Edward Jones Noses Ahead of Morgan Stanley to Boast Biggest Brokerage Force
Edward Jones & Co., long the biggest securities firm as measured by its mostly single-broker branches in thousands of communities across the U.S. and Canada, is now also the biggest by salesforce.
The broker-dealer ended the third quarter with 15,795 financial advisors, up 7% from 12 months earlier and 2% from June 30, the privately held partnership disclosed in a regulatory filing from parent Jones Financial Companies this week. The tally surpasses the 15,759 brokers employed by the former biggest firm, Morgan Stanley, as of the end of September.
The increase, which came as brokers at Jones’ 13,314 branches grew client accounts by 2% to 5.2 million households, gives the St. Louis-based company bragging rights and sales momentum at a time when its big rivals have shrunk their recruiting budgets.
“We are proud of the growing number of clients we serve,” Jones’ managing partner Jim Weddle wrote in an e-mail. “The singular face of Edward Jones to our clients is that of our financial advisors and the branch team.”
But the growth spurt could exacerbate criticism from some former and existing brokers that Jones is oversaturating its geography by putting too many branches in its small communities too close to one another, and offsetting growing compensation costs with reduced branch support.
“To those who think our multiple offices in a community may be located too close to one another, I’d suggest someone get a yardstick and measure the distance between desks at our major competitors,” Weddle wrote. “Our multiple branch locations are designed to deliver convenience and accessibility to our clients.”
In the third quarter, Edward Jones’ revenue rose 10% from the 2016 period to $1.85 billion, the company reported. Net income jumped 13% to $211 million—after a distribution of $214 million to the company’s fewer than 500 partners, a 24% jump from what they collected a year earlier.
Operating expenses grew at the same 10% rate as revenue to $1.64 billion, led by an 11% jump in broker compensation to $121 million. Jones controlled home-office and branch support costs, which inched up 2% to $336 million.
The firm staffs most of its branches with an office administrator. While its branch network grew by 502 offices, or 4%, since last year, the partnerships’ “longer-term strategy is to grow its financial advisor network at a faster pace than its home office and branch support staff,” the 10-Q regulatory filing says.
Commenting on an earlier article about the company’s strategy, Ron Edde, a recruiter in California, was skeptical. “Given that Edward Jones offices are already to the point of being ubiquitous in America, the addition of more offices further dilutes the pool of available clients every time a new office (manned by yet another new advisor) is added,” he wrote. “EJ loses experienced advisors to other firms nearly as fast as it can add new, inexperienced ones to take their place.”
Jones’ broker attrition rate in the third quarter fell to an annualized 6.8% of the salesforce, down from 9.2% in the third quarter of 2016, this week’s filing said.
Although the company largely develops its own brokers by training neophytes from college and people starting second careers, it has initiated a campaign to recruit experienced brokers from competitors.
In bypassing Morgan Stanley’s previous industry-leading position as an employer, Jones also has forged ahead of Merrill Lynch’s 14,954-broker force and the 14,564 brokers working across Wells Fargo Advisors’ branch, independent and in-bank channels. UBS, still generically characterized as a “wirehouse” because of its PaineWebber roots, had 6,861 brokers in the U.S. as of the end of September.
LPL Financial, which sells products and services through 14,253 brokers who are independent contractors rather than full-time employees, could surpass Jones as it absorbs brokers from its recent acquisition of National Planning Holdings.
“This is the first time we’ve been able to say we have the largest number of financial advisors, but possibly only true until one of our competitors merges or acquires another competitor,” Weddle, who last year said he aims to employ 20,000 brokers by 2022, wrote in his email.
Like its large competitors, Jones had a challenging quarter generating new money from customers. Net new assets gathered by its growing brokerage force fell 10% from the year-earlier period to $9 billion, a total that excludes capital gain distributions to U.S. customers from mutual funds, the primary investment product sold by Jones brokers. But money in fee-paying advisory accounts soared 71% to $269 billion while commissions in traditional accounts fell 36% to $12.9 million from $20.2 million a year earlier, and are down 18% for the first three quarters.
Jones said the majority of the increase in advisory program assets came from existing clients.
“Regardless of whether an advisor force is growing or shrinking, the success story is going to be about organic client growth,” said Doug Trott, cofounder of software firm McKinsey PriceMetrix, noting that he was not specifically addressing the Jones results. “As a popular metric, net new assets rewards indiscriminate growth.”
Although market gains and a shift of customers to the advisory accounts helped client assets “under care” rise 13% to $1.07 trillion from $950 billion on Sept. 30, 2016, commission revenue from mutual funds, equities and annuities plummeted 37% to $314 million from the year-earlier quarter as money shifted to fee-paying advisory accounts.
About 75% of Edward Jones’s total revenue comes from mutual funds and annuities, but due to the DOL fiduciary rule changes fund revenue dropped 47% from the third quarter of 2016 to $118 million, according to the filing.
Sales from one mutual fund company represented 14% of Jones’ total revenue, it said. Jones didn’t name the company, but in the past has identified it as Capital Group Cos.’ American Funds, which in past years has fueled about 20% of its revenue.
Total mutual fund commissions in the quarter plunged 47% to $118 million as customers under Jones’ direction shifted more funds into advisory programs. So-called revenue sharing, asset management money that fund companies pay to their larger distributors, fell 6% to $45 million during the quarter from $48 million in the year-earlier period while management fees Jones collected from its growing roster of proprietary funds more than doubled from a year ago to $35 million.
Jones has reduced its transaction-based products and retirement accounts in response to the Department of Labor’s fiduciary rule and introduced more fee-based products, resulting in a 71% jump in advisory program assets to $279 billion from $163 billion a year earlier. The bulk of the advisory increases came from existing client assets, the filing said.