IRVINE, Calif. — As the number of regional brokerage firms dwindles, executives at those that remain insist they’re better off staying independent.
“We have no intention of being sold,” said William Johnstone, chief executive of employee-owned D.A. Davidson & Co. in Great Falls, Mont. “I know there’s a question about the viability of smaller firms, but our [independent regional] business model continues to work well.”
“We don’t take any phone calls or visits with people who want to talk about” buying our firm, said Ed Wedbush, chief executive at privately owned Wedbush Morgan Securities Inc. in Los Angeles.
The desire for “continuity and control of our own destiny” is important, he said.
“We always talk to [suitors],” said Thomas James, chairman and chief executive of
Raymond James Financial Inc. of St. Petersburg, Fla., but he noted that
Raymond James shareholders would not get a big premium in any deal, since the stock trades at 15 to 20 times earnings, versus the 10 to 11 multiples at which major Wall Street houses trade.
“We [already] get rewarded for higher growth,” Mr. James said. “That alleviates the concerns of shareholders.”
His family and employees own nearly 45% of the company, Mr. James added.
But with major regional players such as Advest Group Inc. of Hartford, Conn., Legg Mason Wood Walker Inc. of Baltimore and Piper Jaffray & Co. of Minneapolis now gone — and with A.G. Edwards & Sons Inc. of St. Louis about to be swallowed by Wachovia Securities LLC of Richmond, Va. — observers predict that more regionals will be forced to sell out.
“There’s not too many of us left,” Mr. Johnstone said.
Without financial backing from Toronto-based parent Royal Bank of Canada, “we would be struggling the way Piper, Advest and Legg Mason did,” said John Taft, chief executive at RBC Dain Rauscher Inc. in Minneapolis.
The cost of supporting well-trained advisers with a full wealth management menu is “enormous,” Mr. Taft said. “There’s no way a small independent firm can compete.”
In September, the firm is expected to dump the Dain Rauscher name and become RBC Wealth Management.
Don’t have to sell
Skeptics question the usual rationales given for deal making — the need for scale and a broader product offering.
Some industry observers say size drives bigger margins.
A.G. Edwards has pretax profit margins of around 17%. Raymond James earns about 15%, and
Edward Jones of St. Louis 11%.
By contrast, Merrill Lynch & Co. Inc. of New York, the Smith Barney brokerage unit of New York-based
Citigroup Inc. and Wachovia Securities all claim pretax margins
of 20% or more for their retail businesses.
But competitors don’t believe the big firms’ numbers.
Profit margins “can be jimmied up and down depending on under- or overallocation of costs,” Mr. Wedbush said.
In a recent investor presentation, Wachovia sported a 29% pretax profit margin, but Mr. James said that the firm is allocating to the brokerage firm profits made from bank lending.
Mr. Taft said a firm such as RBC Dain Rauscher, with 1,800 reps, can achieve 20% pretax margins.
“People think there’s a correlation between scale and profitability,” he said. “There is not. There’s a correlation between broker productivity and profitability.”
The need to merge “comes down to what the corporate focus is,” said Patrick O’Shaughnessy, equity analyst at Morningstar Inc. in Chicago. Legg Mason Inc., for example, was focused on its asset management business, he said, while Raymond James has performed well as “a brokerage company with small asset management and bank groups.”
Merger skeptics also wonder whether firms really need to get larger in order to provide one-stop shopping.
“I’ve never heard someone ask for one-stop shopping,” said Ben Edwards III, former chief executive of A.G. Edwards.
In the end, mergers are driven by managements who need to “liquefy their estates, retire or perhaps they lost a little of their nerve thinking they can’t compete,” Mr. James said.
Not just about money
To executives at smaller and privately owned firms, running a brokerage house is about more than just maximizing short-term profits.
Mr. Edwards is perhaps the best-known proponent of the philosophy that clients should come first, employees second and shareholders third.
“I agree” with Mr. Edwards, Mr. Wedbush said. By focusing on clients and employees, “shareholders will be well taken care of. The results will come right back.”
“There’s a school of thought — and it’s pretty sound — that when clients and employees are emphasized, shareholders are more than adequately rewarded,” Mr. James said. But putting shareholders last is “completely unrealistic in this day and age,” Mr. Taft said.
While Mr. James thinks client and employee interests must be balanced with shareholder interests, he and other executives worry about seeing the industry run in the short-term interests of shareholders.
Mr. Edwards pointed to his family firm’s crosstown rival, Edward Jones, as “proof that staying close to clients is a viable approach to take in perpetuity.” Over the past five years, Edward Jones has grown fast and been highly ranked by brokers and clients, Mr. Edwards said.
“We’re a private partnership, which gives me the luxury of making long-term decisions,” said James Weddle, Edward Jones’ managing partner.
More brokers are looking for employee-friendly cultures, according to these executives.
As a result, “our firm is being looked at more aggressively by [industry employees] caught up in these mergers,” Mr. Wedbush said. “The current [merger] situation is the biggest opportunity we’ve ever had.”
When asked recently which regional firm they felt is mostly likely to be acquired, 35% of readers responding to a recent Opinion Poll (InvestmentNews, June 11) chose Raymond James, followed by 20% who named Edward Jones, 16% who indicated RBC Dain Rauscher and 14.8% who cited
Stifel Financial Corp. of St. Louis.
