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The Unconventional Wisdom of Sallie Krawcheck

There are few women in financial services as well known, both inside and outside the industry, as Sallie Krawcheck. Her reputation for honesty and integrity—and her very public job losses—has made her a media personality and de facto expert on the challenges of women in senior management.

After receiving a journalism degree from the University of North Carolina at Chapel Hill, Krawcheck started her career as a junior analyst at Salomon Brothers just two months before the stock market crash of 1987. She joined research firm Sanford C. Bernstein in 1994 as an analyst, and by 2001, she had risen to CEO. A year later, Fortune magazine put Krawcheck on its cover, calling her Wall Street's "last honest analyst."

Krawcheck's reputation for smarts and honesty caught the attention of Sandy Weill, then chairman and chief executive of Citigroup, who recruited her in 2002 to become chairman and CEO of Smith Barney. She took on the role of CFO of Citigroup in 2004, and a few years later, was named chairman and chief executive of Citi's wealth management unit, a move widely reported as a public demotion. In 2008, her decision to give clients zero percent interest rate loans when auction rate securities imploded led to months of tension with then-CEO Vikram Pandit and resulted in her departure from the firm.

Next, she was named head of global wealth and investment management at Bank of America to help integrate newly acquired Merrill Lynch into the bank. In September 2011, she left the post after a reshuffle by CEO Brian Moynihan.

Today, as the new owner of international women's networking organization 85 Broads, she's relishing the ability to speak her mind—and speak she does to On Wall Street in this far-reaching interview. She discusses the professional dangers of taking a stand, the potential perils of cross-selling and the reasons why the industry's white male leaders are having such a hard time retaining women and minority advisors.

On Wall Street: Tell us about what you see happening now in the wealth management industry?
Sallie Krawcheck: It's the best of times, it's the worst of times. Most of the mainstream press has a bias about the industry. They think clients are upset, that they're leaving their financial advisors and that those financial advisors who still have some clients are all going independent. They think there's a massive move away from the big guys and everything is bad. Also, that everybody underperforms, and they overcharge, and all clients care about is price and performance. In fact, and I've done an enormous amount of research on this, what clients really care about is that relationship with the advisor. Yes, they absolutely care about performance, but they also care about a financial plan, they care about being kept from panicking during downturns, they care about the advisor caring about their family. There are about six or seven things they care about more, when you ask them, than investment performance. The second thing is that clients are not leaving their advisors in droves. The typical attrition rate for financial advisors of the big firms is about 2% a year.

What do you think will happen when a uniform fiduciary standard meets the increasing pressure on financial advisors to cross-sell the company's other products?
We could talk for hours about the potential for a fiduciary standard. I know there are many in the industry who are against it. I think the underlying tenet is that individual investors should not have to have a Ph.D. in regulatory science to understand their advisor's responsibility to them.


I think most Americans don't even know what the word "fiduciary" means.
But they like the sound of it. And if we're going to have a fiduciary standard, fine, but we should make sure everybody has the same testing requirements and ongoing educational requirements. People sometimes want the best of what they've got. So number one: Fiduciary standard, we should go there. Number two: There is something that is unpleasant about the word cross-sell. But again, it is the same as it ever was. Sandy Weill was talking about cross-sell at Commercial Credit in 1988. Cross-sell is not something that people woke up to in 2010. If you tell me we're going to cross-sell something, to me that's a push to the client, and that doesn't feel good. On the other hand, if you then say to me the financial advisor has got full access to the capabilities of the firm in order to meet the needs of the client, that actually feels pretty good. That puts the client in the center. So is the cross-sell about your company, or is it about the client? We've gotten into so much trouble, not just as an industry, but as capitalism, by putting the shareholder at the center. So don't put the shareholder in the center. Put the client at the center, put the employee next and the shareholder will do just fine. But when you end up with a company that's checking boxes, asking how many people have sold how many of this to how many of these kinds of clients, and you start having quotas, at that point you have to start asking yourself questions.

