After Edward Jones lost two top producing reps and increased production expectations last month, some media outlets and recruiters made a lot of noise about rising advisor defections at Edward Jones. A continued lack of sophisticated high-net-worth product offerings and succession planning options was hurting the firm, they said, and so its best producers were heading out the door. The truth is, Edward Jones hasn’t changed all that much—it maintains that same conservative buy-and-hold investment philosophy it’s had for decades, the same cohesive culture that encourages partnership and loyalty…and the same rabidly happy advisor force that goes with it. In an interview with Registered Rep., managing partner Jim Weddle said that the annualized rate of attrition among its top two quintiles of advisors is less than one percent.
As one Edward Jones advisor put it, “Every time we make a change someone predicts that brokers will be leaving in droves. The changing of the minimum production standards truly affects a very small segment of our FA population. Jones has changed that number before and it didn't lead to a mass exodus. It lead to more production from a group of FAs who were constantly skirting that line. It did not lead to any sort of diaspora of FAs in the firm. There will be changes in the future. People will predict that it will mean Jones FAs are upset by the changes and are now looking elsewhere. It will, more than likely, be an incorrect assumption then too.”
Following is a transcript of our interview with Weddle about the recent changes to minimum production requirements, the firm’s attrition rate, its HNW and succession planning offerings and the fiduciary standard.
Registered Rep.: We have already written about the recent increase in minimum production standards at Ed Jones, but could you comment on that briefly?
Jim Weddle: Two years ago we backed down from increasing our performance expectations. The industry was going through toughest times we’ve ever seen. So we waited until there was sustained improvement. Now the markets are up 65 or 70 percent, clients are bringing in more dollars to invest and funding their IRAs again. We’re in a far better place now and it’s time to adjust. About ten percent of our over 12,000 FAs will be adversely affected by the increased expectations if they don’t improve. If we wanted to fire those folks we would just let them go, but we want to help them improve. For the other 90 percent of our advisors it’s a yawn. We’ve got to move the folks who have been in the business four or more years and get them up to a minimum productivity where they are profitable.
RR: How much did rising costs have to do with the increase in production expectations for advisors?
JW: We calculate a profit and loss for every branch, every month, so we can pay a bonus three times a year, but if you’re not profitable you don’t participate, and if you’re not profitable you’re costing the firm money. It doesn’t matter what your branch rent is, if you’re not grossing $20,000 to $22,000 a month and you’re not profitable, after a reasonable period of time to get there, then you need to move on. So is it based on expenses? Of course, you need enough revenues to cover the costs. Not just your branch costs, but your share of firm overhead, and heavens to betsy, if you can’t gross $260,000 a year after five to six years in the business, maybe you need to go somewhere else.
RR: The firm lost two top producing reps last month, and there are rumors of other top producers leaving. What does advisor attrition look like these days?
JW: To put it in the proper perspective, in the first quarter, if you look at people who we lost, who transferred their license to a competitor—they could have quit, been fired, recruited—it was 84 people. Divide that by 12,000, and you get a 2.8 percent annualized attrition rate. I think most of our competitors would die for that rate. We grow organically; we hire accountants, attorneys, teachers, etc., and put them through a thorough training program. But when you start from scratch there is a lot of fallout. Our annualized attrition rate is running at 14 percent total, but only 2.8 percent of those stayed in the business.
If you look at advisors who are profitable, out of the five segments, segments four and five are running a profitable branch. Of those 84 people, ten were segment four or five (there are 5,000 people in segments four and five) that is eight tenths of one percent if you annualize it. We’re going to lose some good people from time to time. Are we losing a whole bunch of folks? Absolutely not. We’re losing less than one percent annualized of our profitable brokers. We grew by 798 advisors last year, 101 of those were veterans from other firms. Of course, I’m not happy when we lose anyone.
RR:What about succession planning. It’s been mentioned as a weak spot, do you have a process in place for advisors looking to retire?
