It was Smith Barney brokers who gave Sandy Weill the idea to hire Sallie Krawcheck, former head of Sanford C. Bernstein. Brokers had suggested that the Citigroup Chairman buy the independent research firm from Alliance Capital. Instead, he wound up hiring Krawcheck to head a new business unit of Citigroup that will operate under the name Smith Barney, and include the private client group.
So the firm’s 12,500 brokers should be happy, right? They will benefit from research that’s independent of conflict and separated from the firm’s investment banking business, Krawcheck said on accepting the job.
But brokers interviewed by Registered Rep. are still skeptical. Some said they’ve been so burned by the blurring of the line between research and investment banking that it will take more than Krawcheck’s hiring to convince them–and their clients–that the Chinese wall will be secure.
"I’ll say this: It’s a good thing, but the key word here is perception," said one rep. "If you’re giving investors the perception that the research is objective and separated from investment-banking decisions, that’s one thing. But is perception reality?"
Smith Barney has been under fire for allegations that the firm used favorable research to garner lucrative investment banking business. It also has been accused of directing large blocks of IPO shares to telecom execs that pushed banking business their way.
Ultimately, Krawcheck expects the impact of the new structure–and her presence–to change that perception, even if the initial effect is subtle. "Having unbiased high-quality research is going to pay off day by day and week by week," she said.
"My only concern is that she’s never been a broker," says another rep. "But she has a real good reputation. What happened happened–what you can change is what you do moving forward."
One thing that should ensure a greater independence is that that the newly formed unit of Smith Barney will be a separate profit center, with costs covered solely by revenue from the unit, which includes research and the private client group. "Research was run as a cost center," she said. "That’s over."
Krawcheck said that analysts were not likely to be paid as much as they had been in the past, but added little else about compensation. Smith Barney’s new structure stands in contrast to that of Merrill Lynch, which, following a $100 million fine by the New York State Attorney General’s office, has not completely severed ties between research and banking, and has been more vague in exactly how analysts would be compensated.
One broker said the enhanced focus on financial planning means that the research of individual stocks matters less now anyway. "The emphasis isn’t on stock trading anymore, which minimizes the need for quick research," said one rep. "The emphasis for us now is on financial planning, long term investing, a balanced model and allocation."
But Krawcheck, while mindful of the fact that Smith Barney’s private client group has enhanced its focus on managed money and "packaged products," as she put it, said many brokers are still picking stocks for clients, and therefore, the research needed to be accountable to that.