Josephthals Renovation Plans

Josephthal & Co. is an anomaly on Wall Street. As one of the few remaining privately-held investment banks and brokerage firms in operation, it has avoided being swallowed in the merger and acquisition frenzy that eliminated so many of its contemporaries. Josephthal is also an anachronism in some respects: A full-service brokerage firm that lacked any formal managed accounts--or even a central asset

Josephthal & Co. is an anomaly on Wall Street. As one of the few remaining privately-held investment banks and brokerage firms in operation, it has avoided being swallowed in the merger and acquisition frenzy that eliminated so many of its contemporaries. Josephthal is also an anachronism in some respects: A full-service brokerage firm that lacked any formal managed accounts--or even a central asset account--until mid-1997.

And, as company president Paul Fitzgerald acknowledges, the regional firm has seen more than our fair share of compliance problems within the past several years. In fact, Fortune magazine published a cover story about troubles at Josephthals clearing firm, Bear Stearns, in 1997.

But officials at the firm say those problems are history. They point to new asset-management products and marketing initiatives under development for the first quarter of 1999 that are changing the firms culture. And new compliance safeguards are in place to prevent the problems of the past.

Fitzgerald is one of seven individuals who holds ownership stakes in Josephthal & Co., which is known mainly for its research operations. But Fitzgeralds background is compliance: He was vice president of member surveillance at the NYSE for roughly five years and had compliance responsibilities at other firms before joining Josephthal in late 1992.

Until maybe three or four years ago, we really put no resources into providing a formal compliance infrastructure, Fitzgerald says. Thats one of the reasons Im here. Over the last three years weve changed every single position in the compliance department and doubled the staff from 10 to about 22.

Gathering Assets ... Finally Admittedly, Josephthal is late to the game in offering managed accounts, Fitzgerald says. Our revenue per broker is substantially below the industry averages because we are so heavily equity-oriented. However, if you made that comparison on a product line basis, our broker is probably just as productive as the next guy--he just doesnt have the other products--and thats what were trying to develop now.

In mid-1997, the firm hired a specialist to create an investment advisory business. Three proprietary products have been unveiled: the Profund account (a fund wrap program), Access Capital Management (wrap fee with money managers), and the Access Account (brokers function as portfolio managers).

Our goal is to get each one of our 600-plus financial consultants to become Series 65 registered, so it will be very easy for them to place the product, says Lloyd Kagin, director of consumer markets at Josephthal.

In late 1998, the firm introduced the first unit investment trust in a new series called the Josephthal Research Series. The products include portfolios of bank stocks and top picks from the firms analysts. Fixed-income UITs are also under development.

Another initiative is to get each of our financial consultants insurance licensed, because we believe that in the tax-sheltered umbrella of annuities theres a lot of business that we could be pursuing, Kagin says.

In late January, Josephthal was also putting the finishing touches on a central asset account, and was working with a banking partner on a credit/debit card. Its Web site (www.josephthal.com) will eventually bring all of these services together in a central location for clients, officials say.

Once the central asset account is up and running, there will be a Web page where Josephthal Asset Managementcustomers will be able to look at their brokerage account--their money market, checking and Internet banking capabilities, Kagin says.

To spearhead the training effort, Josephthal recently hired Robert Hillis as director of educational development. Hillis, formerly with Dain Rauscher, will use a train-the-trainer approach with product coordinators and the branch managers, Fitzgerald says.

In the first quarter of 1999, Josephthal also plans to begin collecting and storing demographic and marketing data about its retail clients, using computerized scanners to gather information from new account forms and quarterly account statements, both of which were recently updated. So if we want to target a message to everybody who has an IRA account, we can make specific messages on statements targeted to IRAs, Kagin says. A client newsletter is also under development, planned initially as a quarterly publication and eventually a monthly.

Although it has been slow out of the starting gate in many respects, Josephthal now considers itself clearly in the race. Our entire asset capture strategy basically stems from the concept that we, as a firm, have to go through the crawling and the walking stage before we can go into the trot and the run, Kagin says.

As one of the few remaining independent regionals, Josephthal would seem a likely target for an acquirer. Would the firm sell itself?

Definitely not, says Paul Fitzgerald, company president. Were an acquirer, he says. In fact, Josephthal was in discussions to buy New York-based brokerage Ladenburg Thalmann & Co. (which has a sales force of about 80 mostly young, retail reps in Manhattan), but no agreement was reached.

Before we want to become acquired or go public, we want to expand the capital base to our employees, Fitzgerald says. Were in the planning stages of doing things that will head in that direction.

Josephthal & Co.s corporate personality is a tapestry, of sorts, resulting mainly from the combination of different firms with vastly different cultures, says President Paul Fitzgerald.

After the market crash in 1988, the current management/ownership team took control of the firm, then called Rosenkrantz Lyon & Ross. They concentrated on creating a close-knit trading firm that specialized in small underwritings in the $3 million to $5 million range. The firms retail sales force consisted mainly of young, aggressive brokers who focused on small-cap stocks, Fitzgerald says.

But in 1991, the firm merged with Jesup Josephthal, a firm whose sales force was made up of more mature brokers selling mutual funds and blue-chip stocks, he says. The firm still has a sizable contingent of highly productive older brokers, Fitzgerald says. Nothing substitutes for experience.

The firms largest branch office is located in Manhattan, one floor below corporate headquarters at 200 Park Ave., and employs about 80 registered reps. Josephthal added about 115 producers in 1998, but 85 left the company or retired as the company revamped its broker compensation plan a year ago.

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