Sallie Krawcheck, CEO of Smith Barney, is unique among Wall Street executives. It is not her age (38), her gender or her confidence that sets her apart. It’s not even that she arrived at this position precisely because she was a high-profile critic of Wall Street research long before it turned into a $1.4 billion black eye.

No, what’s really surprising is that she does not drink coffee. For someone who has logged a half-million miles in the seven months since Citigroup Chairman Sanford Weill recruited her to restore the credibility of Smith Barney and lead the business through its toughest slump in a generation, doing this sans caffeine is nothing short of amazing.

On the other hand, the 12,500 men and women in Smith Barney’s broker sales force might want to think about going long Starbucks. Krawcheck has a plan in mind that will keep them very busy.

It’s simple: Krawcheck wants Smith Barney advisors to more than double their average annual production to $1 million. "A million," she says, pausing to let the number sink in. "March to a million," she says, mantra-like, although she doesn’t give a time frame to reach this goal.

That’s where Krawcheck and her team plan to lead Smith Barney reps. It’s not only a big jump for these advisors, who are already among the most productive in the industry, it’s a highly ambitious target at a time when average annual production across the business hovers around $300,000 and when many books are shrinking. Indeed, last year, Smith Barney’s average gross production per rep fell to $386,000–down from $510,000 in 2000. It’s also audacious to sketch out such a big goal for a company whose brokers are still reeling from the aftermath of the Wall Street research scandals, in which Salomon Smith Barney’s Jack Grubman became the symbol of client-be-damned, investment bank-driven research.

On the other hand, Krawcheck says, it is Smith Barney that is best positioned to hit such a target, because of its early start in catering to high-net-worth clients.

"We talk about a march to a million, which is something new for us," Krawcheck says, sitting in the area of her office she calls ‘the living room,’ that is, away from her desk. "But the important thing is that we have phenomenal relationships with our clients, and to get there, it’s about leveraging those relationships."

At the same time, this aggressive goal is also about defense: The competition for high-net-worth clients has gotten more intense. Last year, for example, Merrill Lynch surpassed Smith Barney in managed account assets, a form of investing that skews toward wealthy clients. Smith Barney has about 25 percent of the managed money business, including discretionary portfolios managed by Smith Barney brokers. But Merrill finished 2002 with $176 billion in managed accounts vs. $165 billion for Smith Barney, according to Cerulli Associates.

Meanwhile, high-net-worth clients are consolidating their accounts with advisors who can provide a complete range of services. That does not necessarily mean they will bring more assets to Smith Barney or other wirehouses: According to NFO Group, a Greenwich, Conn.-based consultancy, 23 percent of clients who consolidated relationships in 2002 moved accounts to independent brokers, up from 14 percent in 2000.

"We’re going to see more relationship consolidation," says Krawcheck. And, she believes, the huge resources of the Citigroup empire (from Travelers Insurance to mortgages to Smith Barney’s own Consulting Group) can help Smith Barney advisors be the beneficiaries of consolidation, not the victims–if the reps become more adept at selling a multitude of products. "What we hear from clients is, ‘I want to consolidate our assets,’ and having a partial product offering doesn’t work," says Krawcheck.

Finally, the new regime at Smith Barney is also about making sure the sales team really knows how to sell stocks. "There is going to be a time, six months, or two years from now, when clients are going to want to know what you think about stocks," says Tom Matthews, CEO of Smith Barney’s global private client division, Krawcheck’s right-hand man and the exec in charge of the retail branches. "That doesn’t mean you don’t do separate account research–we love that stuff–but doggone it, you better have a view on stocks."

That’s where repairing Smith Barney research’s reputation as an unbiased source of investing recommendations will be critical. Weill picked Krawcheck precisely for this reason. Krawcheck was a veteran financial-services industry analyst at Sanford C. Bernstein, a respected research boutique without investment banking ties. She’d made a name covering brokerage stocks, having once knocked Travelers’ purchase of Salomon Smith Barney.

When Weill brought Krawcheck in last October, there was plenty of skepticism about whether it was anything more than a PR play. "Well, if you can’t protect your reputation, I guess you have to buy it," sneered a broker at a rival firm. And there were doubters within Smith Barney as well. "Personally, I thought it was cosmetic," says a Smith Barney rep. "But she’s no-nonsense. She looks at the business in the way I do–research is research. The problem is building up our credibility."

That’s no easy task. Thanks to Grubman, who kept shilling for banking clients such as Winstar and WorldCom long after it was clear that they were in free-fall, Smith Barney became the symbol of tainted research. Complicating matters–and infuriating many Smith Barney reps–the company did not move against Grubman until last August, after WorldCom filed for bankruptcy.

