Edward Jones: The Dr. Jekyll and Mr. Hyde of the Financial Services Industry

There is a charming, cozy enclave of the American psyche in which places such as Lake Wobegon, Mayberry and the Smuckers' family home repose. It's that halcyon world where Father Knows Best, and a man's word is his bond.

It is this realm in which financial services firm Edward Jones has chosen to position itself, and it has been brilliant in cultivating its "neighbors helping neighbors" persona. Unlike the industry as a whole -- which has a sleek, metropolitan, high-rise, high-tech, high-roller image -- Edward Jones has thousands of modest storefront offices throughout the heartland. In each, there is one advisor, who is humbly, compassionately at your service.

But the birthday card he sends you -- and the pumpkin pie at Thanksgiving, and the new Norman Rockwell calendar every January -- are all part of the firm's scrupulously crafted "Our Town" facade. Everything from the advisor's regular, "just checking in" phone call every few weeks ("Is your cat feeling better?") to his investment advice, is ruthlessly stage-managed by a vast, extremely profitable, expansionistic headquarters.

Some of the firm's financial advisors refer to it as a cult -- they call it "Jonestown" -- and hundreds quit every year, because they "can't drink the green Kool Aid any longer."

Below is part four of a colorful, in-depth investigation of the company. The entire series, with great artwork, can be found at http://kronstantinople.blogspot.com/p/edward-jones-saga.html. It was used by the Motley Fool, with my permission, as the foundation for its own coverage, which was geared toward its specialized readership. My series encompasses the fascinating, disheartening evolution of the firm; its sales force -- which reflects a great deal of humiliation, anger, cynicism and ethical angst; its callous manipulation of clients; and its run-ins with the Feds.

Weddles' Glittering Edwardian Blueprint for the Future

It is hard to assess whether Managing Partner Jim Weddle's grandiose fantasies for the future of Edward Jones are inspired or deranged. His imperialistic visions have made the natives -- his financial advisors, out there in the jungle -- restless. They say headquarters, remotely ensconced in its glassy urban high-rise -- has no concept of the dynamic in which they struggle to earn a living. Many advisors claim that pretty much every new directive, policy and operational model sent out to the boondocks by central office clearly shows how out of touch management is with the nuts and bolts of its far-flung organization.

What's ironic about Weddle's planned expansion and renovation of his beloved "Jonestown" is that it would, every step of the way, make the firm more and more indistinguishable from its competitors. Pretty much everything that has made Edward Jones unique would be lost.

It is the "kumbaya" culture of solidarity and happily shared purpose that advisors say prevents them from speaking their minds about the dubious pronouncements from on high. Oh, and there's always that little fear they keep mentioning about being "thrown off the train," or "getting chewed up and spit out."

"The egos of the leadership regarding the big changes to come have created a toxic environment at Edward Jones," according to a particularly thoughtful and detailed assessment at Epinions.com.

It's a good thing that the advisors are able to vent so freely -- and fervently -- in online forums. Lord knows what might happen if the "Gang Green" -- as they call themselves -- didn't have these outlets for their bile. Maybe "going postal" would be renamed "going all Jonesey."

Weddle's timeline for major changes at Edward Jones is buttressed by the firm's solid financial base, which provides plenty of room for experimentation.


Edward Jones' profits nearly doubled -- to $392.8 million -- in 2010, and they increased almost as much in 2011. Its first-quarter profits alone were up 53.7 percent. Net revenues were $4.58 billion for the year.

On August 11, EDJ reported a 12 percent increase in profit in its second quarter ended June 29 to $139 million, as the company "benefited from continued investment of client dollars into its Advisory programs, which increased fee revenue," the firm reported.

Edward Jones claims, ad nauseam, that it encourages conservative, "buy and hold," long-term investing and discourages frequent trading, "which can increase fees and commissions."

But its dazzling profitability is based entirely on the fees and commissions generated by trading, and many of its investment picks are, according to its own advisors, "junk." (One must acknowledge that this contradicts what several analysts have said. They regard EDJ's cautious, well-researched investment advice as among the best in the business, in spite of its conflicts of interest.)

The St. Louis Post-Dispatch and the St. Louis Business Journal agree that it is buy and sell transactions for its customers, and fee revenues, that flood the firm's coffers.

Fees for other services and administrative work unrelated to trading are becoming an ever-more important, often hidden, source of revenue, and consumers who pay attention are confused.


