Keeping Up With the Joneses
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James Weddle, Edward Jones' top executive, eats in the Edward Jones cafeteria and parks his car wherever there's a vacancy in Jones' vast lot. His office walls are painted beige and are undecorated; the only furniture is a small conference table and two desks — Weddle's and a dark wood antique used by the company founder Edward Jones, Sr. Other than that piece of history, the most impressive feature of the office of James “Jim” Weddle, Edward Jones' fifth managing partner, is the view — the distant skyline of St. Louis, America's 52nd largest city, 15 miles to the east.
A no-nonsense office in a boxy, tinted-glass building off a Midwest highway is appropriate. The last major private limited partnership brokerage firm — with the industry's fourth-largest sales force — has been decidedly un-Wall Street since Edward Jones, Sr., founded it in 1922. It has a unique model of Main-Street focused, one-man offices that now number in the hundreds in every state of the union, with a presence in Canada and the U.K. as well. Jones reps preach an unwavering, conservative buy-and-hold strategy for their mostly suburban and small-town clients.
The firm doesn't sell options, commodities or interest-rate futures, says Weddle. “Those are more like wagers than investments,” he says. Even in the past several years as the wirehouses and independent firms have moved upmarket in search of wealthier clients, chanting “holistic wealth management,” Jones has continued to serve Middle America, offering blue-chip stocks, high-quality bonds and mutual funds.
And it's been tremendously successful doing so. The number of reps has more than doubled in the past 10 years to 9,733; client assets have nearly quadrupled to $405 billion; and, last year, net income increased by 12 percent (to $300 million) over the prior year. “People criticize them for their model, how they serve the middle market, but there's no better model out there for doing it, and it's better than no one serving them at all,” says Dennis Gallant, a consultant with Cerulli Associates.
True enough, but Edward Jones is at a crossroads. As Jim Weddle sits at his desk on the 10th floor of the Jones headquarters in Des Peres, Mo., he acknowledges Jones' challenges. Ironically, the strategy that built Edward Jones is also now holding it back. For example, its technology is out of date and the firm hasn't been able to substantially increase the number of reps lately, despite ambitious growth goals.
But, there's more. According to observers and former reps, the firm also can't seem to hold on to its best reps, partly due to the firm's limited investment platform, a system designed to be as simple as possible. For example, Jones doesn't offer a wrap program, which is offered by most firms, because it is at odds with its buy-and-hold strategy, Weddle says. The firm also badly lags its peers in technological support for its reps. (Companywide email? Not yet, but coming.) And the firm is still mired in class-action litigation surrounding its old revenue-sharing arrangements, which has cost it $75 million in fines paid to the SEC. Three separate class-action lawsuits — consolidated from an original nine but not yet certified — seek hundreds of millions for investors who weren't properly advised about revenue-sharing payments. Critics also point to the firm's dependency on revenue sharing — making up about 57 percent of net income in 2005 — as a potential problem.
Weddle says he'd like to add 9 percent more reps (about 900 reps); long term, the goal is to employ 25,000. To help recruit and retain reps — the life's blood and profit engine of Jones since the firm has only a tiny investment-banking unit — the firm increased payouts and bonuses last year. STill, the number of the firm's reps grew by just 1 percent in 2004 and 2.5 percent in 2005, despite recruiting and training roughly 200 new reps per month. Many reps who left were new brokers, says Weddle. But former reps say some were also million-dollar-plus producers, who had simply outgrown the firm. The big producers say the firm isn't sophisticated enough and hasn't improved its portfolio-management tools despite repeated promises.
Under Weddle, the firm's commitment to the middle market, through what it describes as long-term, conservative investments, isn't going to change, he says. The typical Jones rep is 43 years old, has been in the business for six years and has 863 accounts worth about $44 million. The typical client is 54 years old, makes $61,525 a year and has $106,415 invested through Jones. (By comparison, a Merrill Lynch FAs' average book size is around $95 million.) Asked about the competition's pursuit of high-net-worth clients, Weddle replies: “They're fishing in a very small pond.” And the trend towards wealth management and fee-based service models? “We have a managed accounts program with $500,000 minimums, but our clients are buy and hold,” he says. “The wrap pricing approach doesn't fit with that philosophy.”
Drinking the Kool-Aid
No, it's not Merrill Lynch. But for most Edward Jones reps, that's fine. Selecting only high-quality bonds, blue-chip stocks and mutual funds from the research department's 13 covered families keeps it simple and safe for most clients.
Depending on whom you talk to, Jim Weddle is either the right man or the wrong man to be at the helm at this moment in Jones' corporate life. It's nothing personal: Some former top producers and former general partners who left the firm in the last couple years — and wish to remain anonymous — say the firm simply needs to pick an outsider to gussy up the firm.
In some ways, Jim Weddle is Edward Jones. He grew up in Naperville, Ill., a suburb of Chicago, graduated from DePauw University in Greencastle, Ind., and got his start at the firm in 1976, first as an intern. A year later, armed with an MBA from Washington University in St. Louis, he opened the 200th office in tiny Connersville, Ind., a town of subdivisions and small businesses, surrounded by farms — Jones' country. He became a limited partner five years later and a principal in 1984. And he hasn't forgotten what got him there: “I walked up and down the main street, knocking on every door and saying hello,” says Weddle. “It's slow, it's inefficient, but it's still very effective.” He also doesn't forget the help he got from his firm, specifically two more experienced reps that mentored him through his early years. “They would call me up regularly and say, 'How ya doin, whatcha doin,' what are you workin' on and how can I help?” he says. Weddle subsequently had a hand in the creation of the Goodknight program, by which veteran reps bequeath to new reps their smaller accounts.
That culture hasn't changed much: Recruiters and reps say the firm's culture is a distinct one. Jones brokers still pound the pavement, knocking on doors, preaching a no-nonsense conservative investing philosophy. Many Jones brokers are known to man their offices on weekends. Veteran reps still help newbies. It's like no other firm on Wall Street. Volunteering to recruit, to mentor and to train is held in high regard by management. Indeed, Jones reps are known for their seemingly unflappable cheerfulness. The firm has won Registered Rep.'s “Broker Report Card Survey,” in which reps rank their own firms, for 13 consecutive years; it consistently ranks among Fortune magazine's “100 Best Companies to Work For.”
The great majority of Jones reps never worked in the industry before joining Jones.
The training program is considered to be one of the best for rookie brokers, says Andre Cappón, founder of the CBM Group, a New York-based consultancy. Jones says that 90 percent of its reps pass the Series 7 exam on the first try. They also are indoctrinated in what Weddle calls “our tradeoffs — what we do and don't do at Jones,” he says, referring to the firm's conservative approach to investing.
All 9,733 reps work with at least one sales assistant in small offices that are nearly identical — from the paint to the furniture to the decorations — regardless of where they are located. Reps work in one of 195 different regions under the guidance of a regional leader. They meet regularly among their region to discuss ideas and ask questions, but according to reps, they are rarely, if ever, permitted to attend events where brokers from other firms are present. For all these traits, the firm is often compared to Avon and franchises like McDonalds. The model's rigid standardization combined with the steadfast allegiance of its reps is one reason the firm's culture is both fondly and mockingly referred to as the “cult of Edward Jones.”
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