But if Citi was guilty of allowing itself to get dirty in the bull years, it at least brought in the right cleaning service. Bernstein’s reputation was such that last summer, when Weill met with brokers at a regional meeting, they suggested that Citi buy the boutique (now owned by Alliance Capital) to rehab Smith Barney’s research reputation. Instead, Weill hired Krawcheck to run his brokerage.

Upon being hired last November, Krawcheck immediately took to the road to begin the process of moving the firm past the scandals. "When Sandy brought me in, certainly it was about research, and restoring the trust with the individual investors via the FCs," she says. "But it was also a historic opportunity in the private client group at the point of maximum pain." She would leverage the bitter emotional environment to start making the changes that she feels will put the firm ahead in years to come.

Her whistle-stop tour of Smith Barney branches (almost always with Matthews and sometimes Weill himself) took her to many regional and branch offices, where she is known for speaking candidly about the challenges of regaining investor trust, and delivering what’s become a pet routine about the way research used to work. "So if you have GE, which is an underweight stock in an overweight industry, and IBM, which is an overweight stock in an underweight industry, which do you buy?" she asks a crowd of branch managers in Atlanta, mostly rhetorically, although some cautiously give answers. "Does anybody understand this?"

The troops seem to enjoy it. "I’ve abused the privilege of having her speak here nine to 10 times in the last three months," says Russ Morton, director of the southern division.

Krawcheck says her reps are "the strongest in the industry." Indeed, for all the Sturm und Drang of 2002, Smith Barney more than held its own. It brought in $34.7 billion in net new client assets in 2002, according to its annual report. That was second only to Charles Schwab, which brought in $48 billion in new client assets in 2002. Merrill added $18 billion, UBS $13.4 billion and Morgan Stanley lost $1 billion, according to their financial reports.

There’s an opportunity to grab more assets, too. An October 2002 survey by the NFO Group found that 59 percent of the millionaires surveyed want to have one financial provider, compared with just 45 percent two years earlier. These clients also want a wider range of products and services, including retirement and estate planning, mortgages, personal lending, and insurance. To do all that, says Matthews, "We have to do better on the comprehensive advice side."

A former Marine, who served as a branch manager for 12 of his 28 years with the firm, Matthews is charged with making the firm’s strategy come to life in the field. Reps identify with Matthews and have high regard for his links to the company that had 1,800 reps when he joined. "He really sees what we’re going through," says one.

All Under the Umbrella

Matthews, who runs the day-to-day operations, is doing the blocking and tackling to move the Smith Barney reps to the $1 million mark. The plan involves placing more emphasis on the parts of the business where Smith Barney brokers have not made great penetration–and some of the very places Merrill has. The No. 1 brokerage in number of reps and assets has been very aggressive in getting its reps to sell mortgages and enhanced banking services, for example. While Smith Barney keeps pace with Merrill in stocks and bond sales, it is behind in these "expanded" categories. In 2002 Merrill had $2.11 billion in revenues in "other" financial services, including cash management and lending, compared with $652 million for Smith Barney.

Being part of Citi, of course, has its advantages, because there are so many in-house products. But there are also pitfalls. Neither customers nor reps want to be stuck with house brands when there are better products on the market. The challenge, says Matthews, is creating a structure that will enable the brokers to put products from Citi–and other firms–to use. In order to do that, "you have to have open architecture," he says.

Reps at Smith Barney generally have said that the firm does not pressure them excessively to push Citigroup products. The firm receives among the highest marks in this area among New York-based wirehouses in Registered Rep.’s annual broker report card survey. While more money drops to the bottom line if reps sell Citi-made funds and other products, financial consultants are not paid extra for making sales of in-house products. Nor is the payout grid tilted toward rewarding reps that move clients over to a fee-based business. The firm also eschews stratification of the sales force by allowing reps to maintain relationships with clients of all sizes. These approach contrast to the practices in place at Merrill Lynch, Morgan Stanley and several other firms.

That regimentation goes against the grain at Smith Barney. "If you give a rep incentive to do one thing over another, then they have a conflict of interest in providing the best advice and service for a client," says Paul Hatch, director of national sales.

"No, That’s What Banks Do"

That’s not to say that Krawcheck is sitting back and waiting for nature to take its course. On the Atlanta trip, she tells the audience of branch managers from across the southeast that she’s not satisfied with the results in areas beyond conventional brokerage. "We have three percent of our clients’ mortgages, and we’re in the teens in insurance and annuities," she says. "We should do it better."