The most widely publicized aspect of Weddle's grand plan is his intention to enlarge his advisor force from the current 12,000 to 20,000 by the year 2020.

In 2009, he told the Wall Street Journal he would be adding 5,000 new advisors by 2012. The firm's recruiting efforts the past three years have been ineffective, though, and the number of advisors has remained flat.

Despite the ubiquity of Edward Jones storefronts, Weddle believes the U.S. market is not yet "saturated." He projects that his expanded legion of advisors -- which he is still confident will materialize -- will be overseeing $1 trillion in client assets (up from $634 billion at the end of March 2012).

Many of Weddle's employees think Edward Jones has gone well beyond the "saturation" point already. There are 100 EDJ offices in St. Louis alone. Advisors liken the pervasiveness of their offices, and their "franchise" mode of operation, to Starbucks and McDonald's. They are not the entrepreneurs they had dreamed of becoming, based upon EDJ's recruitment promises.

"I drive past five other Jones offices on my way to my office every morning. It's only a four-mile commute," one advisor says.

"Along Manchester Road, I counted eight one-man Jones offices in a two-mile stretch. If you do a two-mile radius around my office (near Kirkwood) there are 15 Jones offices," another laments.

Remarks such as these have flooded the message boards for several years.

Weddle's expansionary dreams persist nevertheless. For example, he is planning to add more than 236 branches in the greater Seattle area over the next five to 10 years, according to company spokesman John Boul. The firm announced earlier this year that it will open 70 new offices in western Massachusetts.

Jones advisors feel betrayed by this. With each new storefront, their potential client base becomes smaller, even as their mandatory quotas rise.


According to the U.S. Bureau of Labor Statistics website, "jobs for personal financial advisors are projected to grow by 30 percent over the 2008–18 period, which is much faster than the average for all occupations. Growing numbers of advisors will be needed to assist the millions of workers expected to retire in the next 10 years."

Despite those data, and the firm's appealing -- and even inspirational -- outreach efforts, Jones has fallen short of its yearly hiring goals for most of the past decade, according to Reuters business writer Joseph A. Giannone.

Of 12,500 people who applied to be a Jones financial advisor in 2011, only 2,000 were hired, or around 16 percent, according to a 2012 WealthManagement.com article. Typically, about 82 percent of those get through the first few weeks, become licensed to sell investments and get on the payroll, according to Bill Campbell, a partner at the firm. Twenty-three percent quit in the first four months on the job, says Kevin Alm, head of training. Two years later, only about 42 percent of the 16 percent of applicants who were hired are still with the firm. By year three, only 37 percent of the original new hires remain with the firm. Considering that EDJ reportedly spends about $100,000 to train each recruit, it looks like a pretty bad investment -- a 63 percent loss! And yet, people give them money to invest -- pretty ironic.

Edward Jones' success rate sounds positively dismal, but it is nearly twice as good as the industry average, according to Training Magazine.

Given the unemployment rate -- which includes millions of educated, experienced people -- it seems paradoxical that Jones is struggling to meet its recruiting targets.


Former advisors report another hurdle in Weddle's expansionistic dreams: a substantial exodus by those who feel constrained, overburdened or morally compromised by the company's policies.

In November of last year, EDJ advisors in the WealthManagement.com forum discussed the apparent loss of between 1,500 and 2,000 FAs in one year alone.

"I'm guessing 85 percent of the turnover is in the 0-5 year range," one of them said.

"I've seen TONS of FA's in my region leave," another EDJ advisor wrote in 2012. "A lot have obviously failed out, but I have seen more FA's leave to go indy (independent). A guy on the leadership team told me there is a lot of pressure at corporate right now. They are struggling to figure out what direction to take the firm. They have come out with a lot of new recruiting tools and incentives, new-hire pay rules, lots of stuff. But I don't think any of it is enough to get them over the hump. The bottom line seems to be that newbies are struggling to bring in new assets. The ONLY saving grace right now is that everyone seems to be converting to Advisory Solutions, so that is driving up revenue on existing assets. Things are getting strange around here."

Advisors are being pressed to "deepen existing client relationships" by calling each of their customers every three weeks with a list of investment suggestions. Before they do so, they are instructed to retrieve the client's personal information on their computers, so they can ask personalized questions about clients' wives, kids, hobbies, health, etc., before getting down to business. They also pointedly seek referrals during these "warm interactions."


