Assesment

Innovation in Financial Services Growth Strategies for Edward Jones

5/13/2014 Kevin Regan

Word Count: 3242

Innovation in Financial Services

Kevin Regan Page 1

Contents 1.Brief History ....................................................................................................................................2

2. External Scan ..................................................................................................................................3

Introduction ...................................................................................................................................3

Market Size and Structure ...............................................................................................................3

3. Internal Scan...................................................................................................................................5

Introduction ...................................................................................................................................5

Capabilities.....................................................................................................................................5

Core Competencies .........................................................................................................................5

Distinctive Competencies ................................................................................................................6

4. Strategy..........................................................................................................................................7

Introduction ...................................................................................................................................7

Recommendations ..........................................................................................................................7

I. Expand Product Line .................................................................................................................7

II. Coopetition .............................................................................................................................8

III. Digitization .............................................................................................................................9

5. Recommendation and Innovation Challenges ................................................................................. 11

Summary...................................................................................................................................... 11

I. Maintaining Culture ................................................................................................................... 11

II. Technology Barriers................................................................................................................... 12

Brief Conclusions .......................................................................................................................... 12

Bibliography ..................................................................................................................................... 14

Appendix A....................................................................................................................................... 17


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1.Brief History

The Edward Jones Financial Companies can trace its roots back to 1922 when Edward D. Jones,

the man whose name still remains synonymous with the company, established his firm the Edward D.

Jones & Co. in St Louis, Missouri, U.S.A (Edward Jones, 2012). In 1957, the firm opened its first branch

office in Mexico, Missouri, beginning the business model of placing a single branch office in a small town

electronically connected to the headquarters (Ibid). A few decades later, future managing partner John

Bachman sent a memo to Ted Jones, son of Edward Jones, outlining their strategy for growth, seeking to

learn from “the development of companies such as McDonald’s or Holiday Inns than [investment banks]

Reinhardt & Gardiner or Goldman Sachs” (1972).This marked the first time that the company would

write a coherent strategic vision and design testable metrics to achieve these results. Today, the

company serves over 500,000 clients in over 10,000 branch locations with $114 billion assets under

management, making the company one of the largest investment advisor representatives in the world

(Securites and Exchange Commission, 2012).


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2. External Scan

Introduction

Fitzroy et al. believe that, “ developing strategy requires that managers have a detailed understanding of

the external environment in which they compete so that a strategy can be developed to take advantage

of any attractive opportunities or ameliorate emergent problems” (2012, p. 91). In addition to

traditional competitors, the firm also competes against any institution that an individual can place

investable assets. These include traditional savings banks, real estate, commodities, hedge funds, even

collectibles such as art or other precious goods. Thompson, et al., suggest evaluating an “outer ring” of

macro-economic forces such as the political and social env ironment and then developing an “inner-ring”

examining the company’s competitive position within that industry (2005, pp. 45-46).

Market Size and Structure

A Boston Consulting Group study estimated the total of worldwide private financial wealth at

$135.5 trillion, with $43.3 trillion in North America. PwC estimates that $63.9 trillion of global wealth

was classified as assets under management (AUM), and will grow to $100 trillion by 2020 (2012).

Tiburon Strategic Advisors calculates investable assets to grow to $80 trillion by 2017 (Hersch, 2013). No

matter what estimate that you choose to use, it is clearly a huge and growing marketplace. The

structure of the retirement system in the United States contributes a large percentage of the growth in

domestic investable assets. Employers have shifted from defined benefit plans, with a guaranteed and

fixed amount of payment to the employee upon retirement, to defined contribution plans, which

individual consumers can use to invest at their discretion. Defined contribution plans now account for

nearly two-thirds of retirement assets in the United States (Lee, et al., 2011). Meredith and Salter point

to the changing regulatory environment, specifically the automatic enrollment included in the Pension

Protection Act of 2006, in helping to swell participation in retirement plans (2008). Although this pool of

funds will grow and decline with the overall economy, it appears this industry will continue to prove

lucrative.

Such a large and diverse market will inherently attract a large and diverse type of businesses.

Each firm has traditionally focused on its niche clientele; however, competition from outsiders through


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technological innovations has blurred these traditional lines. Edward Jones can pose a threat to some of

the established firms, and the company can expect to face increased competition in its own traditional

market. The firms can be plotted on a strategic group map (Thompson Jr., et al., 2005). In the high

price/service, low geographic coverage segment operate the selective segment of private banks. In the

high geographic presence, but lower price/service operates discount brokerages and online brokerages.

