Smith Barney sees early success with push into advisory product

Sep 26, 2005 @ 12:01 am

By Brooke Southall

SAN FRANCISCO - Smith Barney is reporting success in rolling out a pricing model that makes its stockbrokers look more like registered investment advisers.

The New York-based broker already has 1,100 brokers, or 10% of its sales force, with a combined $1 billion placed into the Smith Barney Advisor program since it was introduced in June.

But the program could really take off next year as it evolves into a supermarket of investment choices similar to Total Merrill, the signature cross-selling program used by many brokers at New York-based Merrill Lynch & Co. Inc., analysts said.

For now, the program allows brokers to manage only portfolios of stocks, bonds and mutual funds.

The key is that Smith Barney is setting a percentage fee to cover the bulk of products produced under its corporate parent.

"The intent is to work with clients and say, 'Our cost is X. You get everything Citigroup [Inc. of New York] has to offer,'" said Paul Hatch, chief operating officer of Smith Barney Consulting Group of Wilmington, Del.

Smith Barney also will credit back 12(b)-1 fees to clients who own mutual funds through the program. "As fiduciaries, we wouldn't accept additional compensation for what we do," Mr. Hatch added.

Another kicker, he said, is that the program can ace out asset custodians with a sweetener: no tacked-on trading costs. And a back-office planning program will guide investments.

"It's no longer any broker selling anything he wishes anytime," said Stephen Winks, principal with in Richmond, Va.

"It could be spectacular," said Charles "Chip" Roame, managing principal at Tiburon (Calif.) Strategic Advisors LLC.

"They own all the components: trust, insurance, banking," he said. "With the Legg Mason deal, they're betting on a distribution model."

The jury is out as to whether Smith Barney can make it spectacular. It needs to develop the technology, scale the regulatory hurdles and make believers of its own brokers, according to Mr. Roame and other industry observers.

But even some rivals concede that the Citigroup subsidiary is pushing in the right direction.

"Paul Hatch is a good guy, and he's trying to do the right thing," said Scott MacKillop, president of U.S. Fiduciary Services in Sugar Land, Texas, which was set up to lure wirehouse brokers to independence.

"This looks like a good thing. It's a positive thing," he said. "But it's still the clumsy football player trying to dance."

Yet if history can be used as a guide, Smith Barney is two-stepping toward success.

Half full?

"It's the fastest-growing advisory solution we've ever introduced," Mr. Hatch said. "In any advisory solution, $1 billion is very successful, especially in a rolling rollout."

But the quick start can also be interpreted as the glass half full, said Ron Cordes, chairman of AssetMark Investment Services Inc., which manages $7 billion in Pleasant Hill, Calif.

"If they didn't have a program like this, there would have been pent-up demand from the [financial advisers]. A good portion [of the new business] may have come from clients they thought they were going to lose," he said.

The $1 billion comes from brokers who fit three profiles: those looking to create a new business model, newly recruited brokers, and wrap managers looking to purge commissions entirely from their practices, Mr. Hatch said.

Many of the wrap managers are frustrated at having to put their brokerage hats on when they invest clients' cash into assets other than separate accounts, he said. Brokers who defect to Smith Barney from competitors arrive precisely because his firm is more fiduciary minded, Mr. Hatch added.

New cash aside, the platform lags those at other firms, Mr. MacKillop said. "They've been behind on the innovation curve, and they're trying to catch up," he said.

Mr. Hatch conceded that Smith Barney won't make its major splash until next year, when it hopes to bring many more products, including separate accounts, under the Smith Barney Advisor umbrella.

'Functional car'

"We can't build a Ferrari the first time out," he said. "We'll build a functional car first."

Smith Barney can create Ferrari-level technology, considering that it was so successful at developing technology for groundbreaking multidiscipline accounts, Mr. Cordes said.

But Smith Barney's slow delivery of the program has already cost it some brokers.

Jim Gebhardt, principal of Gebhardt Group Inc. in Lafayette, Calif., left Smith Barney in May, partly because his branch manager couldn't help him operate with a fee arrangement like that of an RIA.

"He said, 'Well, we have that [ability to offer fee-based advice],'" said Mr. Gebhardt, whose firm manages $50 million in assets. "I said, 'Come on. I doubt the program really hits the ground running.'"

"There's $1 billion in assets under management on the West Coast that has left," Mr. Gebhardt added. "So you figure they've got to try something" to retain fiduciary-minded brokers.

More importantly, Smith Barney needs to convince the Securities and Exchange Commission that it is trying something reasonable, Mr. Cordes said.

"It's interesting they'd use the noun 'adviser' [in the name of the program], given the Merrill Lynch hoopla," he said.

Smith Barney didn't want to attempt semantic subterfuge with the SEC, Mr. Hatch said.

"I'm embracing that [fiduciary duty] rather than running from it," he said.

"It's an advisory product, so all of our advisers and the actions of those employing it will be [regulated] under the Advisers Act," Mr. Hatch said.


What do you think?

View comments

Recommended for you

Upcoming Event

Nov 19


New York Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


These are the federal and state rules that will most impact 401(k) advisers

Will Hansen, chief governmental affairs officer for the National Association of Plan Advisors, discusses regulation and legislation poised to have the biggest impact on advisers.

Latest news & opinion

Social Security funding outlook improves slightly

Retirement reserves extended one year; disability fund by 20 years

IBDs with the most CFPs

How many of the more than 83,000 certified financial planners are employed by the big independent broker-dealers?

Richard Thaler wants to use 401(k)s to boost Social Security payments

The Nobel laureate wants to simplify drawing down retirement assets, which he thinks is 'way harder' than saving the money.

InvestmentNews announces 2019 Innovation Awards winners

Sheryl Garrett is this year's InvestmentNews Icon.

Morgan Stanley rides wealth management train to solid first quarter

Chairman and CEO James Gorman expresses excitement about expanding into workplace plans with purchase of Solium.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print