In a move that might be regarded as pure genius or as cynical and exploitative, EDJ has aggressively (and "excitedly") launched the "FORCES" program, to recruit returning military veterans into its ranks. America loves and trusts its noble servicemen! Let's flip that good will into some profit, people!

In a poll commissioned by Edward Jones, 75 percent of respondents said they would like to have a former soldier as a financial advisor, citing factors such as integrity and discipline. Moreover, they saw it as a way to "express gratitude" for the veteran's service.

Jones' plan is a big PR coup, given all the publicity about the unemployment rate among "our finest." But it's a real economic coup for EJ as well: Thanks to the G.I. Bill, veterans can receive a monthly income while they are being trained by Edward Jones. (Jones has a euphemistic way of phrasing this: "Our training and compensation program dovetails with GI benefits.")

For each vet, tens of thousands of tax dollars will be disbursed that would otherwise have been paid by Edward Jones for its costly training. What a deal!

There is a menacing aspect to this inspired idea: Any vet who joins the Apprenticeship/On-The-Job Training Program under the G.I. Bill forfeits his right to receive a college education.

And the likelihood, as we've demonstrated, is that the veteran will not complete the training and develop a sustainable business. He loses big-time, just as if he'd blown his GI benefits on a sleazy trade school.


Weddle's blueprint for the future encompasses far more than increasing his army of financial advisors. The firm's signature little "sole proprietor" storefronts are expected to fade over time, as Jones establishes offices that house multiple advisors.

In a 2008 Harvard Business Review article, the Jones model was contrasted favorably with Merrill Lynch, which has an average of 15 brokers per office. The Jones ambiance was described as "personable...convenient....and casual." The downside is overhead expenses and isolation. The Jones Boys can get pretty lonesome. Some camaraderie and trash-can basketball might do them some good.

It appears that a substantial upgrade of the Jones work force may be on the horizon as well. Just a couple of years ago an EDJ "image consultant" wrote: "The company does not hire top MBAs or 'stars' from other banks; it hires smart, average, eager folks and trains them. At Jones, the system is the star."

But in the first few months of this year alone, Jones hired 164 "star" brokers away from competitors, Weddle said.


The firm's famous "regular guy" advisors -- recruited in mid-career from unsatisfying jobs that generally had nothing to do with finance -- are expected to go softly into retirement as Weddle shifts gears and goes after a new breed of young, well-educated people, who will bring greater polish and sophistication to the Jones brand.

If you majored in finance, that's great! If you have an MBA, get over here, babe!

Ironically, these savvy recruits are expected to get more training than their unschooled "Salt of the Earth" predecessors did.

Weddle and his inner circle have rolled out a new FA Talent Acquisition organization, new recruitment strategies and additional "hiring screens." The firm is refreshingly, and pragmatically, committed to diversity, and has impressive programs to increase the number of women and African-Americans in its ranks.

"We have increased the size of our FA Career Development Program, which targets top graduates from BA and MA programs and provides them with up to a year of specialized training to prepare them to enter our FA Training program and eventually become financial advisors," Weddle tells AdvisorOne.

In other words, the minor-league firm is going pro.

Isn't Edward Jones beginning to sound like a lot less like the "self" it so proudly and painstakingly contrived, and more like all the other investment firms?


The firm's famously limited ("simplified") investment options are being blown wide open, and are expected before long to include financial instruments that Jones has explicitly shunned in the past -- expanding not just beyond its historical focus on mutual funds and into an array of investments, insurance, banking services and loans -- but also into more exotic and higher-risk products, in order to get more business from each account.

"We'll still take the buy-and-hold folks," a soon-to-retire advisor says. "But they want us to go after the speculators, too. Why not? It's big money."

All of this redesign and recalibration at Edward Jones can be regarded either as revolutionary change or as giving up and joining the crowd.

Jones is adopting a number of trademarked "models" that will reportedly take the guesswork out of creating portfolios. That begs the question: What is the advisor's role? Many current advisors believe their knowledge is useless, since home office dictates everything they do. Think how the new young hotshots, with their increased level of education and training, will feel about everything being prepackaged.

EDJ has begun an evolution away from a commission-based system toward one that is fee-based, which has proven to be highly profitable.


The firm has been insinuating its clients' portfolios into the "more robust" (?) Advisory Solutions model since 2008. Some advisors have complained about being required to "churn" their accounts into the Advisory format, which poses ethical and practical dilemmas for them. Others say it was about time that the firm adopted the Advisory system, years after other firms moved to fee-based platforms. They report that 2011 was the first year in which fee revenue outpaced commissions.

