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Playing Hard to Get?

When it named Robert Bagby as CEO in March 2001, A.G. Edwards all but staked a For Sale sign in front of its St. Louis headquarters. Or so everyone thought. Bagby, despite being an A.G. Edwards lifer (he has been with the firm since 1975), was considered a relative outsider, being the first non-Edwards family member to assume the helm in the 115-year history of the company. The fact that he replaced

When it named Robert Bagby as CEO in March 2001, A.G. Edwards all but staked a “For Sale” sign in front of its St. Louis headquarters.

Or so everyone thought.

Bagby, despite being an A.G. Edwards lifer (he has been with the firm since 1975), was considered a relative outsider, being the first non-Edwards family member to assume the helm in the 115-year history of the company. The fact that he replaced such a staunch believer in the firm's independence — the notoriously stubborn Benjamin Edwards III — seemed to presage a change in the firm's historically staid thinking. In fact, so prevalent was the expectation of a sell-out that the The Wall Street Journal ran a story actually handicapping the race to acquire the company (it favored Morgan Stanley and Wells Fargo). More recently, Wachovia was even rumored to be interested in acquiring A.G. Edwards, only settling on Prudential Securities when Edwards couldn't be had.

But, now, nearly three years later, the firm soldiers on, independent and apparently intent upon staying that way. “Absolutely everything we have done has been to remain independent,” Bagby says. “Every part of the management team all the way on down is committed to keeping us our own entity. We are absolutely not going to be purchased. At all. End of story.”

Wall St. on the Mississippi

A.G. Edwards has long been viewed by Wall Street as a yokel — a respected yokel, to be sure, but one with smallish, midwestern clients with rather humdrum financial needs. For years, the folks in St. Louis have been fine with that reputation, in part because the company has fared so well. Over the last decade, it ranks among the most profitable of brokerage firms, and it carries no long-term debt.

These facts, combined with a retail distribution force of 7,000-plus reps — the sixth highest in the industry — spread across 49 states and the United Kingdom, has grabbed the attention of many a suitor, particularly banks looking for an easy way to expand their securities business.

Given the widespread perception that Edwards resembles other mid-sized brokerages that have already been acquired (PaineWebber, Dain Rauscher, for instance), many felt it was just a matter of time before some big firm assembled a buyout offer Edwards couldn't ignore. But Bagby says he is committed not just to rebuffing such offers, but to finding a way to make Edwards a peer of those would-be acquirers.

Bagby has spearheaded three large-scale projects, one of which would have been unthinkable under his predecessors. First, he launched the construction of A.G. Edwards University, home of the firm's expansive new training facility, occupying 200,000 square feet in a building named after Bagby's predecessor.

Second, he created the Gateway Initiative in response to rep complaints about an under-performing technology platform. This is a ground-up reconstruction of the firms' processing and IT platforms, a project budgeted at $183 million with an expected completion date in 2006.

But perhaps the most visible evidence of the firm's ambitions is the hiring of Minneapolis-based Carmichael Lynch to put together Edwards' first nationwide advertising campaign. In the past, marketing was a decentralized affair, with individual branches each handling their own, says Peter Miller, Edwards' director of sales and marketing. But now the same firm that had once viewed self-promotion as “distasteful” has decided its ambitions require it to get a little more slick.

Carmichael Lynch aims to completely overhaul Edwards' image, primarily through with a redesigned logo (the “G” is a bright red flame) and through TV commercials and print ads that support a rebranding effort organized around this slogan: “Fully invested in our clients.” The goal of the reported $20 million campaign (a figure Miller denies but declines to correct): Take the firm J.D. Power last year ranked first in investor satisfaction but last in name recognition, and reposition it as the Porsche of the brokerage industry.

The marketing effort is so at odds with the firm's historical character that some view it as the opposite of evidence of a commitment to independence.

“We've got a new logo, these high-profile ads. It feels like [management] is dressing itself up to be taken over,” says one A.G. Edwards broker. “The same thing happened when PaineWebber sold itself to UBS.”

