From the February 2007 issue of Research Magazine • Subscribe!

Smith Barney's Goal: Doubling FA Productivity in 5 Years

Charles Johnston, president and CEO of global private client for Smith Barney, lays out his thoughts on sales growth, new compensation plans and more. (The details of the plan are summarized first; his comments on the plans are found at end of the interview.)

----

Smith Barney's new compensation plan means the firm will:

o Fund salaries and benefits for support staff;

o No longer charge FAs for errors;

o Contribute an estimated additional $40 million toward a new deferred compensation plan for FAs called Smith Barney Investment Choice Plan (ICP)

o Introduce a new firm-funded business development account (BDA) for FAs who generate in excess of $300,000 in prior-year gross production;

o Eliminate the discount penalty for transactional business on tickets of $500 - $1,000 and on all accounts across different programs;

o Enhance the franchise protection plan so anyone retiring under the plan will now be paid at 50% regardless of their prior level of production;

o Enhance the cash longevity bonus at the $350,000 and $500,000 thresholds by $2,500;

o Provide a two-year transition payment (paid quarterly) for FAs with total cash and deferred negative impacts greater than $2,500;

o Provide 2007 transition payments for previously FA-funded, non-exempt support staff payments as necessary; and

o Make other grid changes, commission changes and cuts in commissions for first $5,000.

---

What are your priorities today in heading the division?

Our main focus is the five-year plan we started in 2004, which aims to help advisors double their production. Plus, the advisory business is becoming more fee-based, and we are focusing on that; this has gone from about 38 percent of our business to about to 50 percent [in 2006].

Overall, the business has evolved from asset-allocation-type planning to a more holistic approach. Also, the competency of the FAs and their staff has become more important as the business has grown more complex than it was, say, five or six years ago.

Client experience is actually another business opportunity. [There is a lot of effort] to make it easier for clients and advisors to do business through new systems and products at Citigroup, which may be embedded within certain parts of the organization.

We're really on track, as measured by gross annual production per FA. That should come in at about $500,000 per advisor in 2006, which is up about 20 percent, and that's right where we want it to be. Some of this progress has been closely tied to the wealth-management business and key initiatives including fee-based advisory work and other parts of the platform.

What is the average yearly gross production target for your advisors?

This bottomed out a few years ago, when we were around $350,000. And we've wanted to get to about $670,000-$700,000 a year by 2009. We're two years into that $700,000 goal, since we're now at $500,000, and we're very much on track to get to that level by 2009.

If you look at our fee-based advisors with 10 years to 15 years experience that do holistic (estate planning, lending, etc.) and fee-based work, these advisors are on track to do $900,000 in business this year. The other side, those mainly in transactions, will do about $340,000. That gap is where we're focusing our efforts.

How have you been growing in terms of trainees and other programs?

We had 845 trainees this year, a great number. This is for those who are new to the business and are going through our 18-month financial advisor training program, which includes two full years of salary. Typically, they then come to work for us through two channels. Some work as free-standing FAs, who come in on a salary and bonus and work at one of our 630 offices around the country. Other trainees are added as part of a team to work with a senior producer who wants to bring somebody new in to work on their practice.

In 2007, which is new, we are partnering with Citibank and Citibank branches where there is typically a Citibank Investment Services advisor. These advisors are being transformed into Smith Barney by mid-year 2007. We launched this already in Boston with five advisors, and Philadelphia is next. We're going to convert the existing branches to Smith Barney FAs by May or June. This is a new avenue and gives us a way to hire people who want to work in a bank lobby.

You mentioned that there are 630 Smith Barney branches; how many Citibank branches are there?

There are about 900 now, with 700 having Citibank Investment Services financial executives. So 700 will come over to our platform as advisors in 2007, and Citibank wants to open 200 U.S. branches a year moving forward. That means there could be 900 by the end of the year and 1,100 in 2008.

Now, we might not have an FA in every branch, because the market may not warrant it. But, we should end up with a Smith Barney FA in about 80 percent of those branches overtime. That means we could increase our footprint by some 1,000 FAs.

A year ago, we had the ability for Smith Barney clients to walk into Citibank branches and make deposits or withdrawals. That's unique. You can't do that at a brokerage. In the first year, we brought in $1 billion of assets to Smith Barney through the bank channel in 2006. This speaks to client service and additional distribution points.

How has your headcount changed in '06?

We started the year at 11,900 and ended it at 13,500. That includes a gain of 1,200 Legg Mason advisors and 400 other advisors.

How does the latest compensation plan deal with the issue of overtime pay and the practice of having financial professionals share in various costs of doing business?

The reality is that there have been lawsuits filed against the industry ... We've settled this several months ago with all states and agreed to pay $98 million to begin to put it behind us. And after a year or so of looking at it, we rolled out a new compensation plan.

We did so with three goals in mind: to be cost-neutral to the firm ... to not take away the ability of FAs to be entrepreneurs, and, during the transition period, to not have staff move backward in income. Our plan meets all these goals and sets a standard for the industry.

Reprints Discuss this story
This is where the comments go.