A management shuffle at KBW Inc. has John Duffy going back to focusing on what he and the New York firm he's run for a dozen years are best known for: advising on bank mergers.

Duffy, 62, stepped aside on Thursday as chief executive of the firm that operates as Keefe, Bruyette & Woods Inc. and will stay on in a business development role. Passing the reins to longtime deputy Thomas Michaud may prove wise for Duffy and his ailing firm, experts say.

Duffy, who has vowed to beat a bout of prostate cancer, built a legend by rebuilding KBW after about half of his New York staff, including his son, were killed in the 9/11 attacks. Duffy was already well known for helping put together Bank of America Corp. and Capital One Financial Corp.

"He'll be very active" scouting deals in the U.S. and Asia, a KBW spokesman said. No surprise there. Duffy's star power, and rainmaking skills, are among KBW's most valuable assets. KBW can hardly afford to lose them now, having just posted its first quarterly loss since late 2008.

Meantime, archrival Sandler O'Neill & Partners LP may be pulling ahead in regional bank M&A. Sandler is staffing up ahead of an expected wave in mergers and acquisitions and hired a 10-person restructuring team in October. KBW plans to cut about 80 workers, or 13% of its staff.

Now Duffy will be able to devote himself to clients and moving beyond a messy divorce. One banker Duffy has worked closely with on deals in the past is John Kanas, president and CEO of BankUnited Inc. in Miami Lakes, Fla., and former CEO of North Fork Bancorp of New York.

"John was very good at understanding what worked and what didn't work," Kanas says.

William Bouton, a partner with the Boston law firm Hinckley, Allen & Snyder LLP, first worked with Duffy in 1985. They coadvised First Connecticut Bancorp in its sale to Fleet Financial, one of New England's first big cross-state bank mergers. Among the lawyers on Fleet's team: Brian Moynihan, chief executive of Fleet successor Bank of America.

Duffy plays hard but fair, according to Bouton.

"He's a tough negotiator … but he's also someone who has got a lot of integrity, who remembers the personal things about people," Bouton says.

Even rivals speak well of Duffy.

"He's a very knowledgeable, competent investment banker with a deep understanding of the capital markets as they relate to banks," says Ben Plotkin, an executive vice president with Stifel, Nicolaus & Co. and the former CEO of Ryan Beck & Co., a boutique Stifel bought in 2007. "I have great respect for what he dealt with both personally and professionally."

Duffy has taken knocks, too, for KBW's troubles. Sandler also had to rebuild after losing 40% of its staff in the terror attacks. In the intervening years, both firms thrived amid the toll the crisis took on larger investment banks.

But Sandler, the younger, smaller firm, is in some ways better equipped to handle the ups and downs of the small and midsize banks its franchise depends on. Sandler, founded in 1988, remains private. It raised growth capital selling a minority stake to two private-equity shops last year. Those investors expect a return in five to 10 years. KBW went public in 2006. Its investor base is not as patient, or as supportive of bulking up in a down economy.

KBW advised more transactions than Sandler O'Neill in 2010, but the total value of Sandler's deals was higher, according to SNL Financial data. Sandler trumped KBW by both deal value and volume in the first half of 2011.

Jimmy Dunne, the senior managing principal of Sandler O'Neill, first heard months ago about Duffy's plans to step down. He has a high regard for Duffy, despite their heated rivalry. Like Duffy at KBW, Dunne became the key man at Sandler after the 9/11 attacks. He describes Duffy as "a first-rate guy."

"Obviously, our two teams competed for a long time and still do," Dunne says. "I have a lot of respect for John. In some ways I'm sorry to see the change."

He was reluctant to talk in depth about Duffy or implications of the changeover at the firm. "We are still real competitors."

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