Edward Jones in 2006: Confronting Success

                      Edward Jones in 2006: Confronting Success

Edward Jones was established by Edward Jones Sr. in 1922. Later his son, Ted, joined the firm in 1948 and grew the firm from a small office in St Louis to the national business known today.  The business slowly expanded based upon Ted Jones’ visionary plan to place broker offices in rural communities.

As of 1970, the firm had grown to employ 100 brokers.  The model was based upon small offices with one Financial Advisor and one Branch Office Assistant.  Shortly thereafter, a partner in the firm, John Bachman, contacted Ted Jones with his idea of how the firm could be refined and expanded to better serve both the brokers & their investors.

A few years later, the industry was rocked by a ruling to deregulate the fixed price for trade commissions, halving them from $100 to $50.  This allowed the emergence of discount brokers to change the landscape of the investing industry and bring new competitors into the field.

In early 1980’s, with the help of Bachman, now a managing partner, and Peter Drucker, a consultant, Edward Jones cultivated the personal relationship model that became the cornerstone of their corporate image.  Over the decade, they continued to expand, entering the metropolitan areas they had previously avoided.  This expansion began to swap their location demographic from 25% metro / 75% rural mix to approximately 72% metro / 28% rural by 2006.  In 1994, they even entered the international arena by opening an office in Canada followed a few years later by an office in the UK.

EJ kept to their “personal investor” persona by only working with three segments:  retirees, pre-retirees and small businesses; no corporate accounts.  The firm did not employ a price tier strategy.  This helped allow brokers to bring in accounts of all sizes.  The freedom of the Financial Advisor’s to open any account that came to them meant by 2005, 76% of accounts in EJ were under $50K.  The EJ offices were conveniently located in high traffic areas to have better accessibility.  The Financial Advisors could run events in their community, such as financial planning seminars, that would encourage business.

Their Financial Advisors did not deal in penny stocks, derivatives or any form of risky asset classes.  Their goal was to help their customers steadily build retirement savings, not promote dreams of getting rich quick by playing the market.

Now, current managing partner Jim Weddle stands at a crossroads.  The company goal is to grow to 17,000 financial advisors by 2012 but Weddle must decide whether this rate of growth in the currently changing industry will compromise the driving principles that have guided and sustained Edward Jones to their current success.

1. Is Edward Jones (EJ) remarkably successful? What EJ strategic choices explains the differences?

In order to analyze Edward Jones’s performance, we measured them on different categories in a balanced scorecard.

First, we measured different Profitability, Efficiency and Leverage ratios (DuPont Model) against their competitors. This provides us an understanding of how well their assets are performing in driving their revenue and earnings.  

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A few major highlights for Edward Jones as compared to their competitors and EJ’s strategies that support for these differences:

• High ROE (except TD) and high ROA signifies higher return for EJ’s equity owners. Edward Jones doesn’t hold many assets as most of their operations are done from leased offices. The low level of fixed assets help Edward Jones to increase their ROA to a very high level.  In addition, Edward Jones is a partnership firm, internally funded by partners comprised of selected employees (based on years of service and performance).  As a result total equity is very low, resulting very high ROE.
• Low Debt Leverage Ratio means the assets are mainly financed by equity which reduces the company’s relative riskiness.
• High Asset Turnover Ratio reflects higher Efficiency.  This signifies that their assets are performing well in generating revenue.  With low assets, Edward Jones has been able to generate a high volume of revenue. EJ’s had targeted rural areas and as there was very low competition in the area, they were able to set up small offices and drive higher revenue.
• Pre-tax ROS is low which signifies low profitability/Profit Margins due to their high expenses.  Major expenses for Edward Jones comes from compensation and benefits, accounting for 61.7% of all expenses, much higher when compared to most other competitors.  Edward Jones pays most of its FAs a fixed salary and a commission based on their sales.  Also, as most of its FA offices are leased, the rent of the leased properties are added to the expenses.  Lastly, due to FAs being spread across the country in rural areas, communication expenses (e.g. satellite, broadband, etc.) are also high for branch offices. As a result Edward Jones has very high expenses when compared to their revenues, reducing Pre-Tax ROS

Further we explored EJ’s last three years (2003-2005) of financial statements.