A Sweeter Deal

Sallie Krawcheck and Charlie Johnston are pressing all the right buttons, and Smith Barney financial advisors seem to be responding well. Sure, the firm's 15,000 odd advisors weren't in such bad shape to start with after all, they rank second only to Merrill Lynch in production and assets, and are the leaders in fee-based assets. Even so, they've been doing quite a lot of complaining lately about

Sallie Krawcheck and Charlie Johnston are pressing all the right buttons, and Smith Barney financial advisors seem to be responding well. Sure, the firm's 15,000 odd advisors weren't in such bad shape to start with — after all, they rank second only to Merrill Lynch in production and assets, and are the leaders in fee-based assets. Even so, they've been doing quite a lot of complaining lately about the firm's “oppressive” compliance culture, and even more, about changes to their pay package, made in December of 2006, and again in February of this year. Although Smith Barney says it doesn't have a retention problem, recruiters claim that a substantial number of top-level brokers have defected for other firms in the past year or so.

But Krawcheck, who took over from Todd Thomson as head of Citigroup global wealth management earlier this year, and Johnston are trying to make it a lot tougher for Smith Barney advisors to find something to complain about. Their biggest coup in this respect may be a new (and let's hope, final) round of revisions to pay. Released to branch managers in late September, and distributed to reps the first week of October, the changes will take effect in January of next year. In an internal memo, Sallie told Smith Barney employees that the point of this new package is not to “fix” the old one, but to create the number one advisor pay program on Wall Street.

In broad terms, the new package raises pay for all Smith Barney advisors producing $300,000 or more, provides length-of-service bonuses for those who reach certain production levels within certain periods of time, increases deferred compensation and 401(k) matching contributions and allows retiring advisors to “monetize” their business by receiving 200 percent of production in a five-year split agreement with a junior advisor.

The new pay program also eliminates one of the most controversial elements of the previous plan: limiting payout on the first $5,000 in earnings to 20 percent. Meanwhile, for advisors producing over $1 million, the cash grid rate goes up to 44 percent from the previous 42 percent. For advisors with over 9 years of service, and under $300,000 in production, payout rates fall to 27 and below.

“I think they really started aggressively fixing things this year,” says one recruiter, who preferred to speak off the record. “They didn't believe things were broken until they saw people leaving in waves. Not just the occasional guy, real career-type guys,” he says. “But they've made some significant strides, and the culmination of that is the new payout plan.” The firm first revised its pay plan at the end of 2006 to offset expenses it would have had to swallow when it stopped taking certain business deductions from rep pay. In the process of resolving overtime lawsuits filed by former brokers, it came to light that such deductions are illegal under certain state laws.

But it's not just pay that Smith Barney is changing. A complete overhaul of compliance procedures — begun by Smith Barney private client CEOCharlie Johnston two years ago, and continuing today — is producing results, and finally getting the attention of advisors, who have long complained of Smith Barney's lawyerly and bureaucratic culture. Meanwhile, Sallie has also made several key changes in management, and has made it a point to be in constant communication with Smith Barney advisors.

Janice Fetsch, general counsel, and head of compliance for Smith Barney, says the firm has rewritten all of the firm's compliance policies to shorten them and make them easier to understand. They've also created compliance committees that are staffed in part by financial advisors and branch managers, and will roll out a compliance Website for advisors and branch managers in October that is searchable by key words. In addition, account-opening forms are being consolidated, so that households opening multiple accounts get a single kit, and sign only once instead of multiple times.

“We all have the general perception of compliance that it's the Darth Vader of the world,” says Roger Coleman, Smith Barney's number three broker. But that has changed drastically he says. Whereas it used to take days or weeks to figure out what compliance policy applied to a particular situation, and then explain it to the client, now it takes just minutes, he says.

Overall, morale seems to be vastly improved. “There is a renewed confidence that we have leadership that is truly interested in the long-term well-being of the firm,” says one branch manager who preferred to speak off the record. “Sally has probably visited more branches in the last six months than Todd [Thomson] visited in his whole tenure.”

Coleman agrees. “I have been courted by many, many brokerage firms,” he says. “And despite all of what has gone on, I've happily stayed. I believe they really want to get this right. There is a tremendous amount of optimism in the air.”

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