Edward Jones falls somewhere in between these two extremes, somewhere below the traditional

brokerages and banking firms. Appendix A provides a complete breakdown of the competitive

environment.


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3. Internal Scan

Introduction

According to the resource-based view of the firm, businesses “succeed financially because they

have unique and hard-to-imitate resources that permit them to develop a competitive advantage”

(Fitzroy, et al., 2012, p. 200). Kim and Mauborgne believe “before executives can chart a new strategy,

they must reach a common understanding of the company’s current position” (2002, p. 79). Though the

tools of this approach will differ, the details remain the same. A company must examine its resources to

discover its core capabilities that lead to competitive advantages for the firm.

Capabilities

For the Edward Jones Company to survive and grow during all the turmoil of the financial

markets over the last century, it must have been able to rely on significant resources. Fitzroy et al.

define resources as “firm-specific assets that the firm owns or controls. They have the potential, when

used in combination, to allow the firm to perform activities in a manner superior to competitors” (2012,

p. 203). Edward Jones has numerous resources. Financial, it controls $1 billion in cash and cash

equivalents (Jones Financial Companies, 2013). It has a large physical presence with property valued

historically at over $5million as well as a large national advertising presence (Ibid). It boasts over 10,000

financial advisors and has an award-winning team of analyst to utilize (Edward Jones, 2012). However,

these assets mirror similar firms and business around the world, and don’t comprise the company’s core

competencies: “Most often, a core competence is knowledge-based, residing in people and in a

company’s intellectual capital and not in its assets on the balance sheet” (Thompson Jr., et al., 2005, p.

91).

Core Competencies

“A core capability will generally focus on a user need (so that there is a source of revenue), be

unique (so that prices can be set to some extent independent of competition) and be difficult to

replicate (so profits will not be competed away)” (Fitzroy, et al., 2012, p. 213). Edward Jones realized the


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opportunity to provide comprehensive financial advice to an under-served market outside of major

metropolitan areas. It developed a plan that each investor, regardless of income level, deserved the

same respect and comprehensive financial advice. The company has always maintained a disciplined and

focused investment philosophy. It has looked for long term value, diversification, and made a clear

choice to not purchase alternative investments such as commodities, options, or hedge funds. This value

based approach to investing has allowed the company to weather the storms of the financial crises of

the early 2000’s and of 2008. It also drives the organization’s customer service approach:

Relationships are key, and in our view, meeting face to face builds strong relationships. Our

offices are single Financial Advisor offices that are welcoming, accessible and located in the communities where our clients l ive and work (Edward Jones, 2014).

Every investment firm offers access to products, research, and service, but only Edward Jones truly

focusses on a holistic customer experience.

Distinctive Competencies

“Essential advantage derives from your ability to identify what you do better than anyone else

and from having the discipline to keep doing it, with some variations, year after year” (Leinwand &

Mainardi, 2011) . Its ability to recruit, train, and deploy financial advisors has made the company so

valuable to this day. Managing Partner James Weddle, asked about his business model, stated “We're

absolutely convinced that that attracts the best people. We need self -starters who are very self-assured,

focused and disciplined. ” (Rusoff, 2006). Collis and Smith expanded upon the organization’s exclusive

training:

In the critical first 120 days in the field, emphasis was on face-to-face contact to bring in new clients. This

type of “prospecting” was part of the Edward Jones culture, and every new FA was expected to make at least 400 contacts per month in his or her neighborhood… FAs below expectations received additional support and training (2007, p. 7)

The company’s ability to create a client-centric service approach in an industry known for focusing on its

own profits provides the distinctive competence that separates itself from its rivals (Thompson Jr., et al.,

2005).


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4. Strategy

Introduction

As the financial service industry changes and involves due to changes in regulation, technology,

and consumer preferences, no firm will be able to maintain the status quo in the coming decades:

Successful firms in fiercely competitive and unpredictabl y shifting industries pursue a competing on the edge strategy. The goal of this strategy is not efficiency or optimality in the usual sense. Rather, the goal is flexibil ity—that is, adaption to current change and evolution over time, resil ience to setbacks , and the ability to locate constantly changing sources of advantage. Ultimately, it mean in engaging in continual revolution (Lynch,

2006, p. 121) Although the firm has built and relied on the core competencies of training, geographical presence, and

customer service, today a business cannot rely on it “historic capabilities which brought it success in a

world which has gone” (Leinwand & Mainardi, 2011; Fitzroy, et al., 2012, p. 218). Teece shows that

successful business models must adapt to changing environments (2010). Other studies show that

successful companies are ambidextrous, looking to both create value in the short term and change

practice in the long term (Birkinshaw & Gibson, n.d.). In order to compete, Edward Jones must adapt its

core capabilities to a new and changing environment.