To that end, Citi has added 90 more mortgage servicers–doubling the size of the team dedicated to helping reps, in response to requests from the field to speed up the process. In addition, it is piloting a certificate of deposit with an extended yield (about 20 to 25 basis points above the going rate). Since banks are not permitted to offer above-market rates on products such as this, Smith Barney’s eating the difference. It will likely cost the firm several million. "They say no good deed goes unpunished, and this goes in that category, but we’re going to know our clients better," Matthews says.

Still, most of the effort is centered on the reps themselves. "Nobody has the breadth of services that we do. But if the client is saying, ‘You’re not giving me the depth of product,’ that tells me the FC isn’t showing them everything they need to know," Matthews says. "Does that mean we go around our financial consultants and market to our clients? No, that’s what banks do."

What they have been doing to get the word out is expand the resources of the Wealth Management Group, run by former broker Christopher Poch, which acts as a conduit between brokers and the capital markets group, the private equity group or the fixed income group. Further, the company continues to increase its investment in financial planning. It currently operates nine planning centers in major metropolitan areas, which allow reps to avail themselves of experts who can handle sophisticated cash flow analysis and asset allocations. All centers are headed by a trusts and estates attorney and have planning analysts on staff as well. The firm expects to have 11 of these centers by the end of the year.

Another way Krawcheck and Matthews hope to expand client relationships is to educate reps better. The firm has expanded online learning, with more than 400 courses available. Reps have partaken of the courses 44,000 times in the last year. And for top brokers–those with $150 million or more in personal client (not corporate) assets under management–the company has created a new designation: Private Wealth Manager. The designation test requires Series 7-style commitment in order to pass, says Poch, but gives brokers extensive knowledge of wealth management topics such as lending, alternative investments and other sophisticated topics.

Oh, Yeah. The Research Thing.

For all the talk of strategic planning and the rollout of tactics for helping reps to sell a full range of products, Krawcheck and Matthews still wind up dealing with the aftermath of the research scandals. "We messed up," Krawcheck tells the Atlanta gathering. "We didn’t provide the quality of advice and research that we should have."

At the same time, she does not condemn the pre-Krawcheck research regime. And she doesn’t buy the argument that any research that comes from a firm with a big investment bank is automatically corrupt. "I hate that," she says, adding that the percentage of "Sell" ratings at the independent Bernstein was never particularly high, either. "Wall Street is trying to change things so it looks good in the newspaper by having the same number of buys and sells," she tells the Atlanta crowd. "But we can’t be nervous about being written up and being wrong."

Indeed, it is actual analytical rigor that she says will help Smith Barney brokers serve the high-net-worth clients who want to own individual stocks. Holding the daily research bulletin, she says, "If this is our best call of the day, then we have to question, ‘What’s the impact? What are our financial consultants supposed to do about this?’ We need to recognize we’re not in some ivory tower when it comes to research, because our financial consultants use this every day."

Smith Barney brokers are even tougher on the research department. In Registered Rep’s brokerage report card survey last December, Smith Barney’s research got a dismal score of 5.26 from its own brokers (on a scale of one to 10)–down from 7.00 in 2001 and 7.58 in 2000.

The road back starts with restructuring the organization. Krawcheck moved Bill Kennedy, who was co-head of research in Japan, to head global equity research, in January. Kennedy says his success will be measured, to some extent, in how the reps do in gathering new assets. Reporting to Kennedy is the new head of U.S. research, Jonathan Joseph, known for his semiconductor research, and four associate directors who review research daily. Promoting star analysts into the management ranks was not a popular decision among the reps. "It’s difficult to deal with," says one rep of the changes.

But Krawcheck says this will prove to be the right decision. "People are saying, ‘We lost some of our best researchers to management,’ and I say, ‘Exactly. We’re not going to take our OK analysts and put them into management and hope it turns out OK,’" she says.

The associate directors review research before it is released. The idea, of course, is to put controls in place to make sure the research is accurate. The contrast between this structure and the one that existed at Smith Barney during the bull market is striking, although Krawcheck doesn’t elaborate on how it used to work. "I can’t speak to that," she says. "I can tell you that this [structure] makes us feel more comfortable."

Krawcheck also takes pains to tell the troops that research won’t be infallible. But it does say something. "We’ll be wrong, and we accept that," she tells the Atlanta group. "But we don’t want [research] to just be noise so we can just say, ‘We told you so.’ Even when this is all fixed, you’re going to complain about this analyst, these recommendations, but we’ll be beating the averages."

It’s a work in progress. An effort to bring research and retail brokerage together again to help Smith Barney achieve that $1 million production goal. "We have a lot more work to do with the field on this," Krawcheck says.

Photographs By Dirk Eusterbrock