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Ten To Watch 2003

Turmoil. It's a word that best describes the events of the last 12 months in financial services, and one that, in all likelihood, will also describe the next. True, the market has bounced back some. But that is hardly enough to offset the upheavals still confronting the brokerage industry: lawsuits galore, the rising power of independent reps, more consolidation and, of course, ongoing scrutiny from


It's a word that best describes the events of the last 12 months in financial services, and one that, in all likelihood, will also describe the next.

True, the market has bounced back some. But that is hardly enough to offset the upheavals still confronting the brokerage industry: lawsuits galore, the rising power of independent reps, more consolidation and, of course, ongoing scrutiny from regulators on an assortment of matters, including mutual fund sales.

“The biggest challenges for the industry at a time when the business has gotten squeezed — because revenues are down so squarely — is that there's a huge new raft of regulations and requirements,” says Marc Lackritz, president of the Securities Industry Association, the financial services industry's trade association. “The problem is trying to manage in this new environment at a time when you've had to cut expenses.”

The members of Registered Rep.'s second annual “Ten to Watch” list are among those saddled with having to manage in this tough environment. What makes this group different is that each member has proven influential enough to play some role in creating the industry's environment for the year to come. They hail from a variety of places — wirehouses, government, the legal community — but they share a focused interest in the brokerage business.

Richard Grasso, the chairman of the New York Stock Exchange (see profile, opposite page), sits atop the most important exchange on the planet — a post he has held for eight years. For most of that time, he has been a dominant figure on the Street, pouring hundreds of millions into technology to keep the NYSE on top, recruiting listings from around the globe and, generally, propelling the institution into the 21st century. So far, however, the new century has brought a different tone to the NYSE. After 9-11 and the plunge in trading, it abandoned ambitious expansion plans. The last major open-outcry exchange, it faces growing competition from electronic bourses, and Grasso has become entangled in the corporate governance issues and has been widely criticized for not paying attention to the concerns of investors. How he handles these challenges and shapes NYSE policy in the coming years will have widespread effects on the Street.

Over at Smith Barney, CEO Sallie Krawcheck has inherited one of the biggest challenges on Wall Street. Her mission is to get the No. 2 retail brokerage back on track. Krawcheck needs to move beyond the research scandals that sapped broker morale and undermined investor confidence. And she has an ambitious program to wring more productivity out of her sales force. If she succeeds, you can be sure her business model will be copied across the business.

In the wake of the research and corporate accounting scandals — and all those bear market losses — investor power is a rising force on the Street. And one way in which that power is being exerted is in the courts. J. Pat Sadler (p. 44) heads an association of lawyers who represent investors in suits against brokers and other securities professionals. The volume of securities-related suits is expected to reach a fever pitch sometime later this year. How Sadler and his colleagues fare will definitely affect brokers across the industry.

For the rest of our choices, please turn the page.

How will these folks fare? Check back next year. Meantime, in the interest of full disclosure, here is an update on the Ten Who Matter from last August.

Last year's executives included Charles Schwab, Citigroup's Sandy Weill and Merrill head Stan O'Neal. On the government side, we chose Harvey Pitt (well, mostly because you've got to include the head of the SEC on such a list) and New York Attorney General Eliot Spitzer. From the asset manager ranks, we picked Fidelity's Abigail Johnson and Bill Nutt, head of Affiliated Managers. We also picked Don Phillips, who is the face of mutual fund research company Morningstar. Our best pick? Probably Peter Cieszko, of Citigroup Asset Management, who helped put the multi-discipline account on the map. Our biggest dud? Bruno Cohen, CNBC's news director, who was forced out just a couple days after our magazine came out. Whoops.
David A. Gaffen


What the 56 year-old New York Stock Exchange chairman has done with the NYSE in terms of upgrading technology is quite impressive. A seat on the exchange still goes for $1.8 million; the exchange is increasing its volume of electronic sales as well. At other times, he appears to be presiding over an eternally tied baseball game, frozen in space. “Clearly, he's driven it from an operational standpoint as well as anyone could hope to have done,” said one executive who asked not to be identified. “But talk about a ham-handed performance in other areas — it's unbelievable.”

Since becoming chair of the NYSE in June 1995, Grasso has presided over one of the greatest bull runs in the exchange's history, subsequently followed by a deep, three-year bear market marked by ongoing questions about whether ethics and investor advocacy were completely ignored by the Exchange's heads.