Recommendations

I. Expand Product Line

The first strategic option for Edward Jones involves creating a greater mix of products and

services to increase revenue and add more customers to their traditional business uni ts. The company

has the financial resources, along with the position and image within local communities, to offer a wider

range of banking products including credit cards and insurance. Specifically, the firm could act as an

originator for housing loans, an enormous market valued at over $8 trillion (Tyrie & Eckenrode, 2013, p.

489). Zook and Allen found that “most sustained, profitable growth comes when a company pushes out

of the boundaries of its core business into an adjacent space”, such as when Nike moved from shoes to

apparel to golf equipment (2003, p. 489). The company could also more specifically focus on providing


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private banking services, perhaps rebranding a division as EJ Private Bank, to better serve a growing and

higher-margin segment of customers. This would involve leveraging the existing skills of investment

management and customer service and fulfill a “core” and “adjacent” transformation (Nagji & Tuff,

2012, p. 68). With the population of high net worth Americans growing at a rate of 4.2% per annum,

faster than the overall population, it would be a potentially lucrative market for the company (Rolander,

et al., 2010).

II. Coopetition

Edward Jones’ strategy of placing brokerages in small, sometime rural, underserved

communities in a wide geographical footprint mirrors the strategy of one of the most successful

companies in the world, Wal-Mart. Currently, Wal-Mart offers a range of financial services such as bill -

pay, transfers, check-cashing; the company has also partnered with outside firms to provide insurance

and small-business loans (Dernovsek, 2012). Rochester Institute of Technology finance professor Robert

Manning warns, “If you’re a financial institution and you’re not preparing for Walmart now, it could be

too late” (Dernovsek, 2012, p. 23). With such a large presence and such financial strength, how long will

it take the company to offer investment advice as part of its overall package? Edward Jones could seize

upon this opportunity and try to establish branch location in Wal-Mart stores, potentially abandoning

nearby locations. The two companies compete in the classical economic sense in that a consumer can

choose between an allocation of banking, insurance, and investment assets. However, the companies

could engage in coopetition, which Bengtsson and Kock argue “to be advantageous in that firms

resources and capabilities can be combined and used in competition with others” (Bengtsson & Kock,

2000, p. 412). Wal-Mart could benefit from Edward Jones’ expertise in investment advice whereas

Edward Jones could benefit from Wal-Mart’s location and accessibility to consumers. Though the two

companies might compete for dollars in check-cashing and insurance, both would benefit by competing

with other investment firms. This mutually beneficial arrangement could help secure Edward Jones’

expansion in the future.


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III. Digitization

Edward Jones faces an onslaught of competition from banks, investment companies, and, most

of all, technological innovators. I compare its current situation to book stores and video rental

companies. Barnes & Noble had created a huge national footprint and excellent customer service, but

could not compete with Amazon’s digital model. When Blockbuster had a huge market share and a

presence across the country, who could predict it would face competition from a start-up like Netflix.

Though Edward Jones seems secure in its position, I believe the company will not exist in 30 years if it

does not embrace the technological revolution in personal finance. As McGrath suggests, “Sustainable

competitive advantage is now the exception, not the rule. Transient advantage in the new normal”

(McGrath, 2013, p. 63). Edward Jones cannot rely on its past ability to place a well-trained advisor in

multiple accessible locations, because “when a cheaper, simpler offer is good enough, customers will

abandon the incumbent”(Ibid p.66). Edward Jones must adapt its business model in the face of low-cost,

convenient, and technologically superior distribution methods of innovative new companies.

The complexity, and the emotion, surrounding consumers' financial needs will continue to

coerce the population to seek professional advice. However, the mean of obtaining this advice will vary.

