Wall Street's last partnership

The decision by Goldman Sachs to sell stock to the public, ending 130 years of business as a partnership, reflected common wisdom among Wall Street's giants: Any firm that aspires to have enough financial power to remain an industry leader has to turn to outside investors.

Just one major champion of the Wall Street partnership remains: Edward D. Jones & Co., the St. Louis-based brokerage house.

Often described as the Wal-Mart of finance because of its strategy of serving investors in rural areas long ignored by giant stock retailers like Merrill Lynch, Paine Webber and Morgan Stanley Dean Witter, Jones has expanded rapidly into suburban America, Canada and, starting last year, small towns in England. Jones' network now stands at nearly 4,200 offices, more than any other firm's. Its goal is to have 10,000 offices within five years, most staffed by a single broker and an office manager -- mirroring the company's Oklahoma City office under broker Michael Grant. Such brokers make up roughly two-thirds of its 2,500 limited partners. Most of the others are headquarters employees, including some secretaries. There is no doubt the company could grow even faster if it followed Goldman's lead. Certainly, there has never been a better time to get a high price for a company like Jones, although the 158 general partners could not expect their stakes to be valued at anything like the $100 million figure being bandied about for some of Goldman's 190 partners. Goldman earned about $1 billion in each of the first two quarters of the year, nearly 10 times Jones' net income of $114 million on revenue of $1.13 billion for all of 1997. More capital would allow Jones not just to open new offices faster but also to expand its meager share in investment banking services that can be more lucrative than selling stocks. It could also enter areas it now avoids, like trading for its own account. But Jones figures there is more to lose than to gain from abandoning its partnership structure and the conservative business strategy that has been built around it. The company has, in fact, turned down offers to be acquired in the past. "The greatest mistake successful companies make is focusing their analysis inward on what they do instead of outward on how the world is changing," said John W. Bachmann, Jones' managing partner. "But we've decided to stick with the trade-offs we've made." Those trade-offs start with an investment philosophy that might seem out of touch in the go-go 90s. Clients are typically directed toward blue-chip stocks and bonds and then generally advised to hold them with heirloom-like loyalty. Brokers do not push initial public offerings and the firm, unlike, say, Merrill Lynch, has no in-house mutual funds that it might be tempted to favor. Jones' trading desk in St. Louis purchases bonds not for the firm's account but to provide inventory for the brokers. Similarly, Jones gets involved in investment banking only to create new securities for its clients. Indeed, neither trading nor banking is treated as a separate profit center, eliminating a potential conflict of interest with the firm's retail customers. Brokers are given the freedom to operate their offices almost as independent businesses. They are pushed, though, to generate their commissions by finding new customers and by adding to existing accounts, rather than from trading or speculation. Those who earn profits over the long term, participate in company training programs and keep their compliance records unblemished become limited partners. Grant oversees "slightly under $30 million" in investments by almost 500 clients at his Oklahoma City office, open since February 1995. His business increased 68 percent last year. Jones' current strong buy recommendations include such warhorses as DuPont, Campbell's Soup and Citicorp. Even in high-technology, the favorites tend toward big names like Compaq and segment leaders like Applied Materials, the largest supplier of semiconductor manufacturing equipment. The company's 13 analysts follow fewer than 300 companies, although their work is supplemented by research Jones purchases from Credit Suisse First Boston. "There are periods of time when small stocks are in favor and then the market works against us," said Mary Beth Heying, a company spokeswoman. Not recently, however. Jones' recommended list gained 39.5 percent last year, outperforming the Standard & Poor's 500-stock index and the recommended selections of every other major broker. It continued to outperform the S&P 500 in the first five months of this year, returning 14.5 percent. But the five-year gain through the end of last year of 120.4 percent was 20 percent less than the S&P's and below that of most other brokerage houses. Bachmann frankly admits that he frets about his firm's ability to prosper as Wall Street firms consolidate, banks and other competitors plunge into stock brokerage and Internet-based services offer investors bargain-priced trading from their home computers. Battling firms like Merrill Lynch for hotly contested suburban turf is tough enough, especially since that Wall Street giant has been paying big bonuses to lure away Jones' brokers. But Merrill is at least familiar. Not so huge banks like NationsBank. "We are still learning how to compete with them," Bachmann said. "They are great marketers." Bachmann says the changes in the competitive landscape have not been surprising but the pace of change has been. Jones has responded by hiring 150 broker candidates a month this year and plans to step that rate up to 200 a month. Jones is gambling that rapid expansion can offset the marketing advantages of larger competitors and the lower costs of new Internet- based brokers. How far into the next century such efforts can carry the partnership is Bachmann's big challenge. "The main threat to us is irrelevance," Bachmann said. "If our voice is drowned by giants or they price in ways we can't compete, we'll be in trouble." Barnaby J. Feder prepared this article for the N.Y. Times News Service.

Copyright 1998
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