Michael Corbat certainly has his work cut out for him. Tapped to head up Citigroup's Global Wealth Management unit (GWM) in the middle of the global financial crisis, Corbat is walking into a banged-up Smith Barney franchise. (Of course, what big retail brokerage firm isn't banged up?) For the first nine months of 2008, GWM revenue was up 2 percent, but net income fell by 27 percent compared to last year; client assets flows also reversed (negative $9 billion through the third quarter compared to $14 billion in the same period last year); fee-based assets are down, and, well, you get the picture.

Bear markets will do that, of course. Oh, but so will fixed-income asset write-downs, auction-rate securities fines and increased credit costs. The macro-economic environment — as we all know — is wreaking havoc on Wall Street; Citi and its GWM have good company. (And misery loves company.)

Still, Corbat is coming on the scene at a critical time. Corbat isn't currently doing interviews with the press, so his plans — if he has them finalized — are unclear at this writing. Either way, he certainly has big shoes to fill. As head of GWM since 2007, Krawcheck was highly admired by the rank-and-file financial advisor. Aided by her soft-spoken lieutenant Charlie Johnston, Krawcheck was regarded as their representative in the boardroom. Alas, this was also one major cause of her ouster and replacement. (She fought “like a bulldog” for returning the money Citi clients lost in bad Citi hedge funds, for example.) Indeed, that's what Sandy Weill hired Krawcheck in 2002 to do: Make things right for Citi's clients by pulling the retail financial advisory unit out of the purview of the investment bankers. With Sallie out, advisors are wondering: What happens now?

Not only was Corbat — known as “The Senator” for his polite-yet-gregarious interpersonal skills — a career investment banker, but he will now report to John Havens, chief of Citi's Institutional Client Services Group (ICG). In short, Citi CEO Vikram Pandit is undoing the Weill/Krawcheck organizational chart. Under the former order, Weill pulled Krawcheck in to clean up Citi's image in the wake of the Spitzer conflict-of-interest scandals. (Weill, a savvy businessman, picked shrewdly. Krawcheck, who was CEO at the well-regarded research house Sanford C. Bernstein, was a high-profile business woman whom Fortune magazine labeled “The Last Honest Analyst,” just four months before she was hired to rebuild Citigroup's tarnished brokerage and research divisions.)

Ultimately, Citigroup paid $400 million of a $1.4 billion total settlement among 10 firms — that neither admitted nor denied the charges — to then-New York Attorney General Eliot Spitzer and the SEC. The regulators' investigation found Citigroup to have, among other things, published fraudulent research and failed to manage conflicts of interest between its research and investment banking divisions. As a result of the settlement, all 10 of the firms were required to adhere to a new set of SEC regulations designed to keep investment banking and research independent of one another and to keep investment recommendations free from shilling for the investment-banking side.

But the scandal is ancient history and these days the old structure is seen as more efficient. The overall goal of Pandit's plan — which was also Prince's plan — is focused on undoing Citigroup's bureaucratic tangle of business “silos” in order to get the firm working as a single cooperative unit. For example, he has said he will assign “team leaders” to prevent clients from being swarmed by multiple bankers and advisors. That sounds like a good idea. After all, since the 1998 merger of John Reed's Citicorp, a commercial bank, and Weill's Travelers, an insurance and investment banking firm, creating a universal banking behemoth, the company has largely been one of strong, but separate, parts.

While Krawcheck can't be blamed for contributing to the bureaucracy, the mere fact that she was part of the old guard may have been motivation enough for Pandit to replace her — something he's done in many executive positions already — as is his prerogative. As far as performance goes, Krawcheck's two tours as head of retail — first leading Smith Barney and investment research from 2002 to 2004, and then as the head of global wealth management from 2007 to now — have yielded mixed results. After her first two years, Krawcheck was credited with improving morale and raising broker productivity to a level second only to Merrill Lynch. In the context of the credit bubble bursting, her second stint as head of Global Wealth Management has been less even: Pre-tax income was up 37 percent versus the previous year in 2007 (at $1.9 billion), but net new client assets totaled a mere $15 billion (Merrill brought in $80 billion). So far, in the first nine months of 2008, net income is down 27 percent compared to last year, and net new client assets have turned negative to the tune of $9 billion, at least partly due to broker attrition. (Total FA/private banker headcount fell 5 percent in the third quarter to 14,735 from 15,458 in the same quarter last year.)

But it could have been worse: In the eyes of FAs, Krawcheck's most notable success as a manager was simplifying and sweetening an overly complicated compensation plan — now considered one of the best on The Street. That was one of the principal reasons (other than the stock) for advisor dissatisfaction and defections.

For that and other reasons (i.e. her desire to restore retail investors' auction-rate securities investments — a $7.5 billion repayment — and partial covering of hedge fund losses), Smith Barney advisors considered her an ally. (Though she reportedly concedes that FAs are an amped-up, demanding bunch who need to be sternly managed on occasion.) According to someone close to her, she received over 2,000 emails upon the news of her departure (set for year-end). The mere fact that she was hired by Weill and carried on for Prince's team put her “behind the eight-ball from the get-go,” as one Citi executive puts it. And then Pandit, who as CEO was brought in to save every dollar he could amid what has become a $64 billion bloodbath of losses and write-downs, would have preferred her to take a harder line on clients, say two Citi insiders with knowledge of company politics. Failing to keep Richard Zinman, the firm's top producer, during a period of already low spirits, was an additional unexpected blow to FA morale. And earlier this year, Krawcheck's announcement of a new client segmentation strategy worried and confused reps (and the press) to the point that it needed public clarification (including a spot on this magazine's online video channel).

