THE WAL-MART OF WALL STREET BY PLANTING OFFICES IN SMALL-TOWN AMERICA, FAST-GROWING EDWARD JONES IS OUTFLANKING THE GIANTS OF THE BROKERAGE INDUSTRY. ITS UNLIKELY SECRET WEAPON: ADVICE AND ENCOURAGEMENT FROM 87-YEAR-OLD MANAGEMENT SAGE PETER DRUCKER.
By RICHARD TEITELBAUM

(FORTUNE Magazine) – What is Peter F. Drucker, the ultimate management guru, doing working for an obscure Midwestern brokerage house? As the author of dozens of books and the man credited with making management an academic discipline, he is in great demand--but at 87, he doesn't consult for just anybody. Yet Drucker has plenty of time for St. Louis-based Edward Jones because it is a living laboratory for his ideas, a place where he can test the mettle of his managing theories.

One thing that particularly appeals to Drucker: Edward Jones is very different from your typical financial services company. He says, "They are a completely unique concept that makes sense to me. Wall Street never has made sense to me." What sets the firm apart is its innovative structure--a strong center surrounded by freewheeling satellites--and its strategy: The company is striving to become the Wal-Mart of Wall Street. Like the giant retailer, Edward Jones has built its business in rural and suburban America and left the big cities to outfits like Merrill Lynch and Paine Webber.

So far the results have justified the strategy. Edward Jones, with 1996 capital of $465 million, is only the 34th-largest broker in the U.S. But the partnership sports a 1996 pretax return on equity of 39%, among the industry's highest, even though--by design--it wields only a fraction of the investment banking firepower that has fueled rivals' profits. That return has not dipped below 29% for the past five years, an amazingly consistent record in the volatile securities business. And the company is on a growth tear. Since 1981 it has expanded its broker force at a 15% annual clip--without a single acquisition.

It was in the early 1980s that Jones managing partner John Bachmann first approached Drucker. "I spent a month drafting a letter to him," Bachmann recalls. "I described Edward Jones in such a way that he couldn't help but know that we embraced his ways of thinking, that we were a testing ground for his ideas." Bachmann uses Drucker mostly as a sounding board, someone who can help him get the most out of his innovative organizational structure. Drucker sees Edward Jones as "a confederation of highly autonomous entrepreneurial units bound together by a highly centralized core of values and services." The entrepreneurs are Jones' brokers, who are more entrepreneurial than most. The company obsession with values is succinctly captured on the autographed poster of Drucker that hangs in Bachmann's St. Louis office. It asks: "What is our business? Who is our customer? What does the customer consider value?"

Jones' business is providing financial advice to people, but at the company's core is a strong belief in providing investors with conservative, long-term investments. Its customers aren't much like those of other brokerages; Jones clients might be successful farmers or small-town business owners, and they aren't out to make a killing. But if you want to get a rise out of a Jones executive, call such clients unsophisticated. "We call them intelligent investors," snaps Doug Hill, the firm's normally easygoing marketing chief. "They know what they don't know. They know they are not Bernard Baruch. They know they have idle money that they want to get a better return on."

Keeping that safety-first orientation in mind, Jones brokers forgo the selling of risky initial public offerings, options, or commodity futures. The firm takes a dim view of penny stocks and won't compensate brokers for trades on shares under $5. Says Hill: "We just don't think they're good for clients." Jones as well has decided that in-house mutual funds--enormous profit machines for Merrill Lynch and Smith Barney--pose a potential conflict of interest, as brokers may be tempted to steer clients into them regardless of suitability.

When Drucker meets with Jones' top management, he constantly tries to reinforce the firm's conservative values. Example: During a recent meeting in California, Drucker offered one of his trademark parables, the kind that shine with what seem like several lifetimes' worth of insight. "My first job in London, in 1934, was as a foreign-exchange trader," Drucker says, pausing, and then continuing in his thick Austrian accent. "One day the managing director called me into the office and said, 'You are now the economist and head of asset management.' 'But I'm just getting good at currency trading,' I said. The managing director responded, 'That's why I'm switching you.'"

It's a Drucker anecdote, all right: personal and more than a bit elliptical. The Jones folks chortle and wait as Drucker clears his throat and drives home the point. "You must resist," he says, and then repeats for emphasis, "you must resist the temptation to make money off of currency management. The minute you do it, you'll have another Barings disaster, another Sumitomo. Need I go on? This is what killed the Medicis. They got too smart." The Jones partners nod and smile, Drucker's powerful point now clear. And once again they've been reminded to avoid the quick buck and take a long view.

When selling to customers, Jones pushes only stable, large-cap equities, highly rated bonds, and mutual funds with proven track records. The mantra of Jones brokers: Buy and hold...and hold...and hold some more. The average mutual fund investor, for example, buys and sells a fund every three years. James Rothenberg, president of fund giant Capital Research & Management in Los Angeles, figures that Jones clients hold his funds, on average, an astonishing 20 years. To compensate Jones brokers for keeping client money parked, Capital Research in 1989 introduced what's called a trailing fee--a 0.25% annual commission for brokers who don't shift client funds. It is now standard practice in the mutual fund industry. Writes Drucker: "The product the firm delivers is a different one and one that no Wall Street house has ever sold before: peace of mind. And this is what represents value for the intelligent investor."