“The NYSE has been a little bit behind the curve, especially within corporate governance,” says Rachel Barnard, analyst at Morningstar. Citing some of the ethical blunders Grasso has made in the last year, such as the nomination of outgoing Citigroup CEO Sandy Weill to the NYSE board as a public investor advocate, she adds, “They should have been the leader of this, and they weren't.”

But in the last month, the NYSE has begun a slow, aircraft-carrier-style turn in the right direction. For starters, Grasso resigned as a member of Home Depot's board of directors, arguably a position he should never have held, according to corporate governance experts. “It took the board some time to figure out that they didn't live up to those standards themselves,” says Paul Hodgson, senior research associate at the Corporate Library, an independent firm focusing on corporate governance based in Portland, Maine.

In early June, after being pilloried for not paying attention to corporate governance issues, the NYSE's board adopted a set of recommendations from the NYSE's committee on governance to prohibit members of the securities industry from serving on the NYSE board as public representatives, and for NYSE directors from serving on the boards of other companies. It also agreed to disclose Grasso's earnings ($10 million per annum) and the earnings of other board directors — and hopefully more, says Hodgson.

Among those problems, the ill-fated nomination of Weill was the least of them. The NYSE has been embroiled in ongoing investigations by the SEC into the activities of the Big Board's specialists, the market makers that live off balancing out the pennies and nickels in between the buyer and seller of trades. “That's part of their overall responsibility for being a policeman of the market,” says Barnard. “The NYSE reacted to that instead of coming out front and figuring out what they needed to be doing.”

There's some evidence, again, that the NYSE is starting to get it (or, it's being pulled along by an increasingly vocal SEC under William Donaldson). The Exchange recently announced a joint $450,000 fine of specialist Spear, Leeds & Kellogg for manipulating the prices of listed stocks. While the NYSE touts its trade execution as best in the world, there's no doubt that the advent of decimalization and electronic trading networks has more people feeling that the NYSE's open outcry system is antiquated.

Some say Grasso and the NYSE have been unfairly portrayed. “The board and Dick were out front early on requiring that any firms that listed had to have certain minimum corporate governance, a lot of which preceded Sarbanes-Oxley,” says Securities Industry Association president Marc Lackritz, who meets with Grasso a few times a year. “You still have companies all over the world coming to the U.S. to raise capital, and many of them get listed on the NYSE. We've had a bad couple of years, and yet recently volumes are going back up.”

Several brokerage executives over the last several months have remarked that a stronger market would assuage investors' concerns. But is that chicken-and-egg semantics? Grasso's responsibility is to ensure that the latter is taken care by something other than the former. The integrity of the financial system, including self-regulatory bodies such as the NYSE, depends on it — or the recent rally will be a short-lived one.

WILLIAM ATWELL (Executive Vice President, Client Sales & Service and Schwab Bank)

At last, Charles Schwab & Co. has received a charter from the Federal Reserve to start Charles Schwab Bank. It's an important endeavor — the offering of home mortgages, checking and other services — to help diversify its revenue stream and to help cushion the blows of bear markets, which have had a devastating effect upon Schwab over the last three years. It also completes Schwab's transition from so-called discount broker to a full service financial advisory firm, a la Merrill Lynch.

William Atwell, who worked most recently at CIGNA but spent 23 years in many executive capacities at Citibank, is responsible for developing the Charles Schwab Bank, as well as for overseeing Schwab's advisor program. The bank is important, since, despite Schwab's recent murmuring about becoming less tied to its stock trading clientele, the retail investor who trades online continues to rule the coop there.

“Yes, Schwab has been trying to move upstream to high-net-worth, but retail is still the life blood,” says Kelly Lee Tang, analyst with Sanford C. Bernstein. Indeed, 58 percent of revenues came from the retail arm in 2002. The idea going forward is to sell even more services to its individual clients. Atwell's challenge will be balancing the retail meal ticket while getting investors to cough up more in fees. And the hope is that Schwab would get more of its clients' “wallet share.” Indeed, the goal is to gain $3.5 billion in assets in the bank's first three years.

Atwell is an unusual executive choice for Schwab — he only joined the company in 2000, succeeding John Phillip Coghlan, a long-time Schwab exec who held the post for a couple of years.

Observers wonder if Atwell will finally be the one head of the retail division to stand up to founder Charles Schwab and CEO David Pottruck. “That job has a very limited life expectancy,” says Ward Harris, president of the financial services consultancy McHenry Consultants in Berkeley, Calif. “At the end of the day, retail is the crown jewel of that organization, and anyone who is going to run that shop is a tenuous position.”

Coghlan, who was well respected when he headed up the institutional side of the business, lasted less than a year on retail. His predecessor, Steven Scheid, made it to two years.

