Edward Jones is vulnerable to losing its top producers

Edward Jones’ lack of a top-tier advisory platform for brokers and a succession plan for veteran advisers is hurting its ability to hang on to its highest-producing reps in the fiercely competitive recruiting marketplace.

Jones, which has 12,600 brokers, has long been known for its trademark culture: fiercely loyal representatives selling mutual funds for commissions in small towns to mom-and-pop investors. As a partnership, Jones’ structure is unique among the large broker-dealers.

Last month, two top brokers, Brad Hare and Rebecca Frazier, bolted to wirehouses. The moves, on April 16 and April 30, respectively, were regarded as highly unusual by many industry recruiters and executives.

Each rep produced more than $1.1 million in fees and commissions, and were standouts at Jones. Industry sources estimated that the number of $1 million producers at the firm is 100 or fewer.

The company is not a signatory to the industry broker-recruiting protocol, which stipulates that firms refrain from suing one another when brokers leave to join rival firms. Some broker-dealers that recruit from Edward Jones do so with the utmost care for fear of a lawsuit, they said.

Still, Jones will continue to be vulnerable to losing more of its best brokers, observers said.

The brokerage industry in general has embraced charging wealthy clients fees for investing in managed-money platforms, a model closer to the business of a registered investment adviser than a traditional stockbroker.

The advantage to the firm and broker is the recurring revenue gained from such platforms, which many regard as more favorable than the firm’s and brokers’ charging commissions every time a product is sold.

Though Jones has been working in recent years to beef up its fee and advisory platform, the firm has an extraordinary reliance on revenue from mutual funds.

In its annual filing with the Securities and Exchange Commission, known as a Focus Report, Jones states that the “partnership derived 25% and 31% of its total revenue for the years ended Dec. 31, 2009, and 2008, respectively, from one mutual fund vendor,” American Funds.

In 2009, the firm reported $3.5 billion in total revenue, and a year earlier, it reported $3.8 billion.

Officials at Jones acknowledge the risks of a relationship that relies on one mutual fund company.

“Significant reductions in the revenues from this mutual fund source could have a material impact on the partnership’s results of operations,” the company said in the report.

The firm’s brokers are extremely loyal, said James D. Weddle, managing partner at Jones.

He declined to comment specifically about Ms. Frazier and Mr. Hare but said that the attrition rate for veteran producers is running at an annual rate of less than 1%. “From time to time, you lose good people,” he said.

He also defended the firm’s fee platform, saying it is “the best advisory platform in the business.” Over the past 24 months, the firm has expanded that platform to $35 billion in assets, he said.

That success is prompting the firm, which was late to the game in the fee business, to develop a unified managed account platform for its brokers next year.

Some industry observers disagree. Jones’ lack of a strong advisory offering is an issue, and rival firms recognize that fact, said Courtney Raymond, an industry recruiter who worked to move Ms. Frazier to Bank of America Corp.’s Merrill Lynch Global Wealth Management group.

“As investors become more affluent, there’s less and less of a fit between the clients’ needs and the capabilities of the Jones brokers,” she said. Ms. Raymond also cited Jones’ lack of lending offerings such as bank products and mortgages as another drawback for reps with wealthy clients.

“A criticism is that [Jones is] not very good at advisory services,” said Steve Winks, a principal with SrConsultant.com.

At the same time, he praised Jones’ “unique and successful business model,” citing surveys that show strong loyalty from brokers and clients.

But for a veteran broker, there is a downside, Mr. Winks said.

“If you build a big practice, you can’t capitalize on it at Jones,” he said. “In order to do so, you have to leave. Big reps need to move to a place where advisory business is stressed.”

One former Jones broker, who asked not to be identified, said that the firm would likely lose more brokers because it doesn’t offer succession planning.

Some other firms will value a broker’s practice and put in place a formal transition package to pay the broker.

But Jones’ mindset is that the broker’s book of business belongs to the firm, not the adviser or his heirs, the broker said.

“They will not do a legitimate succession plan,” said the broker. “There’s no discussion of buying the broker’s book of business. Jones’ attitude is, we own the book.”

Mr. Weddle said that the transition plan in place at the firm worked exceptionally well. Veteran brokers bring in a new broker to their territory, work to move the business to the new broker over three years, and collect revenue from their book in the fourth year.

If a broker has moved up to become a limited partner at Jones, he or she keeps that capital for their lifetime, unless they join a rival firm, Mr. Weddle said.

Still, the firm’s loss of two star brokers surprised some recruiters and executives.

Ms. Frazier’s “decision to leave is based upon a dispute over issues with management,” said James McKoon, her attorney. She had been with Jones since 1999.

It remains unclear what prompted Mr. Hare’s decision to leave the firm. Mr. Hare, who didn’t return calls seeking comment and now works for Morgan Stanley Smith Barney LLC, had been with Jones since 1997.

Both Merrill and Morgan Stanley Smith Barney are offering upfront pay packages that could total as much as 330% of a broker’s annual pay to join. Recruiters said that the two brokers face cultural hurdles of working in branches rather than individual offices.

E-mail Bruce Kelly at [email protected].

Related Topics: Advisers On The Move