One Firm Is Sticking With Traditional Way

By JAMES FLANIGAN

Nov. 28, 1999 12 AM PT

‘Investors don’t want to sit in front of their computers all day,” says John W. Bachmann, managing partner of Edward Jones & Co., the St. Louis-based brokerage firm.

That deceptively simple insight, that mainstream investors are not trading stocks online but nurturing a nest egg for retirement or running a small business, has propelled Edward Jones from a regional company with 300 offices 20 years ago to a dynamic financial services firm with more than 5,000 offices in the United States, Canada and Britain today.

And that focus on middle-class customers, amid all the ballyhoo about Internet trading and changes in the financial industry, will probably carry Jones a lot further in the years ahead. It’s a firm that illustrates many truths about global financial services and carries lessons for other businesses too.

Jones takes an old-fashioned approach. It doesn’t discount commissions or offer stock trading for $8 a transaction. Instead, it sticks to a classic brokerage commission structure, charging $100 or a 1% commission to an investor buying or selling 100 shares of a stock on the New York Stock Exchange, and up to $230 or 2.3% for an investor trading 500 shares of a $20 stock on Nasdaq.

For that money, customers get a lot of contact, research advice and counseling from their investment representatives. But they don’t get a lot of trading in their accounts. At any given time, 40% of Jones’ 3.4 million accounts generate no commission income. “Our customers invest for the long term, that’s the way to build up wealth,” Bachmann says.

The Jones firm holds certificates of deposits for its middle-class clients--average income $51,300. It is a major distributor of mutual funds, and offers insurance and annuities as well as stocks, bonds and mortgage-backed securities.

The firm is growing rapidly--$1.46 billion in revenue and $153.5 million in pretax income through the first 10 months of 1999, running 25% ahead of 1998 revenue and 18% ahead on income.

Jones’ profit margins are less than those posted by Merrill Lynch, Charles Schwab, PaineWebber and other brokerage firms. But as public companies, they are under greater pressure to maximize reported income than Jones, which remains a partnership owned by 4,180 of its 5,200 investment representatives.

But, again, behind the image of a small-town brokerage firm--one carefully nurtured with tales of Ned Jones, who built the modern Edward Jones in the 1960s and who drove from St. Louis to Colorado opening offices and hiring brokers in towns along the way--is a firm with sophisticated understanding of where customers are in changing times.

“Demographics drives our business,” says Bachmann, 51, a graduate of Indiana’s Wabash College who has an MBA from Northwestern. He’s determined to double Jones’ offices to 10,000 within three years, to gain customers among the vast numbers in all parts of the world who want to invest for retirement and other purposes. Saving for retirement, long a common practice in the United States, is now growing rapidly in Europe and Asia as people wake up to the fact that their governments won’t fully finance their old age.

Jones confirmed that there was indeed an international financial-services market by going into Britain in 1997 against the advice of experts who said its practice of soliciting accounts door to door would never work. Now it has 66 offices and about 75 investment representatives in Britain.

In the U.S., Jones pre-retiree customers, with accounts averaging $36,000, are often below giant companies’ radar. But the customers are relatively young--average age 43--and are just the kind of upwardly mobile population that online trading firms are spending big money to attract.

Yet Jones customers are proving far more loyal than conventional wisdom would suggest. Over the years, fewer than 100 customers departed Jones for discount brokers, Bachmann says.

And he doesn’t see customers defecting to online trading firms such as Ameritrade and others that admit to spending $500 in advertising for each customer they attract. “They only offer trading; we offer service,” Bachmann scoffs.

None of this is to imply that the Jones firm is averse to technology. Its customers can contact it and get research information online. And it is adroit in using a satellite network to link its offices and appeal to customers. The firm frequently broadcasts question-and-answer sessions with chief executives, such as Jack Welch of General Electric and Roger Enrico of PepsiCo, to brokers and customers. The blue-chip CEOs reach interested investors, and Jones customers enjoy the cachet of being able to talk to corporate bigwigs.

Jones also is expanding into underwriting, focusing on utilities, real estate investment trusts and financial service firms. The issuers get a market for securities among Jones customers, who in turn get a look at issues for their portfolios. Jones now gets as much as 5% of its annual revenue from underwriting.

To be sure, Jones faces increased competition as Merrill Lynch pushes its 18,000-strong brokerage force to step up customer services. Schwab also is creating a customer advisory department.

And online trading firms, as they attract customers and assets in custody--the securities brokers hold for clients--will undoubtedly offer online research and advice.

But that’s just the point about Jones and the lesson it holds for other businesses: It has grown to its present size--custodian of $202 billion of assets--by listening to customers when they said they wanted brokers to contact them and provide them with advice.

The most important prospect of the Internet is that it will prove a new communications medium between customer and financial advisor. Jones will adapt as use of the Internet grows, Bachmann says. “The Internet may make changes in how services are charged for--some mutual fund companies already are rethinking fees,” he notes. “But the business will always be helping customers make decisions about their finances,” he says.

Look at the customer, not the technology--a deceptively simple business idea.

James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.

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Niche in the Middle

Edward Jones & Co., a conservative brokerage firm that offers no online trading but piles on customer contacts and investment advice, attracts a notably young, middle-income clientele.

Retirees

Accounts (millions): 1.0

Average age of clients: 70

Average income: $38,289

Average assets per account: $101,488

Pre-retirees

Accounts (millions): 1.4

Average age of clients: 43

Average income: $47,521

Average assets per account: $36,059

Business owners

Accounts (millions): 0.5