All eyes are on Atwell as he steps up to the helm of Schwab's key retail unit. With a little luck, perhaps he can stay a while.
Ilana Polyak

ROBERT BAGBY (Chairman and CEO, A.G. Edwards

The industry's eighth largest brokerage house by number of registered reps has been the source of speculation for years, most of it revolving around its future: Does the St. Louis-based brokerage aspire to something greater — or is it satisfied with its second-tier status and the prospect of being takeover bait?

Robert Bagby, a lifetime A.G. Edwards soldier appointed chairman and CEO in March 2001, is doing what he can to provide the answers, and the company's reps hear him.

“In the past, we've wondered what's going to happen, or where we're going to end up,” says one A.G. Edwards broker. “But there's been a real push in the last year to show everyone that we're making a big push, and we're not going anywhere.”

The “big push” this broker refers to is part of Bagby's effort to preserve the company's independence by setting its sights higher … and focusing on rallying the troops. In the last six months, he has presided over the opening of a brand-new training facility (A.G. Edwards University) and hired a top-notch marketing firm (Carmichael Lynch) to raise the company's profile through a multi-million-dollar nationwide advertising campaign — the first in A.G. Edwards' 116-year history.

Most important, he has given his formerly uncertain troops a definitive direction and assurances that the firm is staying independent — “for good.”

The communication appears to be paying off. The firm's surprising second-quarter results, as well as its ability to weather the torment that was 2002, impress analysts. Nevertheless, Bagby is definitely taking a risk: The firm is pouring a lot of money into the ad campaign, which casts it as “the BMW of brokerage firms.” Does it have what it takes to live up to that image? Bagby is betting it does, and the coming year will tell whether his wager was a smart one.
Will Leitch

JESSICA BIBLIOWICZ (President and CEO, National Financial Partners)

Under the leadership of CEO Jessica Bibliowicz, National Financial Partners has become one of the country's fastest-growing networks of independent registered investment advisors. Since its founding in 1998, NFP has been building a nationwide chain of independent financial services firms that cater to the needs of the affluent. NFP's network consists of over 1,200 producers in 40 states, 124 wholly owned firms and 169 third-party distributors, according to its prospectus. Since 1999, its revenue has nearly tripled.

NFP has filed with the SEC to raise around $250 million in an initial public offering, perhaps as soon as September. The cash infusion would allow the 43 year-old Bibliowicz and her team to pay off debt, and, more important, provide the capital to acquire more financial advisories. With a publicly traded security, Bibliowicz should be able to sweeten the deals for advisors, too.

In building a national distribution chain set to go public, “She's done what few people thought she could do,” says Russ Alan Prince, an industry consultant. “If she can pull this off, an enormous amount of other people will try to duplicate this [model].”

With NFP, an independent advisor may get operational support and access to the company's impressive roster of financial products important to attracting the high-net-worth crowd. But Bibliowicz, daughter of the legendary Wall Street empire builder Sandy Weill, might be the company's most important selling point.

“She was the deciding factor” in the decision to be acquired in 1999, says Patrick Monaghan, president of executive compensation firm Monaghan, Tilghman and Hoyle. “She has a truly charismatic personality, a lot of energy and you sense that she has a great deal of experience.”

WILLIAM H. Donaldson (Chairman, Securities and Exchange Commission)

William H. Donaldson took the reins of the U.S. Securities and Exchange Commission in the midst of one of the most tumultuous periods in the history of the securities industry. Since his appointment on Feb. 18, Donaldson, 72, has set out to demonstrate, among other things, that he is ##em##not##/em## his predecessor, Harvey L. Pitt, who was lambasted for his slow response to the research and corporate accounting scandals and was, in effect, hounded from office.

Although on paper, Donaldson might have struck some as a reformist pussycat (he's a co-founder of Donaldson, Lufkin & Jenrette and a former CEO of the NYSE), he has shown that the SEC — and not just New York Attorney General Eliot Spitzer — is on the case. Despite the $1.4 billion research-scandal settlement between Spitzer and the brokerage industry, Donaldson has continued to pursue the wirehouses by ordering an investigation into why the top executives failed to put a stop to the abuses.

Further, he has made investigations into mutual-fund disclosure practices a top priority. Specifically, the SEC is examining how compensation deals between mutual fund companies and brokers affect the fees paid by consumers — and how those fees get disclosed. Also on his agenda is an effort to bring the largely unregulated hedge fund industry under SEC scrutiny and plans for giving shareholders more power to choose corporate board members.