Getting Down to Business

On a certain level, Edwards' reputation as a “regional” brokerage is misleading. It has 7,024 reps in 706 offices in the United States and England. “We feel we're a national firm that acts like a regional one,” says one Edwards rep. It is the largest publicly held brokerage firm outside of New York, and its research department consistently ranks among the highest rated in the industry. It has also plowed “substantial” capital into its investment banking business, and the move looks to be paying off. In the most recent quarter (the second of Edwards' 2004 fiscal year), the investment banking unit brought in $20 million more in revenues than in the previous quarter.

Overall, Edwards' profits in the most recent quarter were up 37 percent from the same quarter a year ago. Net revenues totaled $632 million, up from $569 million in second-quarter 2002. The results vastly exceeded analyst projections and represented the highest-revenue quarter for the firm in more than two years. Its shares, at around $40.50, are trading near 52-week highs.

Despite some nods to diversification, Edwards' now and future success is likely to ride on the shoulders of its retail business, which currently accounts for 80 percent of revenues.

On the surface, the strategic direction of its retail business is at odds with the firm's top-tier aspirations. While every top firm on the Street pushes its workforce towards fee-based arrangements with their clients, Edwards shows some signs of moving in the other direction. Last year, for instance, it abandoned its fee-based initiative, Client Choice, because, Bagby says, it became a platform for hyperactive trading. “We didn't want something that was just designed for trading,” Bagby says. “We want our platforms to be suited for investments.” The program was short-lived, says one Edwards rep: “About as soon as they started promoting that, it was over. It didn't last long.”

Contrary to appearances, Bagby says, the firm is committed to fee-based arrangements. He notes it added more fee-based accounts in 2003 than in any other year. Still, its penetration remains low by industry standards. Of its $253 billion of client assets, only $23.4 billion, or 9 percent, resided in fee-based accounts, according to the most recent earnings report. By comparison, about 21 percent of Merrill Lynch's assets are in fee-based accounts.

One explanation for this is that fee-based accounts generally appeal to higher-income customers, and Edwards, for the time being at least, remains a decidedly middle-class firm. Its reps average $36 million in assets under management, far less than their counterparts at Merrill Lynch, UBS or Smith Barney.

Bagby defends Edwards' middle market focus succinctly: “If you snub people who need help just because they don't have a lot of money, they're gonna remember that,” he says.

The populist sentiments behind such talk might cause a snicker or two on Wall Street, but the fact that Bagby delivers them so flatly sends a message: Edwards' lofty ambitions will not cause it to lose sight of the customers that are the foundation of its success.

Nor is it likely to abandon some of the other anti-Wall Street aspects of its business, because they also continue to succeed. Edwards eschews signing bonuses for new brokers, for instance. Yet its workforce doesn't seem to feel under-appreciated: Edwards' turnover rate in 2002 was 15.2 percent, far below the industry average of 20.8 percent. Sixty percent of its reps have been with the firm five years or more, and the average tenure is eight years.

Further, distance from the Wall Street is proving advantageous in at least one other respect: Edwards remains relatively unsullied by the scandals plaguing the industry. The firm does not feel the need to alter any of its mutual fund selling practices in the wake of the recent scandals involving Janus and other companies.

“Edwards is a good solid, clean shop,” says a New York-based broker for a competing firm. “Their brokers are good producers who don't walk.”

Have Some Cake!

The question then becomes: Can the firm have it both ways? Can it join the ranks of the biggest, slickest firms without surrendering the Midwestern ethos that has served it so well?

Many of the firm's brokers worry that it cannot, and while few doubt Bagby's resolve on the independence issue, they realize that the firm's failure to grow aggressively could take the matter out of Bagby's hands. Attractive acquisition targets sometimes have a way of attracting offers that override almost any non-financial objections.

“You'd never sell a retail brokerage firm just as retail is starting to recover,” says Brad Hintz, a research analyst at New York-based Sanford C. Bernstein. “But this is a wonderful acquisition for someone in the long term, maybe one of the Canadian banks or Bank of America.”

Still, Bagby remains confident in his firm's commitment to independence and to its roots. If the ad campaign itself is a little un-Edwardsian, its message is anything but.

“We don't think of this advertising,” he says. “This is just trying to let people know our brand. Not enough people know it.”

“If there's one thing I need to do here, it's let people know who we are,” he adds.

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