FOOL ON THE HILL
While a skeptic of most brokerage houses, Whitney Tilson is impressed with one that has a long-term, low-turnover investment philosophy and truly puts its clients first.
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Quick! Name the only major brokerage house that didn't drink the dot-com Kool Aid. That didn't participate in any IPOs of ridiculous, worthless companies whose stocks soon went to zero. That refused to offer online trading. That in November 1999, near the peak of the tech stock bubble, sent 2.3 million letters to every one of its clients warning them about "investors' increasingly unrealistic expectations regarding the future performance of the stock and bond markets," and noting in particular "a great deal of risk in the 'dot-com' fad." Give up? The answer is Edward Jones. Never heard of it? Neither had I until I had the opportunity to spend three hours with its managing partner, John Bachmann. After meeting him and doing some research on the company, I'll confess that I'm an unabashed admirer. Background Edward Jones has such a unique, focused strategy that the godfather of strategy, Harvard Business School Professor Michael Porter, wrote a case study on it. The key elements of the firm's strategy include an entrepreneurial culture revolving around small offices staffed by only one broker (plus an administrative person), an emphasis on long-term, low-turnover investing, and a strong focus on rural areas (though 70% of brokers are located in metropolitan areas) and on average American investors (the average account size is about $50,000). Edward Jones vs. the big brokerage firms Edward Jones's strategy is to be precisely the opposite. In particular, the company: I'm not trying to paint a black-and-white picture here. I'm sure there are some incompetent or unscrupulous brokers at Edward Jones, and most brokers at other firms no doubt care about their clients and serve them well. But I believe Edward Jones has an investment philosophy, corporate culture and structure that makes it uniquely and exclusively focused on its clients' best interests. This belief is confirmed by an independent survey last year by Registered Representative magazine. In it, eight firms' brokers were asked to rate on a scale of 1-10 their own firms in a variety of areas, and Edward Jones consistently scored at or near the top. On the questions I believe are most important, "Freedom from pressure to sell certain products" and "Overall ethics of the firm," Edward Jones had the highest scores of 9.96 and 9.98, respectively (the averages were 9.08 and 9.23 and the laggard firms were Merrill Lynch at 8.26 and Prudential Securities at 8.60, respectively). Case study on strategy and corporate culture Conclusion This has always been true, even at the peak of the online stock trading mania early last year. Thus, it's entirely reasonable that many people would hire a stock broker or other financial advisor to assist them. I'm not recommending that you rush out and open an account with Edward Jones by any means. The capabilities and integrity of the individual broker are undoubtedly more important than what firm he or she works for. But a firm's investment philosophy, corporate culture, and structure are also critical for investors looking for a broker, and I believe Edward Jones rates highly in these areas -- Whitney Tilson Guest columnist Whitney Tilson is Managing Partner of Tilson Capital Partners, LLC, a New York City-based money management firm. He did not own shares of any company mentioned in the article at press time. Mr. Tilson appreciates your feedback at Tilson@Tilsonfunds.com. To read his previous columns for The Motley Fool and other writings, visit http://www.tilsonfunds.com/
Edward Jones was founded in 1922 and has grown to become the seventh largest securities firm in the United States based on number of brokers (approximately 8,400 at latest count, growing by four a day, with plans to hit 25,000 by the end of the decade). The firm is enormously profitable and successful. Since Bachmann assumed control in 1980, it has grown its top and bottom lines at an annual compounded rate of 23% and consistently generates pretax margins and returns on equity of at least 10% and 25%, respectively, significantly above the industry average. My only regret is that it's not a public company, because I'd love to own the stock (at the right price, of course). (Incidentally, the firm has had buyout offers of up to 10 times book value, but is steadfast in its desire to remain private and independent.)
I have long had a dim view of the major brokerage houses, feeling that in far too many cases they:
I've written a number of columns about strategy and corporate culture, and how critical each of these elements are in building and maintaining competitive advantage. Edward Jones is one of the best examples I can think of in which a small company in a highly competitive industry has been able to generate significantly above average growth and profits due to a distinct, focused strategy and powerful corporate culture.
Perhaps it strikes you as unusual to read an article on this site that speaks favorably about a brokerage firm. After all, The Motley Fool in many ways stands for investors rejecting stock brokers and instead taking control of their financial lives and making investment decisions on their own. I believe this is good advice for many people, but the more I talk to average individual investors, the more I realize that many other people simply don't have the time, interest, or ability to manage their money (see my column, Get Help, If You Need It).
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