When she was brought in to run Smith Barney back in 2002, Sallie Krawcheck was heralded as a savior — the single best person possible to buff Smith Barney's tarnished reputation. And sure enough, she met the challenge. By the time she was pulled off the job and appointed to be CFO of parent Citigroup in late 2004, Krawcheck was credited with helping raise rep productivity and morale. Now she's back. As soon as a CFO is found to replace her, she'll take charge of Citigroup's Global Wealth Management division, which includes Smith Barney, the equity research division and the private bank, succeeding Todd Thomson, who in January left the Global Wealth Management division after only two years to “pursue other interests,” as the firm put it.

At first glance, this second coming of Sallie probably looks like a cakewalk compared to her first adventure. There are no ethical scandals plaguing the company, as there were back in 2002. And, Smith Barney — which accounts for 80 percent of global wealth management's revenues — posted another strong year in 2006. Indeed, pretax profits were up 15 percent, to $1 billion from $871 million in 2005; revenues climbed to $8.16 billion, up 20 percent from 2005. And the 13,000-plus advisors that move the needle are a talented bunch, ranking behind only Merrill Lynch in assets and production.

But, make no mistake: Smith Barney is not the ass-kicking brokerage it appears to be on paper. This is not to impugn the efforts of Charlie Johnston, CEO of the global private client group and a former broker; by all accounts, Johnston and his executive team are highly regarded by the rank and file. But, like any organization, there are occasional hurdles. And beneath Smith Barney's strong earnings are some worrisome numbers: A meager $9 billion in net new assets were gathered in 2006 — that's down from $28 billion in 2005. The pretax profit margin also slumped to 18 percent last year, down from 21 percent in 2005. On top of that, rank-and-file brokers and branch managers are grousing about what they describe as a lawyerly corporate culture (even by Wall Street standards) under Citigroup CEO Charles Prince; a new compensation arrangement that some describe as a cut masquerading as a raise; and a stagnant stock price that has done little in five years to help increase the value of reps' deferred compensation. As a result, many veteran Smith Barney advisors are said to be headed to or looking for the exit, recruiters say.

On top of all that, the Global Wealth Management division has been run for two years by Thomson, whose indiscretions with corporate coffers only scratch the surface when it comes to his arrogance, according to reps. The list of gaffs committed by Thomson while head of the global retail unit is long — from an overly opulent office (the “Todd Mahal”) to an imperial and aloof leadership style. (He preferred to mingle with high-end clients at corporate events, snubbing the financial advisors who served them, critics charge.) Advisors' stories of his largess, like Thomson's alleged misuse of the corporate jet, were widely reported on in the papers. In fact, total operating expenses in Global Wealth Management for 2006 increased 20 percent over 2005, shockingly outpacing the unit's full-year revenue growth, which was 17 percent.

Then there are the reported communication and cooperation breakdowns between the retail bank, Smith Barney reps and the private bank. Prince has been trying to break these “silos” down and plans to begin integrating all U.S. consumer businesses to create “one Citi” over the next five years. Analysts doubt it, but talk is rampant among reps that one day — perhaps after it's been prettied up — Smith Barney, with its massive distribution capability, could be sold off, since it represents only 9 percent of its parent's top line.

HEADWINDS

It's all taking its toll on morale, say reps. The firm's attrition rate, which recruiters say is typically lower than the rest of the Street, increased last year. Johnston, who spoke to Registered Rep. in the fall, acknowledges the firm lost 230 more reps in 2006 than 2005, although he says half of them were sub-$250,000 producers. In fact, Johnston calls persistent rumors of significant defections from Smith Barney “a smokescreen.” He says it's a tactic by rival firms to take attention away from what the firm does well. “They can't knock us on our platform, or on our profitability, or on the quality of our business and our FAs. So there's this talk about attrition, and about bureaucracy, and how clumsy we are,” he says.

Indeed, recruiters say Smith Barney still has one of the best, if not the best, platform of products and services in the industry. “There's still very much a ‘wow factor’ at Smith Barney,” says Pete Deragon, founder of Deragon Executive Search, who says the firm's technology, for example, is quite impressive. And Smith Barney reps are still second only to Merrill Lynch advisors in annual production per rep ($667,000 as of 2006, according to Prudential Equity Group analyst Michael Mayo) and assets per rep ($105 million). Meanwhile, in the increasingly competitive metric of “client assets in fee-based accounts” — excluding net interest and other fees — Johnston says the firm is at 55 percent, which leads the industry.

