Reports that Citigroup Inc. may be considering selling its asset management unit to Legg Mason Inc. renewed speculation that the financial supermarket - once thought to be the wave of the future - is rapidly approaching obsolescence.
Never mind that the deal is far from a certainty. Rather than signifying the death knell of the financial supermarket, the discussions may instead be a sign that the model is evolving from theoretical design to practical structure. That structure emphasizes sale and distribution of products and services and leaves manufacturing and production to others.
"Citi was one of the pioneers in creating financial supermarkets; this may be another pioneering move," said James Wilcox, a professor at the University of California-Berkeley's Haas School of Business. "Supermarkets are interested in providing the best products and services at the best prices. Banks can deliver financial services without actually producing them and still be a valuable provider."
Selling its asset management unit would not be inconsistent with the strategy that executives at Citi have mapped in recent years. Charles Prince, its chief executive, and Sallie Krawchek, its chief financial officer, articulated some of the guiding components of that strategy at an investors conference Wednesday.
"If you think of a financial services company being products or distribution, this company is tilting more towards being a distribution - or, as I like to say, a relationship - company," Ms. Krawchek said.
Mr. Prince candidly discussed the shortcomings of the asset management unit at the same conference. Though he characterized the unit as a "high-growth-potential and high-return business," his enthusiasm for the Smith Barney retail brokerage network was much more evident.
"We would love to expand that not only domestically but internationally. It's not a product unit; it's a distribution channel," he said. "It's clearly an important part of Citigroup."
Given its obsession with capital allocation, businesses that are not "important" are not likely to be part of Citi for long. Executives continue to stress their willingness to shed units that are "hobbies" - enterprises that distract it from its core businesses.
That's doubly so for units that give rise to potential conflicts, and there's no question that asset management raises tricky questions for a company seeking to convince regulators of its commitment to ethical behavior.
Citi said this week that it would pay $208 million to settle Securities and Exchange Commission charges that its mutual fund advisory unit did not disclose important facts in advising customers to switch transfer agents. (The asset management unit's first-quarter earnings fell 24.8% from a year earlier, to $79 million.)
That's just the kind of conflict that regulators are targeting, and Citi's reported willingness to sell its asset management unit may be an acknowledgment of that environment.
"The regulatory pendulum is now swinging in the direction of removing any potential for conflicts of interest, rather than policing for them," said Chris Siedman, an analyst at Hoefer & Arnett Inc. "Citi is probably only considering the move because they feel the pendulum is not going to swing back."
Banks have generally chosen open-architecture structures in offering mutual funds. The more difficult it becomes for banks to find a way to guide customers to their own products, the harder it is to justify the proprietary unit.
If Citi concludes that "being in the client advisory business does not go hand in glove with having your own proprietary investment products to sell, the change would not just affect Citigroup and Legg Mason," Mr. Siedman said. "It could have a pretty big ripple effect for the entire industry."
Some analysts are skeptical that a sale is in the offing.
Jeffery Harte, an analyst at Sandler O'Neill & Partners LP, said it is possible to take the "distribution-only" strategy too far. Citi's willingness to sell its Travelers insurance units resulted largely from the units' poor financial performance, and asset management tends to be more profitable, he said.
The regulatory environment has probably prompted Citi to consider whether it can continue to broker its own asset management products, but that environment should not trigger a sale, he said.
"You should be able to manage those conflicts," Mr. Harte said. "The entire investment banking/brokerage business is about managing conflicts. They should be manageable in a way other than exiting a business."