"As a fee-based program, the advisor won't be tempted to switch you in and out of funds to increase his commissions," an analyst with Morningstar explains (while inadvertently explaining a lot about how Jones has been operating all these years).

The design of model investment "platforms," such as Advisory Solutions, seems to be sweeping the financial services industry. Even though EDJ was relatively late in signing on, it was named Advisory Solutions Firm of the Year in May by the Money Management Institute. At that time, it had shifted $75 billion in assets into the Advisory format.


Advisory Solutions at least discloses its fees -- some of them, anyway -- which is a stunning step forward for Edward Jones. The model imposes a $5,000 annual program fee (for accounts up to $500,000), plus administrative fees and "internal expenses." There is also an Administrative-UMA Fee of $1,500 as well as SMA Manager Fees. And don't forget to read the prospectus for each product in your portfolio, to discover what their "charges and expenses" are.

(One nice old retiree was devastated to learn that his Advisory Solutions program had cost him $9,000 in one year.) (Like most people, he probably hadn't read the deluge of boilerplate materials that had engulfed him after he signed up.)

"The Administrative-UMA Fee also covers security trading activity and overlay management for UMA Models," the Edward Jones site explains confusingly. Although this package is for those "who prefer to work closely with their financial advisor to implement and refine their long-term financial strategy" it obliges them to "leave the daily investment decisions to a team of financial professionals dedicated to the program."

Under this arrangement, your money is subject to "Dynamic Threshold Rebalancing," which is designed to exclude your EMOTIONS from consideration in buying and selling decisions. (I, for one, respect my emotions.)

"You just wait outside and let us take care of this counter-intuitive chore," EDJ seems to be saying. Its decisions are based on "our Research department’s continual, rigorous analysis and review process," the Jones web site explains, so you can just calm down and let the experts do a job on you.

It is surprising that Jones would abandon its fundamental model of investment simplicity and caution, which is distinctively appealing and still resonates with a wide swath of its longtime target market: Mom-and-Pop investors.

But Weddle has his eye on trillions of dollars from 79 million Baby Boomers heading into retirement. He estimates that about half of them fit the "psychographic" of Edward Jones: "conservative, long-term investors who want to work with a trusted advisor."

As Weddle sculpts his empire into something more modern, he seems to be assuming that the next wave of investors is perhaps too cool for EDJ's current quaintness. Stop that "howdy!" bit, and dump the Norman Rockwell!

I think that's too bad. And I am a Baby Boomer.


The proposed and current changes in how EDJ does business have caused uneasiness among the rank and file.

According to a 17-year veteran of the firm, "disturbing things are happening at Jones." He refers to the imposition of additional "segments" to the sales-quota system and to rumors that Jones "plans to begin paying people starting in year three on a wirehouse-like grid. There are also rumors that the firm is going to outsource its research function to save money and lower 'perceived' conflicts of interest," the advisor says.

"For those of you that work at Jones, you know that they have tools to essentially create model portfolios for you. Last year they rolled out a system that will create and buy non-advisory models for you (A-shares, stocks, etc). The word is that at some point, this will become mandatory for new money, and that the only non-model assets that will be allowed in client accounts going forward will be legacy assets and exception assets (such as transfer assets with embedded gains)," he writes.

In spite of the continually increasing use of "prefab" portfolios, EDJ claims on its website that it is dedicated to "developing and reviewing investment guidelines specifically for each individual investor."

They don't. They fill in the blanks and press "submit."


Edward Jones, which has been notoriously averse to technology (its advisors were still begging for email in 2006) (and they still typically don't give their email addresses to clients) (and headquarters reportedly monitors and then destroys company emails) is finally diving into social media, according to SMARTMONEY. It is posting videos about investing strategy on its YouTube channel (nothing seems to have gone viral yet) and is even trying to get itself out there on Twitter every day. It recently tweeted "Kudos to financial advisor Don Logan for always answering his phone!" and "Olympic coaches approach training their athletes in different ways -- learn how we approach your financial needs!" and "Calling all Women: Declare Your Financial Independence!" and "Think running 26.2 miles is a lot? Try 146. Thru Death Valley. This Edward Jones partner did. Find out why!" and "Edward Jones has a very personal feel that's almost like family. And we're very proud of that!"

In many ways, it is almost like family. And the more you learn about the firm, the gladder you are that Edward Jones isn't your daddy.