WALL STREET - Mr. Jones Goes to Town

Daniel Timm peers intently at a collection of tiny green dots and red triangles superimposed on a map of downtown Phoenix laid out on a conference table in his St. Louis office. The green dots show available sites where Timm’s brokerage firm, Edward Jones, is considering opening new offices. The red triangles represent the firm’s existing locations. The former greatly outnumber the latter, and that brings a smile to the burly 49-year-old’s face.

“There are lots of opportunities for growth here,” says Timm, the member of Edward Jones’s management committee who oversees new-broker training. “There is a whole lot more we could be doing here if we had enough of the right people. They need us here.”

Timm is charting a new future for his firm. The 86-year-old brokerage has carved a unique, lucrative niche by avoiding big cities like Phoenix. Instead, it has served small-town America, with nondescript, one- and two-person offices providing no-frills, low-cost service to local professionals and small-business owners. Jones has never made a big acquisition to grow its brokerage force, as so many of its competitors have, and remains a partnership competing with huge, publicly traded enterprises. The firm has bridged the gap between industry titans like Citigroup’s Smith Barney unit and Merrill Lynch & Co., which increasingly focus on ultrawealthy customers in big cities, and online brokerages that offer little or no personal touch.

Charles Roame, managing principal at Tiburon Strategic Advisors, which tracks the brokerage industry, argues that Jones has a rich vein of potential clients to tap, citing Federal Reserve Board data showing that 111 million of the country’s 117 million U.S. households have less than $1 million in assets. “Everyone else is fighting over the top 6 million,” says Roame. “While they’re doing that, Edward Jones can just sail right in under the radar and mop up the rest of the business. They know who they are, and they don’t seem to worry much about following in others’ footsteps.”

During the ten years through 2007, the firm’s profits grew by an average of 16 percent annually on a 14 percent average annual gain in revenues; client assets soared from $144 billion to $541 billion, and the firm’s ranks of financial advisers grew 11 percent annually, to more than 11,200.

“The business they have established is pretty much safe from Merrill or any of these other guys in their core business area because their competitors are not going to go out and set up thousands of one-broker shops all over the country in these small communities,” says Adam Honoré, a senior analyst with research and consulting firm Aite Group in Denver.

But Jones is also battling an array of forces that has driven many a second-tier brokerage house into the arms of bigger competitors. The business has grown steadily more capital-intensive in recent years, as clients demand more-sophisticated investment products and as costs for technology and broker compensation have skyrocketed. Smaller firms that once supplied investors with plain-vanilla stocks and mutual funds must now build big bond inventories and gain access to more-complex products, like derivatives and alternative investments. Faced with such challenges, rivals have gone public or sold themselves to industry giants. The latest to do so was Jones’s crosstown rival, A.G. Edwards & Sons, bought in October for $6.8 billion by Wachovia Corp., operator of the country’s second-biggest brokerage force.

But the top executives at Jones face a more fundamental, and daunting, long-term concern. Victims of their own success, they have done such a fine job of saturating the country’s hamlets with outposts that there is little room for growth left in small-town America. Which explains why Timm and his colleagues are spending long hours poring over maps of likely targets, from Phoenix and its rich outskirt enclaves, like Scottsdale, to Atlanta, Boston, Philadelphia, Toronto and Tampa, Florida.

Moving beyond its tried-and-true strategy, Jones is also sprucing up its product offerings, adding new fund families, introducing fee-based plans and pushing insurance-related portfolios.

“We know what we’re good at,” says James Weddle, Jones’s managing partner since 2006 and just the fifth man to run the firm since its founding. “Now we need a strategy for growing in the major population centers, to make it possible for us to capture more of this market.”

Going upmarket, however, doesn’t come without dangers. For one, competing in big cities means vying with far bigger, better-capitalized firms for talent, real estate and customers, many of whom may want greater portfolio sophistication and brand cachet than Jones can offer. The firm also risks losing the identity that has helped it attract and retain both employees and clients over the years.

WHAT WON’T CHANGE ABOUT Edward Jones as it embarks on this new chapter is what many observers, inside the firm and out, regard as its secret weapon: the way it recruits and trains brokers, a process geared toward fostering strong personal relationships between advisers and their clients. Rather than the young, often brash strivers that populate big-firm training programs, Jones targets mature career-changers who already have firm roots in their communities. More than half of the new recruits are referred by existing brokers; just 11 percent of those who apply are accepted.

“We’ve done surveys to see what job backgrounds and what personalities are most likely to be successful in our business model, and as a result, we’re really targeting small-business owners and managers with sales backgrounds,” says Timm. “They have to be excited about running their own office, and be able and willing to go out over and over again to win people’s trust face-to-face, which doesn’t happen after just one meeting. They have to be willing to work hard.”

