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In an age of mergers, two local brokerages keep their independence

This article first appeared in the St. Louis Beacon: August 20, 2008 - When Wachovia Corp. bought A.G. Edwards last year, many financial analysts said the deal reflected another major step in the extinction of regional brokerages.

A.G. Edwards' management and stockholders decided that independence was strategically insupportable, but other St. Louis brokerages still embrace their freedom.

"We've been around since 1890," says Ronald J. Kruszewski, chairman and CEO of Stifel Financial, the parent of Stifel, Nicolaus & Co. "We can compete and win. Why sell? It would rip our culture apart. And for what end?"

Stifel is a public company, so there's always the question of management being required to do its fiduciary duty if someone came up with the proverbial offer that shareholders couldn't refuse. "People would ask us if we're interested" in being sold, said Kruszewski, declining to identify companies that wanted to kick the tires. No one has made a formal offer.

As a private partnership, the Jones Financial Cos., parent of Edward Jones, has a better built-in defense against a hostile or friendly takeover. It also has the same attitude about independence as does Stifel.

"We have a major strategic advantage because (being private) allows us to have a long-term focus," says Jim Weddle, managing partner, because the firm doesn't have to deal with Wall Street analysts' expectations matched against quarterly performance.

"We're responsible to clients. We're accountable to ourselves," Weddle says. "We've had offers: The answer is always 'no.'" He declined to identify suitors.

The siren song of synergy, peddled by big banks offering big checks, lured many independent brokerages during the early part of the decade.

"There was a wave of consolidations," says Jaime Peters, a banking industry analyst for the independent financial research firm Morningstar.

Until late 1999, federal law kept commercial banks and investment banks separate. The law was repealed and a new law was signed enabling banks to provide many financial services.

"Banks were trying to become one-stop shopping centers for consumers," a business model that is more popular in foreign countries, Peters says. "But they met resistance from (U.S.) consumers who liked their own broker and who liked their own bank."

Achieving the goal of cross-selling different products among divisions of a giant bank "hasn't been that successful," she says. "Expectations were high in 2000."

Peters doubts banks will be foraging for regional brokerages or any other acquisitions for at least the next two years. They are too crippled by the weakening economy, ill-fated acquisitions, poor investments and exposure to the deteriorating housing market via their mortgage-lending businesses, she says.

"They were going to be all things to all people, and they really screwed things up," adds Juli Niemann, executive vice president of the Clayton financial advisory firm Smith, Moore & Co.

Rather than buy brokerages, "banks will have to get out of businesses where they don't belong," Niemann says. "If you see them doing anything, you'll see them de-merging."

THE VALUE OF INDEPENDENCE

In assessing why some regional brokerages remain independent, let's first drop the word "regional."

Edward Jones has more than 9,200 offices in the U.S., bragging on its website that "we have more branch offices than any other brokerage firm in the country." It has more than 590 offices in Canada and more than 230 in the United Kingdom.

Its parent's total revenue last year was $4.15 billion, up 18 percent from 2006. Income before allocations to partners was $508.2 million, up 30 percent.

Stifel Nicolaus has 181 offices in 32 states and the District of Columbia, plus three European offices. Last year, its parent earned $32.2 million on total revenue of $793.1 million. In 2006, it earned $15.4 million on revenue of $471.4 million. These gains were aided by acquisitions -- a New Jersey-based brokerage and investment banking firm in February 2007 and a small St. Louis-based commercial bank in April 2007.

However, the weakening economy took a toll on both parent companies as each recorded modest second-quarter declines in revenue compared to the same period last year.

Kruszewski told investors, during an Aug. 12 telephone conference call, that a soft economy hasn't stopped Stifel from expanding. Although the financial-services industry may be dismissing many employees, "we are adding people almost at a very fast pace," he said.

These additions "can have a pressing impact on short-term results," he added. "But we are not running the firm for short-term results. We are running it for long-term value."

Despite stock market volatility, Stifel has created an excellent takeover defense by maintaining a strong stock price, making itself very expensive to potential suitors, says Juli Niemann. "Edward Jones is too big" to be acquired, she adds. "You'd have to come up with the sweetest offer that would be unimaginable."

Stifel's stock performance outshines the biggest multi-service banks, as well as giant investment banking firms based in New York city where the term "regional brokerage" identifies companies outside the 212 area code.

