Legg Mason Inc. promises its customers a smooth transition when the Baltimore company swaps businesses with Citigroup Inc. and analysts predict those investors may even see lower fees as a result of the $3.7 billion deal announced yesterday.
Legg Mason agreed to exchange its brokerage for most of Citigroup's asset-managed business in a transaction that will alter both companies. Legg's 1,540 financial advisers will move to Citigroup's Smith Barney brokerage firm. And Legg Mason will assume dozens of mutual funds from Citigroup, including more than 60 from Smith Barney. The deal, which is expected to close in the fourth quarter, will make Legg the fifth-largest mutual fund manager in the country.
The swap means Legg investors will have more products and services available to them through Smith Barney, such as online banking and loans. Citigroup customers will gain access to Legg's top-performing mutual funds. But the deal raises all sorts of questions for both firms, although analysts and company officials say in some cases it's too early to give answers.
Even though both companies hope to make the transition as seamless as possible for customers, there is likely to be a hiccup or two, experts said. As with any transaction involving thousands of customers, "there will be some glitches," said Craig Woker, an analyst with Morningstar Inc. in Chicago.
Legg is sending a letter to clients who work with financial advisers, informing them that their brokerage will switch to Smith Barney.
"They will still deal with the same financial adviser" and have access to the same Legg Mason products, Tim Scheve, president of Legg Mason Wood Walker Inc., said yesterday. "Most of our locations in Maryland will probably stay the same," he added, although the name on the door will be changed to Smith Barney.
Clients are likely to stay put as long as their broker does, experts said.
"Most investors will stick with their investment adviser ... they could care less what the name on the front door is," said Kerry O'Boyle, a Morningstar analyst.
On the fund side, the deal should have no effect on investors in Legg funds, said Andrew Clark, a senior research analyst with Lipper Inc. in Denver.
And the move likely will be good news for investors in Smith Barney funds, many of which have been underperformers, Clark said.
In the past decade, 15 of 19 funds managed by Legg Mason or a subsidiary - 79 percent - delivered returns that ranked in the top half of their peer group, according to Morningstar. By comparison, only 16 of 49 Smith Barney funds, or 33 percent, posted returns in the top half.
During the past 18 months, investors poured $2.3 billion into Legg Mason funds and withdrew $2.8 billion from Smith Barney funds, according to Financial Research Corp.
It's possible some of Smith Barney's funds may be folded into Legg Mason products if they overlap, something other financial institutions have done in mergers, Clark said. But even if that doesn't happen, Legg's culture might be a good influence on Smith Barney funds and benefit investors, he said.
"Legg Mason has a better reputation in terms of performance, a better culture in terms of the number of top-performing funds," Clark said. "One would hope some of that would rub off on Citigroup units."
One area where Legg Mason investors may see changes are in the fees they pay.
Morningstar's O'Boyle said Legg and Smith Barney have different fee structures.
Legg charges a level load, which essentially is an annual sales commission of about 1 percent. That can be costly for long-term investors, O'Boyle said. Smith Barney, on the other hand, offers different classes of fund shares with varied commission structures. Investors can choose the class of shares that costs them less in fees, depending on how long they plan to hold the shares.
The deal could make Legg become more flexible in its fee structure, which may save investors money, O'Boyle said.
Barbara Roper, director of investor protection for the Consumer Federation of America, said consumers should pay attention to any changes in fees and to their accounts.
"You never panic," Roper said. "Generally, it would be a good time to assess what your situation is and whether this is best for you."
Sun staff writer Laura Smitherman contributed to this article.