms, cost-cutting is the order of the day. “The complaint I hear the most [from Smith Barney reps] is, ‘I don't like being nickeled and dimed,’” says one national recruiter.

One of the bigger initiatives that Krawcheck discussed with Registered Rep. was the firm's “March to a Million” plan, designed to get the average annualized revenue per advisor to $1 million within three years. Annualized revenue per rep is at $500,000, compared with $444,000 in third-quarter 2002. (That compares to Merrill Lynch FAs' average of $700,000 in annualized revenue per rep.) Firm officials say the march was, and is, more an internal “aspirational” goal — but it still spoke of her ambitions for the firm.

While Thomson never worked as a rep (which can irk some producers, see a related story on page 18), advisors are pleased that he did once run Citigroup's private bank and is familiar with some aspects of delivering financial services to retail clients. And brokers are reassured by the continuing presence of Tom Matthews, head of the global private client group (who now reports to Thomson), since Matthews is a veteran executive and a former broker himself.

“He's more important for us than Thomson or Krawcheck,” says another advisor. “They're more for the public.”

Tale of the Tape — Krawcheck, Beginning to End

Smith Barney has fewer advisors, but productivity has increased.
Third-quarter 2002 Third-quarter 2004
Total client assets $851 billion $920 billion
Revenue per advisor (annual) $444,000 $500,000
Fee-based assets $152 billion $221 billion
Asset flows* $31 million $14 million
Profit Margin 21% 21%
Last Quarterly Revenues $1.430 billion $1.523 billion
Fee/recurring revs. $728 million $849 million
Commission revs. $702 million $674 million
Financial consultants 12,744 12,096
* For the first nine months of the year.
Source: Smith Barney financial statements
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