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Main Street Trumps Wall Street


John W. Bachmann may be Merrill Lynch & Co.'s (MER) toughest competition. Far from Wall Street, he oversees the country's biggest network of brokerage offices, 8,357 at last count. As managing partner of St. Louis-based Edward Jones for the past 22 years, he has shunned the freewheeling ways of Wall Street. His firm does little investment banking, so it doesn't have the conflicts of interest that Merrill and others are trying to explain to government regulators. Its 35 research analysts cannot own stock in the industries they cover. Bachmann doesn't believe in online trading. He is not too keen on margin trading, either. And Edward Jones is winning 1,000 Merrill clients a month.

But Bachmann, 63, will only gently chide his rivals. "I'm not going to criticize someone else," he says. "But if you are being compensated for bringing in deals and writing reports, that should be disclosed in bold print. The key principle is to tell clients how the system works."

Public mistrust in Wall Street plays to the advantage of Edward Jones. During the dot-com boom, the firm tried to dissuade its clients from buying shares in many of the initial public offerings that promised too much. Bachmann did not want to see Mr. and Mrs. John Q. Public stuck with stock in, say, InfoSpace Inc. or Pets.com. While clients may have watched the frenzy from the sidelines, that's where they were during the crash, too. "We missed a number of things," says Bachmann. "But most of what we missed turned to dust anyway." Some ridiculed the firm for its refusal to offer customers online trading, but Bachmann wouldn't budge. "Almost every Internet consultant was critical of us," he recalls. "But the market we serve values relationships. We do not want to encourage you to gamble."

That determination has served Edward Jones well. For the past year, former Merrill clients have been stampeding to the firm--without Edward Jones wooing them. Merrill's defection rate is so high because it no longer offers smaller clients personal service. Now, those investors have to make do with representatives at call centers. Still, Jones is a relatively small company, with $255 billion under management, compared to Merrill's $1-trillion-plus. It is also a more profitable one. Despite Jones's high-cost office network, for years, the firm's pretax returns on equity have outperformed those of most rivals. In 2001, Jones's ROE was 24%, well above Merrill's 19% or Charles Schwab's (SCH) 13%. Even though high-margin underwriting work accounts for only 3% of the firm's $2.1 billion in revenues, Jones still managed to beat investment-banking heavyweight Morgan Stanley Dean Witter & Co. (MWD) in the past five years, with an average return of 40%, vs. Morgan's 39%.

Edward Jones's profits outpace most of its rivals largely because it doesn't pay Wall Street-size salaries or bonuses. Its brokers sell an array of financial products, including mutual funds, life insurance and annuities, bonds, credit cards, and home loans, and they receive 40% of the commission--a fact the company makes clear. As at most other brokerages, though, Jones's analysts failed to get clients out of big losers such as Enron Corp. and Lucent Technologies Inc. (LU) until it was too late. The firm began urging clients to dump Enron in mid-October, when it was selling at $22 a share. Jones's analysts still have a "hold" rating on Lucent after riding it down to $4 a share. "We missed the call," concedes Dave Otto, head of research. "That was clearly a mistake." Nonetheless, the firm's portfolio of recommended stocks is consistently among the top performers, according to Zacks Investment Research Inc. Jones's model portfolio over the past five years is up by 93.5% through last year, vs. 66.2% for the Standard & Poor's 500-stock index.

One of the reasons Edward Jones was able to resist the temptations of online trading and other fast-money gambits in the late 1990s was probably Bachmann. His Midwestern roots undergird the conservatism that is an essential part of the Edward Jones ethos. His personal guru is the staid Peter F. Drucker, the most influential management philosopher of the last century. Indeed, there's nothing flashy about Bachmann. Even his philanthropic work is fairly traditional: He serves as a trustee of the St. Louis Science Center and hits up the well-heeled for United Way. But he is willing to get his hands dirty in the line of civic duty. A few years ago, he spent a morning nailing shingles on the roof of a house his firm was building in Atlanta for International Habitat for Humanity. "He didn't just make a cameo appearance," says Jim McKenzie, a Jones investment rep who has known Bachmann for 40 years.

Bachmann, who will retire at the end of 2003, started at Edward Jones as a messenger and board marker, working summer vacations during college for $175 a month and living in a room at the local YMCA for $11 a week. At Wabash College, where he majored in economics and played baseball with more enthusiasm than skill, he wasn't exactly a star pupil. "College was hard for me," he says. "But I worked very hard at it, and I learned a lot." After earning his MBA at Northwestern University in 1962, he returned to Edward Jones as a full-time researcher.

His real apprenticeship, however, began in Columbia, Mo., where he ran a branch office from 1963 to 1970. Like all investment reps then, Bachmann went door to door to drum up business. On his first call in a nearby town called Moberly, he went into Carpenter's Jewelry Store and approached a woman dressed in black. "I'm here to see Mr. Carpenter," Bachmann announced. "We buried my husband this morning," she replied. Mistaking him for a mourner, she added: "It's wonderful for you to come by." Bachmann froze, unable to summon a word. "I was so shocked I drove straight back to Columbia," he recalls. "I said, `If it's this hard, I'm going to work at the Post Office."'

But Bachmann recovered. Indeed, he mastered the drill, persuading farmers, merchants, and others to purchase mutual funds by asking a simple question: "If you were to look at the investment portfolio of the most successful person in town, what do you think you'd find?" By 1970, he had moved to headquarters as a general partner and later began to help Edward D. Jones Jr., the founder's son, with planning. An epiphany of sorts occurred two years later when he and Jones read Peter F. Drucker's newly published book, Management: Tasks, Responsibilities, Practices. Bachmann saw the tome as "a set of instructions on how to build" the business by, among other things, setting clear objectives at the top and creating jobs that allow for personal growth. Shortly after Bachmann succeeded Jones as managing partner in 1980, he appealed to Drucker directly by offering the firm as "a laboratory" for his ideas. Drucker, then 71, signed on as a consultant, a role he continues to play.

It was a near-perfect match. If Edward Jones is the antithesis of the Wall Street firm, Drucker is the anti-consultant. Indeed, he once dubbed himself an "insultant" who "scolds clients for a fee." Drucker rarely, if ever, gives answers. Instead, he queries his clients so they look at a situation differently.

It was a Drucker question that altered the direction of Jones's growth strategy. For years, it argued that the company's appeal was mainly to rural and small-town Americans. With the exception of St. Louis and Kansas City, the firm avoided metropolitan markets where it might collide with the big brokerages. At a consulting session in 1981, Drucker asked if the two city offices were more productive than the firm's rural locations. Turns out they were. Drucker's insight led to an aggressive growth plan that has brought Edward Jones to almost every major city in the U.S. as well as Canada and Britain.

Now, Wall Street's troubles should buoy that growth. But Bachmann's too much of a gentleman to gloat about it. By John A. Byrne in New York


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