Do you think financial advisors are just stockbrokers who called themselves advisors so many times that their clients started believing them?
I've spent a lot of time with financial advisors, or stockbrokers or whatever one wants to call them, and again, there is a wide perception that brokers are all about "sell them this, churn that, move that." The typical client relationship with an advisor at one of the larger firms is more than 10 years in length. And we do have compliance departments, and the compliance departments do, at regular intervals, find financial advisors who are churning. Or they find inappropriate things that they are selling to clients. Then they toss them out. I think the industry actually does a pretty good job of finding those who are in it for the short term and spitting them out.

I was on the ASTA/MAT/Falcon/auction rate security [failed hedge funds at Citigroup] receiving end from our financial advisors, and I have never been screamed at so much in my life. I have never seen a group of people advocate for their clients with the kind of energy I saw from those people. I listened to them. I heard them out. I combed through the documents looking for someone who broke the law. I couldn't find anybody who broke the law. I found out we were stupid. But I think if the clients out there could have seen those advisors yelling at me, they would have felt pretty good about their financial advisors advocating for them.

I know clients love their advisor. Clients ain't so crazy about their advisor's firm. Clients will tell you again and again that they are [with a particular firm] for the advisor and that they view their advisor, in some cases, as a shield against the firm.

Since the advisor relationship with the client is so strong, how important is a firm's brand to the customer? Does it matter?
It used to be that brand was very important. Today, the brands have been damaged. But the advisor relationship we've talked about is stronger than is commonly perceived. And the cost of technology is declining. The smaller guys have not yet caught up to the big guys, but they're a lot closer than the big guys realize, and for a lot less money. This is an advisor golden age. Advisors actually should be very much enjoying the fact that there's this technology arms race going on. The product capabilities are improving all the time. And it's great for the clients.

The challenge the big guys have is that when you're big, it's hard to do things that move the dial. If you're earning two billion dollars a year, any new business is a little business, and it's hard to shake things up when you're making so much money. Goodness knows, I've tried. Along with that you have the increased regulation, being public, you have to make earnings, plus the press is all over you. You've always done it the way you've always done it, so you keep doing it that way. The new guys can try stuff, can fail below the radar screen and can throw stuff at the wall. But they don't have the resources, so if they fail, at some point they're out of business. It's a great marketplace, though, and at some point one of these little guys will become a big guy.

Do you miss the industry?
I miss the advisors. I loved the advisors. I loved everything about them. I loved how client-focused they were. I loved how painful they could be to me. I really liked the industry.

How were advisors painful to you?
Oh, because it was always something. They always wanted something else. So if you rolled out X, they wanted double-X. If you rolled out Y, they wanted double-Y. You get the picture. I mean there's a reason these advisors at Smith Barney and Merrill were successful. They were never satisfied with what you had, so they kept you on your toes. And I thought it was great, I really enjoyed it. Do I miss the big bank operational risk committee meetings with the 300-page deck and the "Sallie, you need to talk to page 182 through 184 and here's your script?" Not particularly. I don't really miss that.

What was the ostensible reason given to you when you were "sent home," as you call it, from Citigroup and Merrill Lynch? and what, in retrospect, do you believe the actual reason was?
With Citi, it was the fight over Falcon, MAT and the auction rate securities. I probably committed hari-kari or something. People know what happened with Falcon and MAT, but with the auction rate security implosion, I was having clients call me and say, "It's in cash on my broker's statement. I can't get my money. My daughter's supposed to get married in two weeks. What am I going to do?" We gave them zero percent interest rate loans. I'm not sure the CEO was really aware that we did it. We went out on a limb for our clients, and so at the end of the day when you have that kind of break with your CEO, you have to go home afterwards. With Bank of America, the CEO who brought me in told me, "Coming into this company is hard. I'll be here for two years to ensure your safe passage." He announced his retirement less than two months later. I said to the new CEO, "I'm not on your team. In fact, we've been competitors for years. I'm happy to go home and let you put your own team in place." He said, "No, we need you. You were brought in to turn around the business." And two years later when the turnaround had clearly gotten traction, they reorganized the business. I was told "We're not going to have anyone run Merrill Lynch any longer, so the job's just eliminated."