Trainee advisers are assigned to established brokers for an apprenticeship of several months, during which time they must demonstrate that they are making 25 contacts per day with prospective clients. To count toward the quota, contacts must be more than a perfunctory hello or phone call. Trainees must introduce themselves and get a sense of the prospects’ financial objectives, then follow up a few days later with specific products, ideas and strategies to pitch. Standout brokers are encouraged to hand small clients over to trainees to help them get their businesses up and running. As many as 200 of these apprenticeships, which involve sharing office space for a 12-month period, are established per year. The program has been in place relatively unchanged for decades. Senior management, including Weddle, who joined Jones as broker No. 200 in 1976, and Timm, are all graduates.

Jones makes it easy for its advisers, trainees and veterans alike to focus on cultivating relationships by taking care of the bulk of portfolio construction and product selection from the home office. Because the firm’s typical client has some $500,000 in assets — well below the roughly $750,000 of wire house customers — and relatively simple goals like minimizing taxes or saving for retirement, few require highly customized or sophisticated products. All an adviser needs to do is take an appropriate set of mutual funds or recommended stocks off the shelf and market them effectively to the client. Jones doesn’t ban brokers from developing their own ideas but strongly encourages them to spend their time on community projects and prospecting for clients instead of on stock picking.

“Our hope is that the majority of our advisers will take advantage of the professional selections,” says Brett Campbell, a member of the executive and management committees and head of financial adviser development. “They will recognize that, ‘Hey, these guys are paid to think about these things all day, every day, with a greater depth of training and expertise than I have as a broker. So they are probably better at the stock picking and fund picking, and I should probably rely on my home office to give me the right investment tools for my client.’”

The firm’s approach to recruiting and training jells nicely with its rural roots. Brokers do plenty of cold calling, but the firm prefers that they troll for clients door-to-door, looking their fellow townspeople in the eye and firmly shaking their hands.

“You can’t talk to a [broker] at Jones who can’t tell you a dog story,” says Timm, who joined the firm in 1983 as a broker in Humboldt, Iowa, before moving to run the firm’s Yankton, South Dakota, office. “We’ve all been out to farms over and over again, trying to turn someone from a prospect into a client.” Timm’s most memorable canine run-in came during his first year with the firm, when a pair of persistent collies snapped at his heels as he was leaving his business card in the door of an empty Iowa farmhouse, then chased him back to his car. “The first time around the car, I managed to open the driver’s seat door; the second time, I got in, shut the door and just headed out of there.” The pooches pursued him until they collided with some children’s bicycles near the side of the road. “In my rearview mirror I saw dogs and bikes fly into the air. I don’t think I ever did get any business from that farm,” he recalls, chuckling.

Even in slightly more populous areas, Jones sticks to a similar formula. Take Mooresville, North Carolina, a town of just less than 19,000, situated some 25 miles from downtown Charlotte. Famous in Nascar circles as the hometown of the late Dale Earnhardt and other racing greats, “Race City USA” is also one of the communities of choice for Charlotte’s growing ranks of white-collar professionals.

“This neighborhood has a lot of tall trees, modest homes, and it’s very close-knit,” says Adam Bloom, a 33-year-old former middle manager for NationsBank who opened a Jones office here eight years ago.

Several miles closer to downtown Charlotte, in a neighborhood called South Park, offices for Wachovia and Smith Barney occupy handsomely outfitted space near a popular luxury shopping complex. In contrast, Bloom’s humble digs are squeezed between a life insurance office and a pharmacy in a tiny strip mall off the two-lane road that is the sole link between the city center and a lake-dotted peninsula where thousands of suburbanites make their homes. Every day, commuters trapped in traffic on that thoroughfare get a clear view of the Edward Jones sign above his door for minutes at a time.

“It’s pretty much the best marketing you could have,” Bloom says with a grin. Still, it took months of pounding the pavement — literally — to build up his current roster of some 600 families, with annual incomes anywhere from $30,000 up into the millions. “It takes time to build trust,” says Bloom, who carries a “brag book” stuffed with photos of his two young children, Spencer and Elise, to show to clients. “These are my peers, these are the people in my community, and this is only one way that they see for themselves I’m a part of that community.”

In late November at the Jones office that Lawrence Robertson runs in Webster Groves, Missouri, not far from the head office, Mary Hall arrives for an update on her portfolio. The 70-something retired teacher chitchats with Robertson about local events, thanking him for getting her tickets to hear historian Doris Kearns Goodwin speak in town recently.

“Any time you see anything that interests you, just let me know and I’ll see what I can do,” he responds.

