Edward Jones: Confronting Success in 2006

EDWARD JONES IN 2006: CONFRONTING SUCCESS CASE STUDY INTRODUCTION & BACKGROUND Founded in 1922 in St. Louis by Edward Jones, Sr. , Edward Jones (Edward Jones Financial Companies, LLC) is today the nation’s fourth-largest brokerage with 8. 1 million retail accounts and retail client assets of $369 billion as of the end of 2005 (Collie & Smith, 2008, p. 18). At the end of 2005, Edward Jones had 9,733 brokers working in 8,581 domestic and 660 foreign (Canada and the UK) offices (Collie & Smith, 2008, p. 18).

Edward Jones falls into the category of a full-service brokerage (offering a variety of financial services products and direct, personalized assistance from a Financial Advisor) and it competes against other traditional full service brokerages as well as against discount brokerages, online brokers, banks, insurance companies, financial planners, and mutual funds. Under the direction of Edward Jones, Jr. , the company Edward Jones made its initial expansion starting in the 1950s and 1960s into rural areas and small suburbs where there was little or no competition.

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Edward Jones began to pursue a more ambitious expansion plan in the 1970s and 1980s, following a plan and strategy set out by Financial Advisor and partner John Bachman. Bachman served as managing partner of the firm from 1980 to 2004, steering the firm, with the help of consultant Peter Drunker, on an aggressive expansion (including expansion into metropolitan areas beginning in 1981), while still heeding to the firm’s original strategic principles. A central tenant of the strategy is the belief that the “end customer was the only client of the firm… very client was to be treated equally and afforded the same high ethical standards and access to services” (Collie & Smith, 2008, p. 5). Other key principles in Edward Jones strategy stressed the power of individual entrepreneurs in offices with just one financial advisor and one branch office assistant, the notion of employees as owners, the stress on the personal relationship with the client, and training and promotion from within the firm (Duffy, 2002).

Edward Jones had historically eschewed reliance on client-computer interfaces (e. g. , no online trading, no email communications, etc. ), although in recent years there was a greater reliance on computers, including an existing $100 million project to convert from satellite to Internet-based terrestrial network. Edward Jones stressed a fairly conservative investment approach, urging clients to stay in for the long-term and to focus on quality, blue-chip stocks.

The brokerage industry has undergone enormous changes over the past three decades as a result of major transformations in the operating environment. Globalization of finances, deregulation, the evolution of new technologies including the Internet, economic changes, demographic shifts, and other factors had all impacted the industry. New competitors and new categories of competitors had emerged in response to these changes. John Bachman ceded his role as managing partner to Doug Hill in 2004.

Hill resigned in late 2005 after regulators fined Edward Jones $300,000 and charged it with involvement in a “revenue sharing” program (Hume, 2005, p. 1). Jim Weddle took over as managing partner of Edward Jones in January of 2006 and set out to see how the firm could sustain its performance and achieve its goal of expanding to 20,000 financial advisors by 2017. The following provides an analysis and potential case solution to this Harvard Business School case study on Edward Jones looking forward from 2006. PROBLEM STATEMENT

While the strategy that Edward Jones has followed for the past thirty years has served it well, this strategy may now be out of step with the demands of the rapidly changing operating environment and Edward Jones’ goal of maintaining its historical high performance record and grow to 20,000 financial advisors by 2017. Weddle must determine whether the strategy, or perhaps the strategic goals, should now be modified, and if so, how. ANALYSIS A P. E. S. T. (Political-Economic-Social-Technological) and S. W. O. T. (Strengths-Weaknesses-Opportunities-Threats) analysis will be used to help generate appropriate alternative courses of action.

P. E. S. T. Analysis Political Edward Jones operates within a heavily regulated industry. The Security and Exchange Commission (SEC) provides broad oversight of all company operations and sets standards and requirements for broker licensing, financial advisor licensing, trading parameters, etc. In early 2006, the SEC reported had about 900 proposed regulations and policies on its desk (Warner, 2006, p. 1). The cost of complying with regulations adds a significant expense burden to Edward Jones and the other competitors.

Changes in regulations and/or the elimination of regulations also has the potential to create big disruptions in the operating environment. A good example was the 1975 deregulation of brokers’ commissions which had the effect of creating an entirely new category of competitor: the discount broker. Another example concerns regulatory changes which have made possible the convergence of insurance companies, banks, financial advisers, and brokerage firms so that each can now offer products which were formerly under the purview of just one or another.

At the same time, with convergence, brokerage firms who now decide to deal in products traditionally associated with other financial industries (e. g. , checking accounts) are now subject to regulations pertaining to those industries and those consumer and institutional products. While there are some similarities in the aspects of the business which are regulated, there are considerable differences in specific regulatory schemes from one country to another.

