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Finance: BROKERAGE HOUSES
CAN IT PLAY OUT OF PEORIA?
It sounds like a throwback to the 1950s--selling stocks door-to-door. But for stockbroker Timothy J. Finucan, the Edward D. Jones & Co. formula has worked terrifically. Eight years ago, the 33-year-old Wisconsin native launched his one-man office by knocking on nearly every door in Webster City, Iowa--pop. 7,894. With the nearest big-city brokerages 20 miles away in Fort Dodge, Iowa, he peddled a plain-vanilla mix of stocks, bonds, and mutual funds, urging customers to buy and hold. Now, Finucan is a top producer at a firm where run-of-the-mill brokers earn six-figure incomes. "It's a great firm," he gushes.
He's not the only one who thinks so. Though relatively unknown beyond small towns, St. Louis-based Edward D. Jones, whose roots go back to 1871, has prospered mightily by sticking to old-fashioned values that some better-known competitors have lost sight of. The firm tightly monitors its sales force. It steers customers, many of whom are inexperienced, away from risky investments. Through various incentives, it encourages brokers to act in customers' interests rather than their own. Not surprisingly, Jones ranks at the top in customer surveys. From 300 offices in 1980, Jones today has 3,350--six times as many branches as Merrill Lynch & Co.
Yet this year, the Jones juggernaut has lost some steam. It has saturated many of the best small-town locations, causing veteran brokers such as Finucan to fret about newcomers encroaching on their territories. Jones is striving to expand into larger communities but is running into stiffer competition. Door-to-door marketing that works wonders in rural Iowa falls flat in some major metropolitan areas such as Los Angeles, assert critics inside and outside the company. Among the reasons: costly solo offices, low name recognition, and limited array of products. Earnings at Jones, which is a private partnership, fell 19% last year, to $53.8 million--the first drop since 1988 (charts). That was better than the industry's 87% decline in 1994. But Brown Bros. Harriman & Co. analyst Perrin Long predicts that while Jones's profits will rebound in 1995, they will still lag behind the industry.
HOLDING STEADY. The principal architect of Jones's expansion, managing partner John Bachmann, is stepping on the brakes to regroup. The firm won't open any additional offices in 1995, the first no-growth year since the low-key, unflappable Bachmann took over from the founder's son in 1980. Yet the 56-year-old Midwesterner stands by an oft-stated goal of 10,000 offices--including another 4,000 over the next five years. "We have to have a large network to be competitive, and we want to get there quickly," Bachmann explains. But Jones's vaunted quality could suffer, warns Long. "They're growing too fast."
To date, quality-control has been one of Jones's hallmarks. The firm has developed a mother-hen monitoring system at the home office that provides equal parts hand-holding, suspicious scrutiny, and decrees from on high. It allows watchdogs to check accounts across the country for potential problems, such as excessive trading.
Jones also keeps its brokers out of trouble by limiting product offerings. About 31% of Jones's $658 million in annual revenues comes from selling the funds of a half-dozen mainstream families, including American, Goldman Sachs, and Putnam. Government securities, corporate bonds, and other fixed-income products account for 24%, individual stocks 14%, and insurance products, such as annuities, an additional 13%. Jones customers hold their funds for an average 18.3 years, three times longer than the industry standard. The firm won't offer lower-rated securities or stocks that sell for less than $4 per share. It has few fee-based accounts, sells almost no initial public offerings, and strictly forbids futures and options. "Not for amateurs," Bachmann explains.
Jones also offers no proprietary products, eliminating the potential for conflict between broker and customer interests. Its sales contests for brokers stress diversification, rewarding those who sell a mix, rather than a single, favored product. Brokers who assist in training and supervision can become limited or general partners, entitling them to a slice of the profits.
Keeping Jones brokers in clover as the firm expands into cities will not be easy. Bachmann is instituting a variety of reforms. He is restructuring a training program that had grown too impersonal as hiring skyrocketed. The firm now employs a screening exam that better identifies the driven self-starters who tend to succeed at Jones. In a bid for better name recognition, Jones will modestly increase its meager advertising budget. And the firm has launched a $100 million computer upgrade to improve communications with the branches.
MERRILL MARAUDER. Some Edward Jones brokers in tougher markets such as Southern California and New England call for more radical changes: a massive advertising commitment, multibroker offices to reduce overhead, and a broader product line--such as a wider array of mutual funds. Jones did recently acquire a Missouri thrift, allowing it to expand trust services and move into mortgage banking.
Those moves could help in a looming competitive battle with Merrill Lynch, which is pushing into small communities. Over the next three years, the New York-based firm will expand from 125 small-market branches to 250, with an average 3.5 brokers per office. Merrill's lower-cost offices, stronger name recognition, and broader product line give it a big edge, says Paul A. Stein, who oversees the firm's foray into the sticks. Broker Jeffrey J. Bobrowicz, who left Jones for Merrill last year, believes the direct competition will slow Bachmann's planned dash to 10,000 offices: "With Merrill Lynch doing what they're doing, I don't see any way they're going to make that," he says.
Bachmann's not worried: "Merrill Lynch is trying to do everything they can to emulate our system with people they've pirated away from us." He's more concerned about powerhouse regional banks such as First Chicago NBD. Bachmann denies rumors that he might sell out to a banking titan. He adds, though, that to compete against them, Jones must continue growing.
But is he pushing his one-broker offices to areas where they're unworkable? No way, Bachmann replies. The "knock-knock, sell stock" formula will work in every community once Jones attains critical mass, he says. The firm has a computerized map of the U.S. that identifies with a green dot each street-corner destined for a new Jones office. Under Bachmann, Jones will either turn those green dots into 10,000 branches--or rub its knuckles raw trying.By Greg Burns in St. Louis