When you were at Citi, who supported your decisions with reimbursing and who exactly was against you?
The board voted together to reimburse, but the board clearly allowed me to leave. So was that with me or against me?

Was it your sense nobody was thrilled that you raised reimbursement as an alternative? What would have happened if Sallie hadn't spoken up?
I don't think the zero percent interest rate loans would have been made. What I want to be clear on is that it was a difference of business opinion. Did I believe we had an ethical obligation? Yes, but I also very much believed that it was a positive NPV thing to do. I thought that if we told clients, "Sorry. You did read the really small print, didn't you?" they would leave us. On the institutional business side, a large trading partner will trade with you and sue you at the same time. Individual investors will sue you, leave you, if they are big enough clients, which these were, and they'll take their advisors with them. And then they will talk about you. Individuals don't forget when they feel like you've done them wrong, and they talk about you at the golf club, and today they'll go to social media and talk about you. My very strong point of view was that it was the right business thing to do.

A lot of people at the time said to me, "Were you kicked out because you were a woman?" And I said absolutely not. But as time has passed, I think I would still say "no," but I would acknowledge the research that shows that women tend to have a longer-term view on business and that women tend to be much more empathetic to clients. And so I don't think I was thrown out because I was a woman, but I do think there was something about being a woman that made me take the stands I took.

Would you do it again today?
Oh, a thousand times again.

Everyone's been watching as you embark on your 85 Broads adventure. Tell us a little bit about that.
85 Broads is a 32,000-strong professional women's network around the world and across industries. I bought it because everything I read kept reinforcing the positive impact of diversity in senior management. Companies with more women in senior management yield higher returns, lower volatility, more client focus, greater innovation and lower gender pay disparity. Diversity is so powerful that diverse teams outperform more capable teams. I've worked on diverse leadership teams where there were really robust, vibrant, fulsome conversations, and I've worked on teams that were a bunch of folks that were just alike who finished each other sentences. That's fine if they're right. It's not fine if they're all thinking wrong. When I think about the causes of the financial downturn, the court of popular opinion tends to put the blame on greed. There was greed. But what we really haven't fully thought about is all the groupthink that happened during that period. Groupthink had just as important an impact as greed or individual mistakes.

What do you think the industry will look like in 10 years regarding its diversity?
The industry has a real challenge with diversity. I am almost 100% certain that if I had started as a trainee at Smith Barney I never would have run Smith Barney. I had to come in an unconventional way, because the hiring of financial advisors at Smith Barney, a company I love, was highly skewed toward male characteristics. The people who were at the top of the business were using Marine Corps questionnaires for hiring people. They were very "take the hill" and "command and control." That was a hurdle that existed. The other hurdle that has existed is that women financial advisors tend to be successful more slowly than males, so the firms were knocking women out along the way. And then finally, and this continues at all wealth management firms today, if one wants to get promoted through the ranks, one moves a lot. And it's very military in that by the time you make it up to the number one position, you have moved your family ten times. At Smith Barney, we had one woman who had made it up to regional director and she was single. Those challenges are so ingrained in the cultures of those organizations that they're almost hard to pull out. It's like having a bunch of splinters. And goodness knows I tried, but I think that's the reason that as much as the companies have really, and I think with very good intentions, said we're going to get the number of women financial advisors up, they can't get it past 12% or 14%.

Also, I wouldn't be sure that all the male executives at the firms "get it." Not very long ago, I was with the CEO of a quite large financial institution. We're having a cup of coffee and I took him through some of the numbers showing that 45% of U.S. millionaires and 60% of college attendees are women, and 90% have responsibility for managing their own money at some point in their lives, and I finished by saying there's an enormous opportunity here for wealth managers. And he says, "Hmm, very interesting, very interesting. But don't their husbands manage their money for them?" He didn't even hear me. It's because he's got a worldview that is stuck, maybe not in 1952, but it might be 1997. But because these organizations are making so much money, what's the point at which they have to change? When you're making two billion dollars a year, at what point do you start to panic?

The industry's in very good shape. The industry is in better shape today than the press will concede. The industry is in worse shape long term than folks recognize if they don't change their ways. And the biggest risk is knowing you have to change, but just not being able to do it.

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