Thus, a US-based firm which plans on international expansion must take into account how the regulations fit with the company’s current operations and how compliance with regulations will impact expenses. Globalization is an important political force affecting the brokerage industry. Globalization has opened up new opportunities in international markets, including newly emerging markets in some cases. Moreover, globalization is changing the nature of the brokerage business domestically. For example, because of globalization, there is now more of an opportunity for brokerages to sell U. S. lients foreign-based securities and/or investments. At the same time, globalization also expands the competitive field, since domestic clients may choose to access assistance from foreign brokers when buying foreign securities, and, if regulations permit, even in dealing with the U. S. market. A variety of domestic political factors influence the investment market. Governments create or back investment instruments, which can spur client interest in these investments. In the U. S. , the solvency or rather, imminent insolvency of the federal Social Security (retirement) system affects individuals’ inclination to invest.

In foreign countries, the existence and solvency of a government-backed retirement system would have a similar impact on these markets. Economic Economic factors have a profound impact on the brokerage industry. Increases in household net worth and discretionary income fuel growth in the brokerage business, as people are more inclined to invest. Increasing values of stocks also encourages investment, as does the promulgation of new investment instruments (e. g. , IRAs). Business decisions about how to manage retirement accounts and defined contribution plans has an impact on the brokerage market.

Declines in stock market valuation has historically served as a chill on individual investment. In severe recessions and/or economic depressions, individuals often pull out of the stock market entirely. Economic recessions reverberate through the brokerage industry, forcing companies to lay off employees, and drastically changing the income structure of the brokers who survive the layoffs. While the economic factors noted above are among the factors which can generally influence trends and rates in individual investment, there are economic factors which can influence individual investors’ decisions about brokerage firms.

Many firms specifically target investors of a certain household income or net worth level with their services and fee structures. During recessionary periods, investors may become more cost-conscious about fees or commissions and look to discount brokers. Social Demographic factors are important to the industry. The aging of the population and in particular, the approach of baby boomers towards retirement will present brokerages with a new set of challenges as they struggle to tailor products and services towards retired (versus working) boomers. Another important social issue for the industry, and one which omplicates tailoring services for aging boomers and in many cases, their very old but still living parents, is the expansion of life expectancy. Individuals will need to figure out how to invest wisely to ensure that they have enough money to see them through their golden years. An increasingly ethnically diversified population is changing the theoretical customer base for brokerages who have (in the US) historically marketed to upper-middle-class and upper-class Caucasian investors. Another social factor affecting the brokerage industry is attitude towards risk-taking.

In the United States, brokerages have witnessed this to be a generational issue. For example, it is noted that members of the baby boom generation are generally less risk-aversive when choosing investments than their parents were. An other social factor concerns investors’ level of comfort with technology interfaces. Younger generations of investors, and new ones just coming up are in general extremely comfortable with new communication technologies versus older clients who may more consistently prefer to deal face-to-face or, at minimum, by old-fashion telephone (versus text messaging, email, etc. . Yet another social factor for brokerages to consider relates to human resources management. Brokerages are dependent upon their brokers and financial advisors to bring in revenues. As a consequence, brokerages pay attention to how to best satisfy their employees. Changing social norms affects what factors are important in satisfying and motivating employees (e. g. , wages, autonomy, ownership participation, work-life balance, etc. ). Technological

Although the brokerage industry is arguably a knowledge-based business (in the sense that investment decisions are based on information and, in the case of the full-service brokerage, the provision of financial advice to investors by a knowledgeable broker and/or financial advisor), it is a business which runs on technology. Extensive, technologically advanced communications structures are needed to execute trades. The fixed costs to entering the brokerage business are very high, nearly all of these costs are related to IT infrastructure.

The more efficient the IT infrastructure, the lower the marginal costs of trades and the better opportunity brokerages have to satisfy clients. The spread of the Internet and of related personal computing technology has produced dramatic changes in the brokerage industry. It has spurred online brokerages, “day-trading” ,new categories of discount brokerages, and changed how brokerages interface with their clients. The spread of the Internet has also made information that was previously controlled by brokers and financial planning professionals readily accessible to individuals.

While some clients are not comfortable with using the technologies they need to access the information, others are, and overall, the spread of technology has increased the bargaining power of the buyer. S. W. O. T. Analysis Strengths 1. Financially, the company is very strong, with a strong track record of revenue growth and profitability. Assets per account are lower than many competitors, and compensation and benefits expenses are higher, but average pre-tax ROE are higher than most of its competitors. 2.

Edward Jones has a talented, well-trained, and very satisfied work force that is the admiration of many in the industry. 3. Strong employee training and compensation program. 4. The company has an impressive network of offices across the country, including offices in areas where there are few competitors. 5. The company has good relations with existing customers, and lower than average industry customer turnover. Weaknesses 1. No presence in online trading. 2. No presence in discount trading. 3. Limited presence in auxiliary financial services. 4.