They go on to discuss how she might fund the purchase of a new car. “Don’t go the financing route,” he cautions her. Hall also wants to talk about her portfolio’s performance; she’s a bit worried by the dip in value caused by the market turmoil in the late summer and fall. “Well, yes, that wasn’t very pleasant,” says Robertson. “But look, you’re still ahead about 5 or 6 percent for the year as a whole, and your portfolio is up 23 percent in the last two years.” He urges her to think about putting some of her profits into a new long-term-care insurance plan; Jones has been pushing such products, issued by providers like Genworth Financial and Metropolitan Life Insurance Co., since 1991, as part of its effort to meet clients’ retirement needs across the board. Because Medicare doesn’t cover most of these expenses, advisers are urged to get their clients to plan some other way of meeting nursing home or other elder-care expenses. “Promise me you’ll think about it?” he coaxes. Hall agrees, and also promises to set up a time for her daughter, who’s looking for help managing her money, to meet with Robertson over the Christmas holiday. “Just let me know, and I’ll be there,” he says.

THE TRICK FOR JONES IN the next five years will be modifying and adapting this proven model to new markets without sacrificing what makes it work. Weddle and his management team believe they can do that by continuing to emphasize close relationships and community involvement, even in more populous, busier locations. They’ll target the same underserved demographic: those whose portfolios aren’t big enough to get first-rate service from the wire houses but who want a trusted adviser to help them invest.

“Just because there are more — and potentially more sophisticated — individual investors in these higher-growth markets, doesn’t mean that they are looking for a different kind of relationship with their financial adviser,” argues Campbell. “Lots of people need help; lots of people want to build a high-quality, diversified investment portfolio and would be grateful to have a relationship with an adviser who can get that done.”

The firm realized it needed to modify its strategy during a presentation by management researcher and consultant Jim Collins at a 2006 meeting of its 15-person executive committee. Collins, author of the bestselling book Good to Great: Why Some Companies Make the Leap . . . and Others Don’t, told the committee that despite its solid performance over the previous decade, Jones was reaching only a fraction of its target market. It was, Weddle recalls, a wake-up call.

Jones executives knew they had to shift their focus from the straightforward opportunity on which Edward D. Jones Sr. founded the firm in 1922 and which Edward (Ted) Jones Jr., his son, continued to exploit by launching its one-broker branch system in 1955. Back then, thousands of rural and suburban communities around the country had yet to be tapped by brokerage firms. Jones offices became the only game in town for the well-heeled rancher or car dealer looking to open an investment account.

The firm won’t change the way its advisers interact with clients, but it will begin to offer slightly different products and services in big metropolitan areas. Jones is taking tentative steps toward the fee-based model adopted by most other brokerages, albeit with some hesitancy. “We’ve always felt that the best way to demonstrate the value we brought was to be very clear about what each idea, each trade, cost the client,” says Campbell. Occasionally brokers might gripe about the need to start each month from scratch, rather than earning an ongoing fee, but the firm’s leaders still believe this practice encourages advisers to drum up new ideas and new business to prove their value to clients over and over again. And though some critics say that commission-based accounts encourage brokers to recommend unnecessary trades, Jones officials say a combination of strong compliance oversight and the firm’s culture of serving local communities keep that temptation in check. Nevertheless, it hopes to attract urban clients by forging into unified managed accounts; for those with at least $100,000 to invest, Jones will set up a fee-based account that invests in a diversified portfolio of mutual funds and exchange-traded funds selected to correspond with one of dozens of model portfolios and automatically rebalance each month. The firm is also pondering new marketing and advertising campaigns to reach prospective big-city customers.

Of course, the push into America’s population centers will cost money. Real estate and personnel will be more expensive; sophisticated products cost more to supply, even if they carry higher margins. The key challenge will be to attract enough customers to support the costs of acquiring them. Jones also will be competing for talent with big firms. And despite seeing itself as serving those clients who fall between the behemoths and online players, the firm would happily accept the business of those now working with the likes of Merrill, Morgan Stanley, Smith Barney, UBS and Wachovia. Those brokerages can sink far more into developing state-of-the-art technology and products to serve customers from fancy offices in affluent neighborhoods.

Still, Weddle believes the abandonment of ordinary American investors by big firms pursuing high-net-worth clients has left a big opening for Jones, which does not, in his opinion, need to go public or sell to a big rival to raise more capital. “I have opened accounts for paperboys with $100,” he says, “and then seen their parents, neighbors, aunts and uncles come in the door as clients because of that.”

Tiburon’s Roame believes the Edward Jones business model looks more like a network of independent financial advisers — LPL Financial, for instance, or Raymond James Financial — than it does a wire house like Merrill Lynch, even though the Edward Jones brokers, like Merrill’s, are all employees rather than affiliates or independent contractors. That may help Jones continue to outgrow rivals: Independent advisers have seen client assets grow at an 18 percent clip over the 1995 to 2006 period, he says, double the rate of growth at wire houses, regional and boutique brokerages. “They’ve figured out how to blend the best of both worlds. That makes them survivors at the very least, and maybe even winners.”