The St. Louis Beacon compared Stifel's stock results to those of big money-center banks -- banks with a brokerage business -- and the biggest investment banking firms.

Stifel's stock beat every competitor -- domestic and foreign -- at intervals of one year, two years and five years. Stifel also beat the S&P 500-stock index, based on these measurements.

Stifel's performance, even during the brutal past 12 months, stands in stark contrast to institutions such as Wachovia, whose stock has been hammered thanks to, among other things, big losses and its mortgage-lending operations.

Wachovia isn't alone. Big-name institutions -- from Citigroup to UBS to Lehman Brothers Holdings -- have reported significant second-quarter losses and shriveling stock prices. The comparison excludes Bear Stearns, whose collapse was so dramatic that it had to be acquired by JP Morgan Chase in May.

For the 12 months ended Aug. 19, Stifel's stock, adjusted for a 3-for-2 split in mid-June, is up 6.5 percent, while the S&P index is down 12 percent. Wachovia is down 71 percent.

STICKING TO A STRATEGY

St. Louis financial institutions operate away from the spotlight of national media and Wall Street analysts. Being private assures Edward Jones' privacy. Only two investment banking analysts follow Stifel; calls to both were not returned.

But Edward Jones receives attention where it counts. From 2005 to 2007, it placed first each year in the annual customer satisfaction survey of full-service brokers conducted by JD Power. (Stifel wasn't in the survey).

This year, Edward Jones slipped to second, but it depends on how you define "slipped." With 806 points on a 1,000-point scale, this score was higher than its first-place scores in 2005 and 2007 and just 2 points below its first-place record in 2006. (The 2008 winner was Raymond James Financial, an independent brokerage, with 831 points.)

Executives at Edward Jones and Stifel say their strategies enable them to navigate a profitable path between the offerings of giant banks and those of discount brokers.

"We are not the broker for everyone," says Weddle. "We don't compete on the basis of price; we compete on the basis of service."

Check the Edward Jones website. As a practitioner of conservative investing, the firm identifies what it opposes: No "fads," no penny stocks, no "stock du jour," no options, no commodities, no recommending "young, unproven companies," and no market-timing.

But the company isn't immune from trouble. In October, it settled lawsuits related to its marketing of mutual funds between 1999 and 2004. It agreed to pay $55 million to former clients and for attorneys' fees as well as $72.5 million in credit vouchers to current clients.

"We've got it behind us," says Weddle, who became managing partner in November 2005. The company has taken preventive measures, he says, including more detailed communication with clients, enhanced training for employees and greater monitoring of financial products.

Edward Jones' approach to growth is build rather than buy. It started its Canadian brokerage business from scratch 14 years ago, and it started its United Kingdom business the same way 10 years ago. Both operations remain in the red. "While annual losses for the Canadian operation have decreased since its early start-up years, the losses for the U.K. operation have increased significantly in recent years," says the 2007 annual report filed in March 2008 with the Securities and Exchange Commission.

Weddle says he is patient. His company hasn't publicly stated profitability goals or timetables for the foreign operations.

U.S. growth is measured in part by adding financial advisers in a "disciplined" manner, Weddle says. A five-year plan calls for an annual growth rate of 8-10 percent this year, 9-11 percent next year and 10-12 percent for the next three years. "We're not growing to be bigger," says Weddle. "We are growing to be better."

Like Edward Jones, Stifel treads the middle ground between large banks and discount brokerages. "We're not trying to get into the discount business," CEO Kruszewksi says. "Our customers are people who want financial advice."

Unlike Edward Jones, Stifel is willing to grow by what Kruszewski calls strategic acquisitions.

The 2007 purchase of the Ryan Beck Holdings brokerage gave Stifel greater access to the Northeast to complement its emphasis on the Midwest and Southeast. He says another purchase, in late 2005, "turbocharged our capital markets business," which includes investment banking, equity research and fixed income research.

Despite making acquisitions and expanding services, Kruszewski promises Stifel won't mimic the misadventures of giant banking and investment-banking companies.

"We take more risks than your average hardware store," but Stifel won't bite off more than it can chew, he says. "We want to take advantage of opportunities. I don't know where our next opportunity will be."

Robert W. Steyer, a freelance journalist in New York, was a business reporter for the St. Louis Post-Dispatch. 

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