WHAT NOW?

What does this reorganization mean then? In a September 22 Citi press release, Pandit said the move will “increase coordination between GWM and ICG, underscoring the company's priority to deliver the full benefits of the entire Citi franchise to its clients, extending beyond historic business lines.” Some paranoid reps fear the integration message combined with the fact that they now report to the investment bank implies a push for more cross-selling and possibly a marketing push from the firm's struggling alternative investments business. (Corbat assured reps they would not become “a sales channel” for the investment bank during the firm's third quarter earnings call.) To the vast majority of Smith Barney FAs (and those at other firms) any assault on “open architecture” would denigrate their independence to choose best-in-breed asset managers. But then that is probably not a worry: Open architecture — for “mainstream” asset management anyway — is here to say. So is the reorg a smart move? Most analysts have had little objection to Pandit's choices thus far. Will the brokers like this one?

For Sanford C. Bernstein analyst Brad Hintz, there was nothing untoward about the change in leadership. (Hintz and Krawcheck are friendly, since Krawcheck “saved my life,” says Hintz, in that she recruited Hintz from Lehman to Bernstein. “Otherwise I would have been working for Keefe Bruyette & Woods and in the World Trade Center on September 11.”) Asked for his opinion via email about Sallie Krawcheck's seemingly unceremonious exit, Hintz replied: “Vikram now has his team in place.” It's as simple as that.

Besides costing Citi money, Krawcheck also apparently locked horns with Pandit on the wisdom of reuniting the investment bank with wealth management. Says one Citi insider: “She was truly an advocate for clients, that it was worth taking the hit now to keep a client for 20 years, whereas the investment banking mentality is more deal-oriented: Forget the one [disgruntled] client — just find a new one.” The same insider states further that under Krawcheck, Citi had a reputation for “listening to its FAs” — perhaps too much. “Morgan Stanley and Merrill Lynch don't flip [on policy] just because FAs complain,” the insider avers.

One particular sticking point with Pandit happened in May as the credit markets began to freeze. The firm was announcing a parade of asset write-downs, two prominent Citi hedge fund groups — Falcon, a fixed income fund, and ASTA/MAT, a highly leveraged municipal bond fund — with roughly $15 billion in assets had to be rescued after experiencing losses of between one-third and three-quarters of their value. Brokers and clients threatened to leave the firm. Citi declined to offer details, but reports suggest Krawcheck was instrumental in getting the firm to offer to cover as much as half of investor losses in the two funds in order to calm brokers and their clients. Still, the deal didn't make many happy — neither the burned clients nor Pandit. Clients who accepted the refund had to sign agreements not to seek further damages, but given the option of recouping only half their money, many clients decided to try their luck in FINRA arbitration or in class action lawsuits which continue to be filed. (One law firm, Aidikoff, Uhl & Bakhtiari, filed 19 FINRA arbitrations in September and October seeking a total of $16 million in damages). This caused Krawcheck to lose considerable political capital.

The hedge fund blow-up had a related fallout as well. Richard Zinman, Smith Barney's top producer with roughly $8 billion in assets, had lots of his clients' money in the funds and was so incensed with the embarrassing collapses that he had one foot out the door. Krawcheck and Johnston, president of GWM, sat down and negotiated a private deal with Zinman to persuade him to stay. A deal was reached but fell through, according to an anonymous source, after it was leaked to the rest of the firm. Zinman left in May to join Credit Suisse, but not before a last ditch effort by Citi to keep him, the source says, in which Pandit even offered Zinman his own account if he stayed. The anonymous source says it was avoidable: “He's the top producer. He should get a deal and it shouldn't have to be a secret kept from the other reps. If you have $8 billion in AUM, you, too, should have a deal.”

THE IMPORTANCE OF RETAIL

Despite contributing roughly 9 percent of pre-tax earnings, Pandit understands the importance of the Smith Barney brand and has repeatedly described wealth management as one of Citi's “core” businesses — which, given the bank/brokerage marriages recently, seems obvious. But he clearly wants the retail brokerage (and the private bank) and the investment bank to help create new business for each other — a move that Krawcheck is said to think is smart, but over-hyped. Last year, GWM helped the investment bank generate about $300 million in revenue, says a source with direct knowledge of the units; Pandit would like to double that. “It's not gonna happen,” says the source.

A Citi spokesperson said the firm's executives were too tied up with the (now failed) Wachovia bid to comment on this story. “The bottom line is that hopefully this will all result in a further smoothing of the edges between all of Citi's business lines,” says a Citi spokesperson, who added that the institutional and retail businesses have long been “uneasy allies.” The new management structure directly linking the two should improve that relationship, increasing access for both sides, he says. In an interview with The Financial Times in mid-October, new head of ICG, John Havens, said a large part of bonuses paid to his senior managers will depend on their ability to interact with colleagues from other business lines during divisional meetings. As for any “conflicts of interest” that might arise, the Citi spokesperson dismissed outright any suggestion that the institutional group would “push” alternative products through FAs as a result. However, the Citi spokesman did say the improved access to Citi's alternative investment products would be a plus for interested higher-net-worth clients. One regulator who wished to remain nameless was also dismissive of the negative implications, saying Citi is well aware of the new rules and procedures to prevent such conflicts. “How they structure their business is their decision.”