Grieve not for demise of financial supermarket

June 05, 2005|By Jay Hancock

GOOD RIDDANCE to the financial supermarket. One of the dumbest business ideas of the 1990s is headed for the same junkyard as industrial conglomerates, Internet pet stores, the Sony Betamax and The Adventures of Pluto Nash.

Reports that Citigroup is considering selling its money management business to Baltimore's Legg Mason would mark another step toward sanity if it comes through.

Along with Bank of America, Citigroup was the model of the one-stop money shop.

These kinds of companies were going to sell stocks, bonds, mutual funds, checking, savings, credit cards, travelers checks, insurance and mortgages all at the same time. They were going to turn bank tellers into salesmen and stockbrokers into insurance agents and cram everything into your wallet and make you ask for more.

Now Citigroup, having sold its life insurance and annuities business this year, is considering dishing its Smith Barney mutual funds and other asset-management business to Legg, The New York Times and The Wall Street Journal reported last week.

Bank of America is considering the same kind of move.

"I think that is something that is fair for consideration, and we should always be looking at it," company Chairman and Chief Executive Officer Kenneth D. Lewis told investors last month when asked if he would sell the asset-management unit, according to American Banker.

At the same time, Morgan Stanley plans to dump its Discover Card division, and American Express is getting rid of brokerage and money-management units.

One reason for the divestitures is ethics. Given the recent unpleasantness with New York Attorney General Eliot Spitzer, financial firms are goosey about pushing proprietary mutual funds, annuities and other products through financial advisers who often hold a legal duty to sell clients the best products available - not necessarily house brands.

Swapping Legg's brokerage sales force for Citi's asset-management talent - which is apparently the deal on the table - would lessen conflicts of interest at both firms.

But there are other forces breaking up the financial supermarket. One is the old "core competence" phenomenon. Even good companies do only a few things well and often err when they branch out. For a painful example, look no further than the former Allfirst Financial's currency trading desk.

Changing consumer buying patterns may exert even greater centrifugal force. Did Citigroup really think people were going to buy a whole life policy from the same place that sold them WorldCom stock?

As the 1990s progressed and financial firms built supermarkets and opportunities for "cross-selling," the Internet and growing consumer sophistication were destroying the foundations beneath them. Thanks to the Web, the main reasons to buy a dozen kinds of products from under one roof - inertia and the hassle of shopping around - have shrunk.

Many households are expanding the number of companies from which they buy, not reducing them. Mortgages, stocks, mutual funds, insurance, credit cards and checking can all be had online. It's one-stop shopping, but the stop is your computer - and each product can come from a different vendor.

Even destination financial Web sites such as Vanguard's, Fidelity's and T. Rowe Price's have been forced to allow customers to use their software to buy and manage rival mutual funds.

What chance does a Citigroup financial adviser have at selling the whole Chinese-restaurant menu? Especially when brokers, salesmen and other intermediaries are increasingly superfluous, not just in finance but many businesses?

Today's winning financial model is Warren Buffett's Geico insurance or T. Rowe Price, the Baltimore mutual-fund gem. They sell one product. They sell directly to the consumer. They make sure it's the best. They don't waste time on diversification. And they tell investment bankers and consultants who contend they should diversify to jump in a lake.

Legg Mason never succumbed to the supermarket strategy, either. In recent years, boss Chip Mason has concentrated more and more on asset management, which has paid off handsomely as a core skill. The Citigroup deal would cement the process, probably to Legg's advantage.

Heck, the supermarket model isn't working very well these days even for supermarkets. Is the mustard in your fridge from Safeway? Or Trader Joe's?

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