Many consumers in Edward Jones’ current target range will feel comfortable enough allowing a

computer to completely manage his or her portfolios. Many will still want the assurance of personal

contact. The challenge for Edward Jones will be to find a way to capitalize on its ethical, value-based

approach to investments and its superior customer service while balancing the efficiencies of increased

digitization. Teece suggests:

’Designing’ a business correctly, and figuring out, then i mplementing—and then refining—commercially viable architectures for revenues and for costs are critical to enterprise success. It is essential when the enterprise is first created; but keeping the model viable is also l ikely to be a continuing task (Teece, 2010, p. 174)

Employee compensation is, by far, the largest cost for the organization. I propose the company could

serve more clients, more efficiently, with half of the staff by combining in person service with

technological improvement. Commercial banks have long managed this task by using automatic teller

machines and other advancements in place of expensive workers. As research has suggested, a business

can create dramatic growth without changing the nature of its industry by just changing the way it is

done (McGrath & MacMillan, 2005). By relocating two out of four financial advisors into a larger, single

office (thereby reducing the branches by three and the workforce by 50%), the company could allow

consumers more tools to access their financial information via mobile and internet application, and


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could also communicate with advisors through text and voice over internet protocols. Advisors,

meanwhile, should embrace the use of more powerful portfolio technology to handle clients’ assets,

thereby focusing more of their time providing superior customer service. This model will enable the

company to compete in a radically changing environment by leveraging its dynamic capabilities.


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5. Recommendation and Innovation Challenges

Summary

I believe the digitization of its business model is the best way for Edward Jones use its

capabilities and also innovate for growth in a competitive market place. The time for change is now.

Studies have shown that a majority of Americans would prefer mobile application to traditional channels

and that many consumers have already adopted the use of mobile banking systems (Weill & Woerner,

2013; Trahan, et al., 2012). However, choosing a strategy is a lot easier than implementing it: Robert S.

Kaplan and David P. Norton note that “the ability to execute strategy was more important than the

quality of the strategy itself” (Zagotta, 2002, p. 509). Nagji and Tuff contend that “transformational

efforts…require a non-linear process in which potential alternatives remain undefined for a long period

of time” and Sull recommends a “strategy loop” to continually re-evaluate decisions and actions (2012,

p. 74; 2007, p. 33). Management at Edward Jones must find a structured process to review two key

challenges to their innovation: maintaining its culture and addressing its lack of technological capacity.

I. Maintaining Culture

Culture surrounds Edward Jones. The company’s training instills its employees with the virtues

of service and client interaction. Advisors “build personal relationships in the community…aimed to

build a client base through referrals and face-to-face interactions” (Collis & Smith, 2007, p. 7). The

company believed in building communities through volunteerism (Collis & Smith, 2007). Managing

Partner James Waddle said, “We’ve always been very protective and proud of our culture” (Rusoff,

2006, p. 1). This model, to build relationships around its values, enabled the company to enjoy the

explosive growth of the last 30 years. How will the company maintain this approach while also

embracing a greater reliance on technology? Clearly, it is imperative that the firm change its business

model: “digitization will require that technology play a more active role in the business…dimensioning

the traditional information-giving role of information managers” (Beardsley, et al., 2013). However,

studies have shown that, while the structure and pricing of an online model has great appeal, many still

distrust a computer to manage finance at a core level and still desire human interaction (Trahan, et al.,


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2012). This is the soft spot in the market for Edward Jones to exploit. It can provide both the

convenience and efficiency of the online model while giving consumers access to a human planner. The

challenge will be how to evaluate and implement the strategy so its culture remains intact.

II. Technology Barriers

The word technology does not find itself synonymous with Edward Jones. The company’s

headquarters in St Louis strays far from the tech capitals of San Francisco and New York, where

competitors Wealthfront and Betterment call home. Only recently had the company allowed advisors to

use email (Collis & Smith, 2007). However, as Kim and Mauborgne note in their classic paper Blue Ocean

Strategy, “leading-edge technology is sometimes involved in the creation of blue oceans, but it is not a

defining feature of them” (Kim & Mauborgne, 2004). The ability to apply technology to a profitable

business model creates true innovation. Wal-Mart, though not perceived as a technology company, has

the most comprehensive logistics network that enables it to run so efficiently. Likewise, Edward Jones

has quietly utilized technology to grow its business. It was one of the first brokers to adopt a paperless

transaction system, and invested in server and telecommunications technology in the 1990’s. However,

all of these technologies operated underneath the core business product of a friendly face. The

challenge going forward will be to replicate this service with superior, customer-facing technology,

which the company has not developed previously. In the financial service industry, companies’ with the

highest consumer-rated technology had better financial performance (Weill & Woerner, 2013). James

Waddle claims, “But people often say, "Wouldn't it be nice if doctors still made house calls?" Well, that's

really what we're doing. It's personal delivery of financial expertise” (Rusoff, 2006, p. 3). However, Weil

& Wormer show how doctors are monitoring their patients remotely and communicating by email

(2013). No traditional company can operate as it used to. Management must discover a way to develop

or acquire superior customer-centric software and monitor its usage so that customer satisfaction is not

harmed with this new business model.