Drucker strongly believes in giving workers on the front line the authority and resources to do their jobs well. With that in mind, Bachmann--whose Lands' End shirt and passing resemblance to Bob Newhart belie his status as a financial big shot--has created a far-flung network of 3,744 entrepreneurial-minded brokers. They have the freedom to get about as close to their customers as they want. In communities cross the country, each broker works from his or her own wired office. It's an expensive way of doing business: The firm has to rent real estate, install a powerful client-server computer, furnish the office, and then hire a manager to run it--all before a broker has turned a penny of commission.

These single-broker offices let Jones mine the kind of small town that rivals ignore. But most critically, such independent brokers can offer face-to-face customer service that lots of people yearn for but that other brokerages, focused on the next trade, don't provide. It seems anachronistic, but as Bachmann says, "it is at the heart and soul of how we do business." Instead of making cold calls, many Jones brokers go door to door, introducing themselves and querying prospective customers about their financial needs and goals.

Spreading the gospel of these radical, "customer first" values among a dispersed brokerage force again requires tactics different from those of most brokerage firms, which often rely on drill-sergeant branch managers to push the company line. While Jones brokers have wide freedom, the core values are toughly enforced: A broker who switches a client from one fund to a similar one had better have a good reason when St. Louis calls to ask why. Brokers are tied to the home office through an advanced satellite communications network that broadcasts homemade TV programming. A question-and-answer session with Goldman Sachs strategist Abby Joseph Cohen might be followed the next day with tips on how to keep your printer from jamming. Customers visiting the brokerage office can watch golf tips from Johnny Miller or see a program on certificates of deposit.

Taking a conservative approach to investing has its downside. It means that Jones can't make money the old-fashioned way--by constantly persuading customers to switch investments. That makes it all the more important to land new accounts, which requires brokers to act like entrepreneurs eager to grow the business. Broker George Engle, of Tryon, N.C., is a refugee from Merrill Lynch who says that at Jones he gets to act like an owner: "I decide when I run a newspaper ad, I decide what I'll sell, and I decide whether Fridays are casual days in my office." Linda Blakely, a former Pan Am flight attendant and also a former Merrill broker, had long wanted to try her hand at running her own business--possibly a gourmet cookware store. Says she: "This satisfies that entrepreneurial urge."

The autonomous feel is nurtured by St. Louis. Brokers typically get to pick where they'll open their offices. A monthly profit-and-loss statement shows whether they are making or losing money for the firm. And if a broker like Martin Krebs of Overland Park, Kan., carves out a specialty--in his case, servicing small businesses--bully for him.

Jones' finely tuned compensation system reinforces the firm's ethos: Brokers get a flat 40% commission, with the rest of a broker's earnings coming from a bonus pool tied to the firm's overall performance. Unlike other partnerships, where only a select few may get to partake of the firm's profits, Jones' 139 general partners are joined by 2,585 limited partners. These range from secretaries to mail-room workers but, most important, include most brokers, whose interests are thus aligned with those of the firm. (To qualify, a broker needs, among other things, hefty profits and a clean record.) The message? The firm's long-term well-being, not the quick sale, carries remunerative benefits for all.

Until recently Bachmann's expansion plans didn't include cities. But to ensure growth, he's not only continuing to expand in small-town America but is also moving into suburban Chicago, Los Angeles, and even New York City. He is expanding in Canada and Britain too. Why the switch? Drucker reasoned that the company's focus on face-to-face service for the "intelligent investor" could be applied to just about any locale.

"My job now," says Bachmann, "is to see how large and how important we can become without giving up the partnership." (He says that in the past he has turned down offers to sell the firm for as much as ten times book value--that would be worth $2.5 billion today.) His goal is to nearly triple the number of brokers to 10,000 by 2004.

Why the hell-bent-for-leather expansion? The first reason is practical: In a mass-market business, Jones needs more brokers to make national advertising feasible and to spread technology and other overhead costs over a wider base. The second is strategic. Not only are rival brokerages growing, but discounters, banks, and fund companies are all piling into Jones' market. No matter how great the firm is at customer focus, it will lose its relevance if it can't grow fast enough to become a major financial services company. After all, who really cares that Apple makes good computers now that Wintel rules the roost?

Already Merrill has rolled out a program to plant small brokerage offices in the rural areas that have long been Jones' domain. So Jones' challenge will be not just to carry its gospel of customer focus to new communities but to do so before the cavalcade of financial giants gets there first. If Jones doesn't do what it takes to protect its market, that, says Drucker emphatically, "would be not just a crime but a sin, and an unpardonable sin."