The Vanishing Partnership

Anyone remember when firms were partnerships?"Sure, there was a time when they didn't allow corporations in this industry," remembers James Bradford Jr., senior partner with Nashville, Tenn.-based J.C. Bradford & Co. "Merrill Lynch was once a mighty big partnership."But today, just a handful of large securities firms are operating as partnerships, offering their brokers an ownership stake and some

Anyone remember when firms were partnerships?

"Sure, there was a time when they didn't allow corporations in this industry," remembers James Bradford Jr., senior partner with Nashville, Tenn.-based J.C. Bradford & Co. "Merrill Lynch was once a mighty big partnership."

But today, just a handful of large securities firms are operating as partnerships, offering their brokers an ownership stake and some degree of influence over the firm's direction. The "Securities Industry Yearbook," published by the SIA, lists only 37 member firms as partnerships, and most of them are institutional boutiques and mutual fund companies. And that's a shame, say some producers.

"Basically, the thing that interested me in J.C. Bradford was its partnership arrangement," says Frank Sloan, a 27-year veteran producer who joined Bradford's Crescent, Texas, branch as a partner in September 1998. "Everybody else is almost a wirehouse nowadays. There's nothing unique to be offered."

But the writing is on the wall and has been for quite awhile. Even J.C. Bradford's days as a partnership are numbered. "We have stated that we would like to put ourselves in the position to go public when the timing is right," Bradford says.

An Endangered Species "There used to be tons of partnerships in this industry," says Jim Weddle, an executive in charge of broker training and development at Edward Jones in St. Louis, Mo. "In fact, the predominant ownership model for the brokerage industry was the partnership structure."

So what happened?

Some trace the demise of the partnership back to April 1970, when Donaldson Lufkin & Jenrette went public, despite strong opposition from the NYSE. The firm was looking for "permanent capital"--a base of investment that didn't come and go with individual partners. Public ownership was the obvious answer, although it was "heretical at the time," says Richard Jenrette, chairman emeritus and a senior adviser with the firm.

DLJ opened the floodgates. A string of other partnerships (including Merrill Lynch) followed with IPOs--all driven by the demand for permanent capital. A.G. Edwards went public in 1971. Goldman Sachs was one of the last large partnership holdouts until it went public in May 1999.

Over the years, the few partnerships that remained gained some legal protection against personal liability by becoming limited liability partnerships. "There are no more pure partnerships," Bradford says. "We've all become limited liability companies."

The Partnership Perks At a firm like Edward Jones or J.C. Bradford, a large portion of a rep's annual compensation is determined by the firm's profitability that year. "We have brokers who have ownership stakes in the high six-figure range at Edward Jones, so that can be very significant," Weddle says.

But beyond the financial perks that come along with partnerships, producers get jazzed about the prestige associated with the partner title. "A client can always do business with a vice president--everybody in the world is a vice president," Sloan says. "But not everybody is a partner in a firm like J.C. Bradford." Roughly 150 brokers are full partners at Bradford. Another 400 employees are junior partners.

"You can go buy stock in any company on the market, but a partnership is more controlled. You have to be invited to join, so there is that appeal of exclusiveness," Bradford says.

Becoming a partner also entitles producers to voice their opinions about the company's direction and policies during the firm's annual partners meeting. And profits via a partnership aren't double taxed like corporate dividends.

At Edward Jones, employees who meet certain qualifications are invited into the partnership every few years. With their own money, they can purchase ownership stakes ranging from 20,000 dollars to 50,000 dollars. Jones approves potential partners based on brokers' production, office profitability, leadership in assisting and training other reps, and recruiting efforts.

About 1,700 Jones brokers are limited partners. And although they don't have voting rights, they do receive information about the firm's financial performance. They also receive a 7.5 percent annual interest rate on their investments.

Jones has an additional 170 general partners, Weddle says. Most are regional directors and corporate executives. "I think the partnership structure creates a heightened sense of responsibility to do what's right and to make sure that others are also doing what's right," he says, "not only in compliance, but also in recruiting other brokers and in developing new programs."

However, putting all talk of personal pride aside, the real reason brokers find partnerships so appealing is that they stand to make a killing if the firm eventually goes public. According to Investment Dealer's Digest, some junior partners at Goldman Sachs raked in 20 million dollars during the firm's public offering. "That is the partnership carrot," Jenrette says.

The Partnership Disadvantages "As you get bigger, the partnership gets a little clumsy," Bradford says. For example, whenever a partner sells an ownership stake back to the firm, the company must find another buyer if it wants to maintain its capital position. "There is a question about the permanency of capital," he says.

In addition, partners who are close to retirement are sometimes reluctant to approve things like technological upgrades, computer equipment and other long-term investments that siphon profits away from the annual distribution to partners.

Jenrette also offers a sobering perspective for securities professionals who are nostalgic about partnerships. "The good old days weren't that great," he says. "The partnerships were stuffy, old fashioned and did not meet modern financial needs."

Ben Edwards, chairman and CEO of A.G. Edwards, says his firm has tried to retain some of the positive elements of the partnership it once was, like bonuses and profit sharing. But he doesn't get warm and fuzzy about partnerships either. "The partner title may bring some personal satisfaction to a broker, but I'm not sure it means that much to a client," Edwards says.

What would brokers face today if partnerships still dominated the industry? "The securities industry would have been swallowed by banks a long time ago if DLJ and other firms like it had not gone public," Jenrette says. Acquiring permanent capital by going public was the only way securities firms could have survived the tumultuous year of 1974 when trading volume fell by half, he says. "The industry would have gone up in smoke."

When Donaldson Lufkin & Jenrette announced it was going public some 30 years ago, the NYSE went ballistic. At the time, the NYSE was approving every single shareholder of every member firm, of which DLJ was one.

The exchange was very comfortable with that arrangement, says DLJ co-founder Richard Jenrette. "They were opposed to us going public because they said things like, 'The Mafia might take over Wall Street,'" he remembers. "In reality, the member firms were afraid that institutional investors would gain access to the NYSE. There was a fear of big, institutional customers like the banks," Jenrette says. "Institutions cheered when DLJ went public."

Also, NYSE officials secretly worried that investors would see exactly how profitable Wall Street was, he says. "DLJ had a 50 percent pretax profit margin at the time. That provided the ammunition needed to do away with fixed commission rates."

Finally, after DLJ threatened to resign from the NYSE and take its trades to a third market, the NYSE caved. "In the end, things were changing rapidly," Jenrette says.

Ironically, DLJ co-founder Bill Donaldson later went on to become the chairman of the NYSE from January 1991 until June 1995. He was succeeded by the current chairman, Richard Grasso, who announced in 1999 plans to take the NYSE public.

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