Brief Conclusions

This paper demonstrates a strategy for Edward Jones to grow into the future. By leveraging its

core assets of providing superior customer service with more technological communication and tools,


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the company can find path to continue its success. Despite the challenges outlined above, Edward Jones

finds itself in an interesting position in the market to exploit consumer’s distrust of an entirely

computerized system while using some of the same technologies to reduce inefficiencies in its own

business model. Despite its long history of achievement, the company must adapt to its rapidly changing

environment. If it does so in a way that does not compromise its service and values, the company will

continue this tradition indefinitely.


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Appendix A Private Banks Private Banks seek to serve the high-net worth (over $1 million of investable assets) and ultra-high net worth (over $10million of investable assets) and provide extremely dedicated and personal service. These firms, highlighted by Harris Private Bank, Credit Suisse, and J.P. Morgan Private Bank, control over $1.1 trillion in AUM (Rolander, et al., 2010). The companies locate in large cities with high per-capita income levels and operate as a team offering a wide range of products including mortgages, derivatives, and lines of credit. Although the firm mainly focuses on the middle-income segment of America, the firm did have 52,000 accounts above $1 million, so competition from this market should not be over looked (Collis & Smith, 2007). Traditional Brokerages and Bank-Brokerages The national brokerages, often called wirehouses, trace their roots further back than even Edward Jones. These firms operate in a larger market, however still mainly locating in wealthier ci ties. The firms can rely on the size and expertise of the larger firms which provide underwriting and other investment banking operations. Morgan Stanley Smith Barney, one of the largest firms, controls $460 billion in assets under management to over 1.4 million customers (Securites and Exchange Commission, 2012). They control a large portion of the market, and also have extremely high name recognition. However, after the financial crisis of 2008, the firms have suffered from a poor image. Also, mergers and acquisitions have consolidated the market and blurred the traditional line between brokerages and commercial banks. Bank of America, the largest commercial bank in the United States, acquired Merrill Lynch for $50 billion in and Wells Fargo, also a commercial bank, acquired Wachovia for $15.4 million in 2008 (Jo, et al., 2011). The banks’ branch locations have become a natural location for consumers to receive comprehensive financial services, thereby encroaching on Edward Jones’ territory Discount and Online Brokerages The Charles Schwab Corporation imitated the industry of discount brokerages after the market was deregulated in 1975 (2014). These brokers would provide allow consumers to trade securities with minimal customer service at a low cost. In theory, the consumer that Edward Jones has targeted could now invest at a much lower cost if he or she were comfortable managing their own portfolios. True innovation would occur when companies such as Scottrade and E-Trade began online brokerages, allowing consumer to make trades on a web platform at an extremely low price. This gave consumers a cheap and accessible way to manage their own funds. Other Brokers Raymond James firm structure mirrors that of Edward Jones, acting as a broker with affiliated advisors and products. Headquartered in Seattle, it has a strong base of operation in the American West and provides a strong competitor to Edward Jones. Other brokers, especially LPL Financial, target independent financial advisors and provide them with more freedom. Collis and Smith note that Edward Jones ‘currently lost the most [financial advisors] to those [firms]” The independent financial advisor model is growing, as more advisors are able to take control of their own business by leveraging tools and technology from the brokers.


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The Innovators “Investors have seen the future and it involves robots managing their portfolios” (Shmuel, 2014). Start-up companies headed by Betterment, Personal Capital, and Wealthfront are using complex algorithms to manage assets by rebalancing portfolios of exchange traded funds. The companies claim that computer will do a better job at managing investments and at a fraction of the cost. Wealthfront has $800 million AUM, growing from $300 million from September 2013 (Ibid). Clearly the explosive growth and sophisticated technology offers a competitive challenge to all in the industry. The model will allow consumers more service than an online broker while skipping the traditional advisor relationship. The model also appeal to the mass market, targeted investors with under $100,000 in investable assets, making these companies direct rivals to Edward Jones. It establishes an external shock that makes “changes in who buys the product and how they use it”, just like the rise of downloading music (Thompson Jr., et al., 2005, p. 70).


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Assesment

Documents

son of edward jones

ted jones

financial services innovation

domestic investable

private financial wealth

external environment

single branch office

branch locations