THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, April 14, 1996 TAG: 9604130281
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
LENGTH: Long : 117 lines
Chief executive officers at most publicly traded companies cannot say enough about their efforts to build value for shareholders.
Not Benjamin F. Edwards III. He has a handful of priorities, and working on shareholder value doesn't show up on the list. ``If we build value for the client, the shareholder will benefit in time,'' the chairman and CEO of brokerage firm A.G. Edwards & Sons Inc. says.
That sort of thinking is typical of Edwards, who has been a vocal critic of compensation practices in the brokerage industry and the proliferation of brokerage fees. A graduate of Princeton University who served a stint in the Navy, Edwards is a past chairman of the Securities Industry Association and has been on the board of the New York Stock Exchange.
He was recently in Norfolk to meet with brokers in A.G. Edwards & Sons' local office. During his visit, Edwards talked about the brokerage industry with staff reporter Tom Shean.
Q: Do you think the stock market is stacked against the small investor?
A: No, I don't, mainly because large investors suffer from group-think. They all get into high-tech stocks, and then they all get out of high-techs. They act in a very volatile manner. I sometimes think the little guy - if he's a long-term investor and not trying to trade the market - he can do a better job.
As far as trading the market goes, you ought to classify it as entertainment. You ought to spend the amount of money on it that you spend on entertainment and not expect to have anything when you're finished. It's exciting, but when speculating in the market, you have the cost of doing business - our commissions, taxes and everything else - working against you.
Q: Over the years, you've criticized the payments of big bonuses to lure stockbrokers from competing firms. Have you seen any change in the use of up-front bonuses?
A: Not really. There's been a lot of posturing. The Tully Committee study on broker compensation said last year that one of the evils was paying these big up-front signing bonuses. I think use of these bonuses is a mistake, but I think free markets should correct it. I'm not for the government coming in and telling us what we can do.
At A.G. Edwards, we don't pay up-front bonuses for two reasons: We don't want someone to come with us for a deal. We want them to come because they think they have a philosophic fit. Secondly, we don't think it's fair to the people who are already with us.
Q: You've also criticized the proliferation of fees that firms have imposed on their clients. Why?
A: When you're seeing how deeply you can get into somebody's pocket by charging a fee for this and a fee for that, you're making it harder for that person to come out ahead as an investor. If it's a real cost for a service, fine, but let the client choose the service. Don't tell him that it's part of the package and that we're giving it to him because we know best.
Q: During the 1980s, several financial-service companies described the bright prospects for ``financial supermarkets.'' Prudential Insurance Co. bought the brokerage firm Bache Halsey Stuart. American Express Co. bought Shearson Loeb Rhoades and then Lehman Brothers, Kuhn Loeb. General Electric Co. bought Kidder Peabody. The results were disastrous, and most of these combinations have been dismantled. Why did they do so poorly?
A: You find the same thing happening in other industries. I was at a forum in January where someone said: ``There really isn't much that a chief executive officer can do. One of the few things they can do is restructure, or diversify.'' That seems simplistic, almost ludicrous, but I believe it's a factor. You have these highly paid top guns who earnestly want to justify their compensation, so they want to do things that are dramatic.
When you start messing in other businesses - either businesses that you don't know or companies that have a different culture - you're building a big-time problem. Putting it together on paper doesn't a success make.
Q: The securities industry goes through cycles, and diversification might soften the impact of those cycles. Aren't you tempted to diversify?
A: No. Our philosophy is to do what we do as well as we are capable of. Sure, we're at the mercies of cycles, but that's all right. I don't mind being at those mercies if we're there for our clients in all seasons.
If you look over the companies that have succeeded over generations, they did two or three things right. They were really good at what they did. They concentrated on that, and they were very concerned with their customers. Any business strategy that doesn't at least indirectly benefit the customers is a faulty strategy, and in time, it will fall apart.
Q: How concerned are you about competition from elsewhere in the financial services industry? Some big mutual-fund groups, such as Fidelity, have established discount brokerage firms.
A: If we focus on our customers' needs and give them value, I don't think we have to worry about discounters or any other competition. If we focus on our competitors and take our eye off the customer, then we become very vulnerable.
Witness the auto industry. Chrysler, Ford and General Motors were paranoid about each other. They all presumed they had the market. Then the Japanese came in and took the market right out from under them.
Q: You were a vocal opponent of shortening the period for settling securities trades from five days to three before it took place last year. Are you still opposed to the shorter settlement period?
A: Yes. It was an operational success, but it is another step in immobilizing the broker and the client. That's not in the best interest of the client or our industry in the long term.
Clients have to keep their money funds with us if they are going to settle trades that quickly. At A.G. Edwards, our money-market-fund balances have gone from $7 billion to over $13 billion in about 15 months. We're glad to have that money, but I'd much rather have to earn it and not feel that people were forced to put it in one spot.
Q: What do you think about the layoffs that are taking place throughout corporate America?
A: If someone is hired to fix a company, maybe layoffs are necessary to keep it alive. I don't have any problem with that. One thing that nauseates me is seeing top managements getting a company into a horrible condition and then laying off a lot of people to get it out. Then the board of directors pays the CEO a multimillion-dollar bonus. If I were CEO, I would bow my head in shame. I should apologize for screwing everything up and give back what I've been paid. ILLUSTRATION: Color photo by HUY NGUYEN, The Virginian-Pilot
Benjamin F. Edwards III
KEYWORDS: INTERVIEW by CNB