Limited connections with minority clients; few minority financial advisors. 5. No presence in higher risk investments. 6. Coverage in Northeast, West and Florida limited. 7. Limited presence in overseas markets. 8. Limited experience in advertising and self-promotion beyond personal contacts. Opportunities 1. Opportunity for growth in new markets, both overseas and domestic. 2. Opportunity for expansion into new delivery systems such as online trading, discount brokerage. 3. Opportunity to grow and become nation’s #3, #2 or perhaps even #1 full service broker. 4.

Opportunity to develop new niche target customer markets. Threats 1. Competition: Edward Jones faces a broad variety of competitive threats; it is being challenged by online brokers, discount brokerages, other full-service brokerages and probably most especially, broker-centric houses which seem to be its most direct competitor. 2. Threat that competitors will “steal” employees. 3. Threat of regulations increasing expenses and restraining operations. 4. Threat of economic downturn, dampening investment enthusiasm, leading to lost revenues, declining employees/partners’ compensation. ALTERNATIVES 1.

Maintain status quo. Under this alternative, Edward Jones would stick with the same strategy it has had for the past 30 years and count on it to help it reach its goals. 2. Transform into a “boutique” full-service brokerage focused on premium investments for middle-to-high income, technology-resistant customers and/or customers preferring a strong personal approach. 3. Transform into a traditional full service brokerage that “does it all” – diversify into various divisions to provide online trading services and self-serve or near self-serve products as well as the company’s traditional full-service products.

RECOMMENDATIONS, RATIONALE & IMPLEMENTATION Alternative number two represents a “scaling back” of operations that would require Edward Jones to forego its goal of 20,000 FAs by 2017 but which might improve the bottom-line returns (albeit on a smaller scale). The company could maintain its traditional focus on quality investments and personalized relationships with clients. A downside is that this strategy would not help the company meet its expansion goals and it would probably require the company to depart from its dictum of treating all clients the same, since it would want to focus on higher-income clients.

Alternative #3 is the opposite of #2, representing a diversification in both clients and services. It is likely that Edward Jones would meet its expansion goals with this strategy. However, it would need to abrogate its strategic principles related to personal relationships and treating all clients the same. Moving in this direction would also have an impact on employee relations, in that it would effect compensation and the current employee ownership structure. For these reasons, alternative #1 – the status quo – has the most appeal.

However, it does seem likely that Edward Jones does need to make some changes in response to the sweeping environmental changes which have occurred. It is not necessary, however, for the company to throw out its basic strategic principles which have worked so well for it all of these years. Maintaining close personal relationships with clients, training employees well, maintaining excellent compensation systems and supporting employee ownership, and focusing on quality investments are all factors which has built Edward Jones into the company it is today and which can continue to serve as sources of sustained competitive advantage.

Because of a changing environment, however, Edward Jones needs to adapt these principles to contemporary circumstances. Technology must be integrated into the business, so as to allow for customer-FA technology interfaces. The ban on personal computers in offices should be lifted and email communication, as well as text-messaging between FAs and clients encouraged as a supplement to traditional face-to-face and phone interactions. It is not recommended that Edward Jones diversify into discount services or purely online trades as this would devalue the company.

However, it should offer online support services – information and client portfolio data, etc. To achieve its expansion goals, Edward Jones needs to fill in its current geographic gaps in coverage, as well as begin cautious expansion overseas. To build business in existing offices, as well as to build name recognition in new markets, it is recommended that Edward Jones launch a nationwide television advertising campaign which stresses its position as a quality-product focused brokerage committed to honest, personalized service. References Collie, D. & Smith, T. (2008).

Edward Jones in 2006: confronting success. Harvard Business School Case Study, No. 9-707-497, Rev. January 11, 2008. Boston: Harvard Business School Publishing. Duffy, D. (2002, February). At Edward Jones, the handshake still rules. Darwin, 2(2), 26-31. Hume, L. (2005, September 30). Edward D. Jones fined $300,000; NASD: firm violated MSRB’s G-15, G-27. Bond Buyer, 353, p. 1. Kim, J. J. & Opdyke, J. D. (2006, February 23). Individual investors shift assets to stocks; brokers report near-record trading activity, investment flows; moving out of real estate. Wall Street Journal, p.

D1. Scotti, M. (2006, January 1). This is the year of pre-trade advances and market structure changes. Traders Magazine, p. 1. Spangler, T. (2005, March). Garbage disposal; in charge of information-technology strategy and operations for the 83-year-old brokerage firm, which reported revenue of $2. 8 billion for 2004. Baseline, 1(41), 69. Warner, J. (2006, June 1). Where the growth is: with their market share growing 20% a year and the boomer generation’s accumulated treasure to deploy, independent broker-dealers are on a prosperous path. Financial Planning, p. 1.

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