Legg Mason After Citigroup Swap: New Distribution Model, Growing Assets

Baltimore-based Legg Mason, which struck a deal with Citigroup in 2005 to swap its brokers for Citi's asset-management business, saw its total AUM grow to $992.4 billion as of June 30, 2007, up 2 percent from $968.5 billion in the first quarter of 2007 and up 16 percent from same period in 2006.

Aiming to further strengthen this asset growth and the organization's distribution in the United States is Donald Froude. He was hired less than a year ago and previously worked at Columbia Management, the asset-management unit of Bank of America, where he led that group's intermediary distribution work from 2004 to 2006.

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Legg Mason Affiliateso Batterymarch (Acquired in 1995)o Brandywine Global (Acquired in 1998)o ClearBridge Advisors (Acquired in 2005) o Legg Mason Capital Management (Created in 1982)o The Permal Group (Acquired in 2005)o Private Capital Management (Acquired in 2001)o Royce & Associates (Acquired in 2001)o Western Asset Management (Acquired in 1986)

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Before the Citigroup deal of 2005, Legg Mason had sold its products mainly through Citi's proprietary channels, such as Smith Barney financial advisors. "So, for me the last 10 months have been about leading with 100-percent focus on building and establishing a non-proprietary model," Froude says. "People that have called on Smith Barney advisors and have 25-year relationships with them, now must call on all the broker-dealers. This is a major change in the dynamics."

To successfully make this shift, "We're very focused on the firms we support, and we meet face to face with them regularly," he explains. This, of course, includes Smith Barney, as well as broker-dealers like Morgan Stanley, UBS and Bank of America.

The external distribution team that reports to Fraude includes more than 80 individuals, with Joseph Lohrer serving as the head of U.S. retail sales. Some team members are dedicated to the wirehouses, while others are part of a group that works with independent financial advisors, such as those affiliated with Raymond James, LPL and other BDs. "This area is experiencing huge growth within our industry," says Froude.

The distribution team he leads has gone through an intense sales training program, become well versed in Legg Mason's portfolio and asset-management work, and is working with a new customer relationship management system. "We are being very well received and there's little turnover, as we've rolled out a generous compensation plan to support these efforts," he says. "These are all the elements you have to have for such a business model, so people are more confident and knowledgeable."

By asset class, nearly 50 percent of Legg Mason's $992-plus billion in assets are held in fixed-income investments, some 35 percent in equities, and the remainder in liquid investments. By division, about 50 percent of these assets are managed by Legg Mason's institutional operations, 40 percent by its managed-investments unit (which includes sales occurring via broker-dealers and financial advisors) and the remainder by wealth-management operations.

Overall, Legg Mason's net client cash flows were $2 billion in the three months ended June 30, including flows in fixed-income of $8 billion and liquidity of $1 billion, as well as negative client cash flows in equity of $7 billion.

"While we believe progress is being made, further improvement in performance will be critical to reverse this trend," says Chairman and CEO Raymond A. "Chip" Mason.

Legg Mason executives say the company is developing products and initiatives in order to fully realize the potential of the distribution platform acquired in its purchase of Citigroup Asset Management. It recently launched two new products in the retail separately managed account (or SMA) area that rely on Western Asset Management's flagship "Core and Core Plus" strategies.

According to the Financial Research Corporation and Horsesmouth, Legg Mason ranked highly with FAs in a recent survey on wholesaler support. "I chuckled a bit," says Froude. "If we're seen that well now, and it's a very new group, imagine where we can go from here. This is because of the terrific value-added programs we have to help advisors build their business, their practices."

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Janet Levaux is the managing editor of Research; reach her at [email protected].

Legg Mason After Citigroup Swap: New Distribution Model, Growing Assets

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