Oh, and as for that pesky Eliot Spitzer: Donaldson supports a congressional bill that would keep state regulators, such as Spitzer, from prosecuting cases that would have an impact on how the securities firms operate nationally.

It all adds up to a busy time ahead for the SEC — and for the brokerage industry.


Sen. Charles Grassley (R-Iowa) is credited with an assist for his role in passing President Bush's massive, market pleasing tax cut in May. But Grassley's biggest legislative contribution to the lives of investment advisors is yet to come.

Grassley, chair of the Senate Finance Committee, will have much to say about the Pension Security Act (HR.1000), which would pave the way for investment advisors to offer personalized investment guidance to 401(k) participants. The measure passed the House in May. So far, the 69-year-old senator is on record as viewing the change as “controversial.”

If passed, the act would be one of the biggest changes to the Employee Retirement Investment Securities Act since its 1974 passage, adding registered reps to ERISA's list of “prudent experts.” If Grassley and the Senate follow the House's lead, companies will receive “safe harbor” and be free to hire registered reps and advisors to give personalized advice — including which individual securities to buy — to their employees, so long as fees and any potential conflicts of interest are disclosed.

ERISA paved the way for the defined contribution plans and spawned the 401(k) market. In the name of cost cutting, companies began moving their staffs to the plans, which left investment decisions to the employees rather than to pension fund managers. Problem is, many employees know little about financial planning or even about picking mutual funds. If passed, this bill would let financial experts manage the employee-sponsored plans the way they do other investments. The opportunity here is huge: 401(k) plans alone accounted for $1.5 trillion in assets in 2002, according to the Investment Company Institute.

“Everybody is in agreement that plan participants need more personal advice,” says Donald Trone, president of the Pittsburgh-based Foundation for Fiduciary Studies. Such legislation would be an incredible business boon for financial services companies, says Trone. But there might be some sticking points too. The legislation would demand that all financial experts use a fiduciary standard of care. Registered investment advisers now operate under such a guideline, but brokers don't.


Smith Barney will be one of the most watched firms on Wall Street over the next 12 months. The firm has displayed of late a strange sort of duality, managing to increase client assets and turn solid profits while proving the poster child for Wall Street-gone-bad: With Jack Grubman and the conflict-of-interest research imbroglio and accusations that Smith Barney doled out hot IPO shares to CEOs to win investment-banking business, the reputation even of Citigroup CEO Sandy Weill has been damaged.

Enter Sallie Krawcheck, 38, hired last year from her position of CEO at Sanford C. Bernstein. All eyes are on Krawcheck and her cohorts as they try to reinvent Smith Barney. “She's open to ideas and willing to test things,” says Christopher Poch, head of Smith Barney's wealth management group. “She's looking at the world through a different set of goggles.”

As Registered Rep. detailed in a June cover story, Krawcheck's goals are lofty: an average of $1 million in annual production from each rep and a restructuring of the research department to ensure more valuable recommendations for clients. So far, the research department has been removed from under the capital markets umbrella (wherein lies the investment banking unit); Krawcheck also recently jettisoned several prominent research analysts.

Krawcheck's moves have raised the hackles of the sales force. They complain that top analysts are being moved into management, where some believe they will be less effective, and that major fissures are appearing in the firm's coverage due to analyst attrition. “We've got a lot of gaps in our coverage now,” says one broker.

Still, many at Smith Barney believe the firm is now positioning itself well for the future, not the least because of its client base. “When I was brought in, this was about research,” says Krawcheck, “but what Sandy [Weill] and I also talked about was that this is a historic opportunity in the private client group at the point of maximum pain.”

JOHN MONTGOMERY (President, Bridgeway Funds)

John Montgomery made $282,701 in 2001 as the manager of several mutual funds for Bridgeway Funds, a Houston-based $800 million-asset mutual fund company. More interesting than how little he earned relative to his peers is that the figure is publicly available. The SEC doesn't require such disclosure, but “A couple of years ago, a shareholder asked me why we didn't reveal how much the fund managers make, and I couldn't think of a good reason,” says the 47-year-old Montgomery, who also is president of Bridgeway.

Pay opacity is the latest battleground in mutual fund reform, and Montgomery is not alone in his opinions about it. Russel Kinnel, director of fund analysis at Morningstar, and Roy Weitz, publisher of the online newsletter in Tarzana, Calif., are also beating the gong.

They charge that incentives for fund managers frequently are not aligned with the interests of shareholders. Making compensation information public — as it is for executives of publicly traded companies — would help investors decide whether a fund is worthy of their investment dollars.

