Smith Barney: Living In A Chuck-Free World

Smith Barney at a Glance:

Total client assets: $1.6 trillion

Number of advisors: 14,873

Average annualized revenue per advisor: $768,000

Pretax profit margin: 24%

Mascot: Red arch

Worst management move: Messing with the payout grid

Best management move: Fixing the grid

Smith Barney reps have been on quite a roller coaster ride this year. The firm's overall score this year, down a bit from last year's 7.8, bears that out. Reps have lost their CEO of four years after a horrible third quarter, and more importantly (to reps, at least), were tortured by a confusing and — according to them anyway — a bad payout grid. It took management three times to get it right, but get it right it did, issuing the corrected grid this past October.

Since the data from this year's Broker Report Cards were gathered in late summer and early fall, before Chuck Prince's resignation and the final (we think) compensation plan announcement, it's likely Smith Barney advisors have shifted gears somewhat. Reps we spoke to seem generally pleased with the new payout grid. But they maybe now be worrying about how much more in bad sub-prime collateralized debt obligations are lurking in the shadows of its balance sheet. Some expect an outright loss in the fourth quarter — to the tune of more than $2 billion.

Of course, the fixed-income fiasco is just noise to most financial advisors, who eat what they kill and are fully independent. But, oh, what a hellish cacophony the CDO mess has made, and it's driven Citi shares to multiples not seen since the real-estate mess of the early 1990s, when you could literally buy Citi shares for your shoe size. What is really bugging advisors, we're told, is the share price. “Most [advisors] don't know what a CDO is, and have never heard of an SIV,” says one Citi executive. But, “advisors are furious about the share price.” Citi shares are an important part of Smith Barney's compensation plan.

Reps say Prince's departure doesn't mean much to their everyday business, but they say it may help buoy the company's stock. Between October 2003 and November 2007, while Prince reigned over Citi, the firm's stock did, well, nothing; it went up about 3 percent. Compare that to Merrill's stock price, which jumped 20 percent in that period (MER is down about 40 percent this year, though), and UBS', which shot up nearly 80 percent. That doesn't sit well with advisors who are relying on the shares for retirement, or those who have stuck around just so they can collect their deferred compensation.

“If you're a wirehouse advisor, you're giving up a large sum of money by not going independent and staying with your firm. The only way to justify it is the deferred compensation, and the chance to cash out your firm's stock when you retire. Any guy who is looking to retire soon just saw his wealth deflate,” says one rep.

It's no secret that Smith Barney advisors have never been too fond of their former CEO. (John Thain was apparently interviewed for the job, and he allegedly told the Merrill board he doubted anyone could handle the Citi job.) They say Prince's background as a lawyer burdened them with too much compliance — more than at other firms. In fact, “administrative burden” is where the firm gets it's lowest mark this year.

So what's next on the Smith Barney ride? A breakup? Perhaps. Some industry analysts say it may be the only way Citi can get back on its feet. Some speculate that Citi should sell off the brokerage to Jamie Dimon's JP Morgan Chase, which has everything but retail securities brokers. (Wouldn't that be sweet for Dimon, who was pushed out of Citi nearly 10 years ago?)

But whether it's broken up, or the bank and brokerage give their relationship another go, advisors are hoping to see their vested stock pay off. Literally.