Still, despite Johnston's insistence to the contrary, recruiters and Smith Barney reps say more top veterans with 20-plus years at the firm seem to be talking about leaving than in the recent past (in fairness, a natural result of an aging broker force). Sure, big producers come and go at all firms, especially in the current hypercompetitive environment, but one recent defection was particularly symbolic, say some reps. Teddy Dimon, 75, father to James Dimon, the well-liked former CEO of Smith Barney and current CEO of JP Morgan Chase, left the firm in August to join Merrill Lynch. He had worked for Sandy Weill — who retired four months earlier — for more than 30 years. “That's Sandy's lifelong buddy, they're in all these pictures together,” says one Smith Barney veteran. “Sure, he's virtually retired, but he's a Smith Barney lifer — and he left. That makes you scratch your head.” The elder Dimon's clients included his son James and none other than Citigroup CEO, Charles Prince.

Recruiter Rick Peterson of Rick Peterson & Associates says the firm, despite its many positives, is currently suffering from a competitive disadvantage. “They have financial incentives pinching them at both ends with the changes to their comp and the 150 to 200 percent deals from firms like Morgan Stanley and UBS,” he says. Several reps mentioned that longevity bonuses are due in March, at which time some will weigh their options.

Changes to their compensation will also be a consideration. As a result of its $98 million nationwide settlement with reps over the overtime pay lawsuit, the firm has made many changes to the way it pays reps. For one, Smith Barney will take on many of the reps' present business costs now deemed to be illegal, such as: sales assistant salaries and bonuses (up to a cap), trading errors, registration fees, communication bills and travel-and-entertainment expenses. Together with what the firm says will be an improved deferred-compensation plan, Smith Barney management says the new plan is worth a cumulative $166 million to its reps. Of course, there is a trade off: All reps will get a flat 20 percent payout on the first $5,000 in monthly gross production. Top producers will have their payout cut by 1 percent, $750,000 to $1 million producers will lose a quarter point and $300,000 to $400,000 producers will get a quarter point increase. The long-awaited final version of the plan, released to reps in mid-February, is an improvement on the original December proposal, say reps. Among the major improvements: Expense accounts were doubled from original estimates, and the maximum cap on the firm-provided subsidy for staff salary, plus two-year transition costs, for reps was bumped up to $80,000. Additionally, the final version allows reps to pay staff using expense account funds, a beneficial twist for large producers that pay staff superior salaries and would have had to dip into their commissions more to keep doing so. “It's definitely an improvement,” say one rep.

Most firms have been forced to cut costs over the years as profitable business lines have been commoditized and profit margins squeezed. But Smith Barney reps say the legal and compliance blanket that Prince laid over the firm when he arrived in 2003 to clean up the firm's image is as oppressive as any resource cut and has created a Big Brother-like atmosphere. One producing Legg manager says he recently retired earlier than he planned after a 40-plus year career because, after little more than one year under the Smith Barney brand, he was overwhelmed by compliance tasks; clients were in danger of coming in second. “The amount of stuff we have to do here day-to-day to prove we're not guilty of something is unbelievable,” he says. Sales assistants must get brokers to sign off on tickets for tasks like moving money from one money market to another. “And we have to time stamp it too — a money market, that can't even be market timed,” he says. He recounts the time when a wealthy business owner client withdrew $1 million from his account only to put it back a week later, for which, he says, he got chewed out. “Compliance wanted to know where the money came from — the money he'd just withdrawn — and how could I be sure, and what if he was cooking his books?” he says. “I told them, ‘This is Bill, who I've known for 35 years,’ not some Al Qaeda sympathizer.”

ONE CITI TO RULE THEM ALL

Brokers say the communication between the retail bank, the private bank, Smith Barney and the capital markets group is frustratingly poor. And in some businesses, they're competing. “I had a client that I offered a residential loan to that responded by telling me the private bank had given him a better offer,” he says. “Now how does that make me look? Ridiculous.” On top of that, dealing with in-house lenders isn't convenient. “I have one guy that I go to for residential loans, another for commercial loans and another for business loans. It's absurd,” he says.

