When Smith Barney and Legg Mason announced a deal to swap the wirehouse's asset-management business for Legg's brokerage unit, a lot of Legg reps saw an ugly storm brewing. Some made calls to recruiters and began to prepare for a move they wish they didn't have to make. But as the details of the combined entity begin to emerge, the devil is sending out the right vibes, and a lot of reps have stopped packing, at least for now.
“I think they'll retain a lot more Legg reps than I originally thought. Smith Barney has handled this very well,” says Danny Sarch, a New York-based recruiter with Leitner Sarch Consultants.
At first, Legg reps groaned at the swap: They are used to working for a small firm, selling their own mutual funds bearing the name of the firm, which has been run by its founder and patriarch for 43 years. For Legg advisors, then, the initial shock was: How are these two corporate cultures — one an established, New York-based mega-company, the other a small but savvy Wall Street outsider based down south — ever going to mesh?
“Smith Barney is a fine organization with great execution, technology, infrastructure and all that — it's just that Legg is an old-line firm, an intimate place. That's where you feel the loss,” says one branch manager, adding that advisors and management are unusually close. Reps would even call Chip Mason directly to speak their minds or just talk shop. “I doubt if the lines of communication to Chuck Prince [CEO of Citigroup] will be the same with more than 13,000 reps.”
But according to FAs, management and recruiters, Smith Barney seems intent upon doing what it can to retain Legg's culture. The deal isn't set to close until December and plans may change, of course. But at this point, observers say Legg is expected to be run as a separate division called, “The Legg Mason Division of Smith Barney.” Further, management will remain the same, and reps will not have to relocate for at least 18 months.
You Can't Take It With You
Of course, for a number of Legg brokers, there is no choice but to stay. For those with a significant portion of their clients' money in Legg's family of 22 proprietary funds, jumping ship is a particularly costly option, since the funds aren't portable. These include Bill Miller's famous Legg Mason Value Trust, the only fund to outperform the S&P 500 index each of the last 14 years. Now Smith Barney will become the primary distributor of those funds for the next three years, at which time they may be open to other distributors.
How many reps will this affect? One branch manager says each of the dozen or so reps in his office has anywhere from 25 percent to 35 percent of client assets in the funds. One $2 million producer says it's no different for the top guys: “I'd say a third of my book is in those funds, and I'd say that's about par among the more successful advisors.”
If an advisor wanted to depart (and rival firms are hotly pursuing top Legg advisors), he would have to liquidate client positions in Legg funds, which could cause the client to suffer adverse tax consequences — not exactly a “client-centric” decision. Another reason to stay? Legg Mason Value Trust was ranked the No. 1 fund family by Barron's out of 67 funds for the five-year period ending Dec. 31, 2004. It's a good bet clients with significant long-term positions wouldn't be too happy with a rep selling their Legg Value Trust shares because he/she “wants to move.”
For Smith Barney, it's the perfect glue, as Sally Krawcheck acknowledged in a press conference: “We think it will be an important retention tool of Legg Mason financial consultants,” she said
In addition, Smith Barney is offering what consultants say is a retention bonus on par with past merger deals, an indication of its intent to build good will with its new brokers. “The deal is very good, considering 90 percent of those guys weren't going anywhere to begin with,” says Andy Tasnady, a compensation consultant who runs Tasnady & Associates, also noting Legg's widely known low turnover rate. “Now they have this money dropped in their laps.”
Still, says an exec at a rival brokerage: “I think there are real challenges in keeping those Legg FAs. They are going from a regional firm to a global financial services company with regulatory and reputational issues,” he says on the condition that his name not be printed. “Retaining them isn't going to be easy.”
His firm, a direct competitor, has mapped out the locations of all of Legg's branches versus his own firm's. He and his firm will then go after Legg's top producers, showing them that their commute wouldn't change. “Do you think I'm the only guy smart enough to think of that?” he asks rhetorically. In short, some rival firms may make it worth a Legg producer's time and effort to move. Recruiters say that top producers — $2 million plus — could get 100 percent to 150 percent upfront in forgivable loans if they jumped elsewhere on the Street. The top producers will get 50 percent to stay. Those producing $1 million to $2 million will get 40 percent; $500,000 to $1 million will get 35 percent; and $250,000 to $500,000 will get 25 percent.
Smith Barney product managers are participating in Legg's divisional road shows, and reps should know soon enough what their new lives will look like. Until then, in the words of one recruiter: “The Legg brokers feel betrayed sure, but they're not blaming Smith Barney. The smart ones will figure out what's best for them and move on.”
|Legg Mason||Smith Barney|
|Number of reps:||1,354||12,189|
|Number of offices:||127||522|
|Annualized revenue per rep:||$546,000||$534,000|
|Avg. assets per rep:||$69 million||$80 million|
|Assets in fees:||53 percent||55 percent|