JW: We have process in place that treats clients to a seamless transition from the retiring advisor to another advisor. It takes three years during which the veteran and the person transitioning into the business share the work and share the revenue. In year four, the vet doesn’t work, but he still shares in the revenue. We’ve completed hundreds of them over the last five years, and it works exceptionally well. If you’re a limited partner, and nearly every vet is, you keep your limited partner capital in the firm, which is not a bad supplement to retirement. It’s earning 15 percent right now, again that is variable and there is only a 7.5 percent guarantee, but last year it was 11 percent. I think we’ve got a terrific combination of both lifelong partnership in the firm and a terrific transition plan for a retiring producer, which allows the veteran to slowly transition into retirement, continue to participate in the earnings, and most importantly treats the clients right.
Selling your book is an alternative people will consider, but I’ve worked the numbers—I used to run branch administration—a limited partnership plus a four year transition is a better deal. When you’re selling a book of business to someone else, number one, you have to finance the purchase because no one is going to give you cash. So you got a promissory note from someone you hope works in an ethical and legal way and doesn’t screw it up. Well, keep your ownership in Edward Jones you get 12,000 financial advisors working for you every day and paying you in retirement. I’m obviously biased on this point, but I think it works very well.
RR:So what about industry people who say the top advisors at Edward Jones would be better off at a wirehouse, where they have all the tools and access to investment to serve their high net worth client and say trade options, which is something they can’t do at Jones?
JW: Baloney… a part of what you said is true, they can’t trade options, but if you’re looking for entertainment you need to go down the street. We’re simply not in the entertainment business; we’re in the investment business. Can we cater to the HNW? Absolutely. We have a wonderful trust company we own. We have a separately managed account, we call it MAP (managed account program). It’s grown from zero to $35 billion in less than two years, and appeals to the HNW. And you tell me, do you think we’re competitive? We’re working on a unified managed account (UMA). We’re not going to have it ready in a year, but we’re working on that.
RR: Changing gears slightly, the majority of Jones’ reps are dually licensed. With everything going on in Washington around a fiduciary standard, do you think there should be one, and if so, what should it look like?
JW: Ninety five percent plus percent of our advisors are dually licensed. There is going to be a fiduciary standard, I think that is clear. We’re in support of that, but what we support is a fiduciary standard that does not eliminate or reduce the clients’ options in terms of how they pay for services, and doesn’t reduce the client’s access to products or services. May they pay by commission or by fee? I think the client deserves the choice. Let’s not limit that to a one-size-fits-all fiduciary standard. That’s what we’re for. I think we will get some thoughtful debate in the senate and the house. Probably some rule making will be pushed over to the SEC that will come up with the appropriate way to approach this.
The FINRA CEO and chairman, Rick Ketchum made the comment a week ago that what he would like to see is a business-model-neutral fiduciary standard. Well if you’re going to have a fiduciary standard for institutional, for retail, for all the different firms in the industry, it can’t be one size fits all. Certainly any fiduciary standard will put the best interest of the client first—we do that with or without fiduciary standard. We couldn’t stay in business if we didn’t.
So we’re going to have one and I think that is great. I sure would like to see it carefully defined and thoughtfully implemented so we can anticipate the impacts to individual investors so they are not disadvantaged in any way. You’d hate for people not to be able to use our purchasing power. We start every day with a couple hundred million dollars of fixed income inventory. We buy by the tens of millions of dollars and we offer those munis, corporates and governments to our clients in tens and twenty thousand dollar pieces. One way of thinking is, well that is a conflict of interest, you’re selling clients what you own… we’re using our $900 million dollars of capital to buy big chunks and break it into small chunks. Is that a conflict of interest ? Sure, and we’ll disclose it, but should it be eliminated? If that means not making that service available to clients, I think that would be a shame; that would be a travesty. So let’s thoughtfully think through what the fiduciary standard means in terms of implementation, and we’d love to be involved in those discussion and make sure the individual investor is taken care of.