Indeed, one of Prince's stated initiatives is to improve the communication and teamwork among the U.S. consumer units. It's all part of the five-year plan to create one Citigroup, and it includes integrating the technology of the retail banks and Smith Barney and leveraging the two organizations off one another. But analysts think Citi has to do better: “That's probably three-plus years later than many of its major competitors. At a time when others are tweaking and improving their business models, Citi is playing catch up,” wrote Prudential Equity Group's Mayo in a research note after a Prince speech on Jan. 31.

The plan means many Smith Barney reps will one day be working in Citibank branches, under the Smith Barney name. One rep has reservations about what he refers to as being “Citi-fied.” “I was a Prudential Securities guy and I remember when Prudential started putting its name on everything — I came to Smith Barney to work for a brokerage, not a bank,” he says. That said, Smith Barney reps say cross-selling opportunities are still too few and that they'd like to see bank reps given incentives for referring clients to Smith Barney. Testing of the integration will begin on May 1 in Boston and Philadelphia, two areas where Prince feels Smith Barney's already strong client relationships can be leveraged to create day-to-day banking relationships for Citigroup (checking, savings, etc.).

Add it all up and Krawcheck would appear to have 13,000-plus nerves to calm when she arrives. (A Smith Barney spokesman said Krawcheck would not comment for this story, because she hasn't officially started as CEO of the Global Wealth Management division yet.) Fortunately, she'll be leading a senior management team that, for the most part, has the respect of reps. Johnston and other senior managers like Russ Morton, director of the private client branch system, and Bob Matthews, director of wealth management, get positive ratings from most brokers and outsiders. And while scarcely a rep or manager recalls a visit from Thomson to a branch, Johnston — a former broker and 23-year veteran of Smith Barney — is seen as a man of the people like his predecessor, Tom Matthews, who retired in 2004 when Thomson took over for Krawcheck. Despite his ascendancy up the ladder, Johnston still makes a point to travel to the branches to have town hall-style meetings with reps. He traveled to nearly 100 in 2006, he says. Frank Campanale, former CEO of Smith Barney Consulting Group, who left the firm in 2003, says managers that want to improve things need only consult their bosses — the reps. “Senior managers, if they're good, last 36 months,” says Campanale. The bad ones last 18, so the guys who know what's wrong, what works, what doesn't, are the reps who've been there for 20, 30, 40 years. As a manager, that's who you listen to.”

Brokers who remember Krawcheck's previous, albeit brief, tenure say she was on the right track. “Bringing Sallie into the firm was a stroke of genius in 2002,” says Campanale, who says she was liked. But he's holding off on calling her return to the retail side a slam-dunk. “From the start she's an improvement from Thomson,” Campanale says, “but it remains to be seen what she can do.”

REVENUE CONTRIBUTIONS BY BUSINESS AT CITIGROUP
56% consumer banking
30% corporate investment banking
9% private client
2% private banking
3% proprietary investments
1% corporate and other
Source: Morgan Stanley analyst Betsy Grasek, research report

BROKERAGE STOCK PRICE INCREASES FROM JAN.1ST 2002 TO DECEMBER 31ST, 2006

Stifel Financial- 409%

Bear Stearns- 193%

Jefferies Group- 170%

Lehman Brothers- 148%

UBS- 141%

Goldman Sachs- 130%

Raymond James- 107%

Lehman Brothers- 148%

Merrill Lynch- 76%

AG Edwards- 59%

Morgan Stanley- 50%

Citigroup- 35%

Oppenheimer- 28%

Source: Yahoo finance historical prices

THE MANAGEMENT SHUFFLE SINCE 1996

Jamie Dimon (1996-1997, fired by CEO Weill — who he helped build Citigroup; leaves to rebuild competitor Bank One)

Michael Carpenter (1998-2000, ousted amid research and investment-banking investigations)

Jay Mandelbaum (2000-2002, resigns, leaves to join Dimon, then CEO of Bank One)

Sallie Krawcheck (2002-2004, brought in from Bernstein as “Mrs. Clean,” moved to CFO of Citigroup)

Todd Thomson (2004-2006, was CFO of Citigroup, swaps jobs with Krawcheck, who indicated the moves were part of Prince's desire to give managers broader experience.)

Sallie Krawcheck (2007-?) she's passionate — she choked back tears in her acceptance speech — and she's off to a good start, she's credited with improving the new comp plan, but she has to wait until Prince finds a new CFO before officially returning to her old beat.