St. Louisbased retail brokerage A.G. Edwards & Sons is lionized for its old-fashioned approach: Its brokers often operate one- and two-person offices in Main Street storefronts throughout America's heartland. The firm's way of doing business stands in sharp contrast to its New York rivals' slicker, faster-paced approach. But what long has been perceived as an asset for A.G. Edwards and its clients may be turning into an albatross.
Or, at least, so says Sanford C. Bernstein analyst Brad Hintz, who in an October 12 research report downgraded his rating on the company to underperform -- Bernstein's equivalent of sell. Hintz lambasted A.G. Edwards for lavishly compensating its small-town brokers, who by his calculations take home 65 percent of the firm's revenues and 86 percent of its pretax profits.
"When I look at the financial performance of A.G. Edwards," Hintz wrote in an e-mail to clients that accompanied the report, "I wonder if this company isn't a Midwest cooperative that just happens to trade on the NYSE."
Hintz, a graduate of Indiana's Purdue University, likened A.G. Edwards to the National Grange, a 137-year-old farmers' benevolent association. He went on to argue that the brokerage's rich compensation -- securities firms, on average, spend about half of their revenues on salaries and bonuses -- makes it a much less attractive investment than its competitors are. "With all the earnings going to the staff, [the firm] is unlikely to be able to match the financial performance of either Merrill Lynch or Charles Schwab in a recovery of the retail market," he wrote. (Hintz declines to comment beyond the report.)
The analyst's criticisms may be hitting home. "We agree that our compensation ratio is not where we'd like it to be," says an A.G. Edwards spokeswoman. The firm, she adds, is seeking to diversify its revenues beyond retail brokerage, which spends a higher percentage of its revenues on compensation than do other securities businesses, such as proprietary trading and investment banking.