Such opinions are finding receptive ears. The SEC, for instance, says it will look at manager compensation issues in the coming months. At the very least, the commission would like companies to reveal to shareholders how incentives are structured. Along with Vanguard founder and luminary John Bogle, Montgomery was asked to testify before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises in March. Montgomery, one of the top fund managers in his style category, waxed indignant about many mutual fund practices, including the secrecy surrounding manager pay.

A Massachusetts Institute of Technology-trained engineer with a Harvard MBA, Montgomery may be the ideal industry crusader. He entered the field of fund management just nine years ago, after serving as a manager in the Houston Transit system and applying self-proclaimed “quaint” techniques to his own investments. Montgomery directs his firm to give away half of its pre-tax profits to charity and to purchase no tobacco stocks; his highest paid employee makes no more than seven times that of the lowest paid employee; and in years when its funds lag their benchmarks, Bridgeway cuts its management fees. That's called walking the talk.

MICHAEL RICE (President, Wachovia Securities, private client group)

The marriage between Prudential Securities and Wachovia Securities is now complete, and the new entity, called Wachovia Securities, stands as the third-largest brokerage in the country. The immediate benefit of combining the firms will be to reap $350 million in annual pretax savings.

At the helm of the private client group — with 7,000 brokers and $3.5 billion in annual revenue — stands one Michael Rice, the 37-year-old son of a New York City homicide detective. Rice, more than any other Pru exec, can claim to be father to this deal. His hope, he says, is to create a major retail force that retains the “independent” feel of a regional firm.

Rice cannot rest on his big idea. Now, it's time to show results. “He's young, and that creates resentment,” says one observer. “He's got his cheerleaders, but he's also got people taking shots at his back.” He's also from New York and plays up his streets-smart persona. Wachovia, based in Richmond, Va., has a decidedly Southern culture.

In addition to addressing cultural issues, Rice has to make sure the mechanics of the merger work smoothly. The company is in the midst of integrating two firms with a combined $500 billion in investor assets, 750 branches in 355 cities. At the same time, he has to keep his sales troops happy. Even before the deal closed, there were some significant defections, and brokers grumbled about compensation issues.

Rice knows firsthand how important it is to stanch the flow. During the late 1990s, the broker attrition rate was in the high double digits. In 2000, Rice successfully turned the tide with a deferred compensation plan called MasterShare, which gave reps a financial incentive to stay. “It was brilliant,” says one Pru executive. “In a lot of ways, we salvaged the firm with it.”

Although he plays it down, Rice may now be facing a similar problem at Wachovia. But the well-placed Pru executive thinks he's up to the task. “He's a real leader — and I've seen them all: Gorman, George Ball and Price.”
David A. Geracioti

J.PAT SADLER (president, Public Investors Arbitration Bar Association)

With investment “malpractice” lawsuits well on their way to becoming the slip-and-falls of the new millennium, J. Pat Sadler is positioned to play king of the new-wave ambulance chasers. Except for one thing: He declines to accept the crown.

Sadler, 53, is president of the non-profit Public Investors Arbitration Bar Association (PIABA), a 13 year-old organization dedicated to “protecting public investors from abuses in the arbitration process.” PIABA's member lawyers have seen a threefold increase this year in inquiries about investment-related suits. But fewer than 20 percent of these turn into actual PIABA cases, Sadler says, offering it as proof of his organization's distance from the “Have-you-lost-money-in-the-stock-market?” crowd. But not everyone buys into the Sadler version of PIABA's mission.

“PIABA lawyers are the quintessential ambulance chasers,” says Gerry Burchard, president of Round Hill Securities in Alamo, Calif. Based on his personal experience with PIABA lawyers and the clients they represent, Burchard finds it “comical” that anyone would suggest otherwise.

But Sadler, who also is a partner in the Atlanta-based securities law firm Sadler & Hovdesven, believes strongly in what he preaches — that PIABA suits make the retail investment business better for everyone involved. But make no mistake: He is at the forefront of a movement that encourages wronged investors to seek redress, and that movement promises to be a thorn in the side of the brokerage industry for years to come.

About 7,700 securities mismanagement cases came before the NASD last year. Sadler says he expects at least 10,000 this year, followed by “double-digit increases in each of the next two years.”

That said, brokerage firms have more to fear from PIABA than do the nation's 600,000 individual reps. “In the vast majority of cases, we do not name the broker,” Sadler says. “We've gone from the era of the rogue broker to the era of the rogue brokerage firm.”

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