. . . By swapping their brokerage and money management units, Legg and Citigroup will be more able to avoid the sorts of real and perceived conflicts of interest that have tarnished the financial industry's image. Though Legg has had few regulatory scrapes, both companies are among dozens that have been caught up in the sweeping investigation, which has resulted in new regulations and tens of millions of dollars in fines since 2003. . . .

"This might be the real point of departure for the industry and the sunset, if you will, for proprietary products being sold to a captive audience," said Burton Greenwald, founder of B.J. Greenwald Associates, a mutual fund industry consulting firm in Philadelphia.

The deal announced yesterday will transfer Legg's 1,540 brokers to Citigroup, transforming Legg into a pure money manager with no in-house brokers to sell its funds. Citigroup will turn its $437 billion money management group over to Legg, getting the banking conglomerate out of the mutual fund business. . . .

"I think avoiding conflicts of interest has become an increasing theme among the very largest firms," said Frederick C. Lane, chairman and chief executive officer of Lane, Berry & Co., an industry advisory firm in Boston.

Lane said separating brokers from asset managers makes sense from a marketing standpoint. It's tough for brokers to keep customers unless they sell them the best-managed funds, and that means sometimes recommending funds managed by their employers' competitors.

Greenwald, the industry consultant, said more insurance and banking institutions will get out of the asset management business to avoid inherent conflicts of interest challenged by Spitzer and the SEC.

Some press reports are heralding this deal as the end of the “financial supermarket.” Such is hardly the case. It’s about like the supermarket cutting the meat department. Sure, it’s a sizeable cut, but a big part of the store is still left intact.

For example, one notable, inherent conflict this deal doesn’t resolve for Smith Barney and Citigroup: the conflict which often exists between brokerage clients and the investment banking department.

In fact, when it comes to scandal, Citigroup and Smith Barney are much more associated to the investment banking conflict than problems related to mutual funds.

Clients, particularly those that are wealthier and more sophisticated, have gotten an intense education on conflicts from the scandals and prosecutions of the past few years. They’re smarter—-and more cynical—-than to believe that deals like this one remove enough conflicts to make a difference to them.

By the way, this deal will inevitably cause turmoil among the ranks of brokers at both Smith Barney and Legg Mason. Some major office consolidation is inevitable in those cities where substantial overlap exists, and I suspect a number of Legg Mason financial consultants have no interest in carrying a Smith Barney business card.