Edward Jones profits fall sharply but firm loses fewer financial advisors

March 13, 2023 2:19 PM

A year after Edward Jones suffered its first loss in U.S. financial advisor headcount in a decade, the firm's attrition rate is tapering off and it's deploying an ambitious hiring plan.

But the St. Louis-based company, one of the largest wealth management firms in the industry, said in its 2022 annual report that depressed stock and bond values last year slashed the firm's profits by double digits, in turn extracting a toll on the compensation of top executive Penny Pennington. The firm also disclosed a regulatory investigation into electronic communications with clients among financial advisors and employees.

For the most interesting takeaways from Edward Jones' annual report, filed March 10, scroll down the slideshow. To view coverage of Edward Jones' results in the third quarter, click here. For a look at where the company stood after the first half of the year, follow this link.

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Note: All figures refer when possible to the company's U.S. business rather than its combined results including those in Canada, where it had 835 advisors at the end of 2022. The company breaks out most, but not all, of its results between the two countries.

Financial advisor headcount

Despite some significant teams departing for rivals including Commonwealth Financial Network and Ameriprise last year, Edward Jones remains a perennial winner in polls of advisor satisfaction across the industry. Advisors' partnership interests in the firm, one source of those high marks, rose last year with the completion of an offering of $568 million worth of stakes in the firm. At least 34,000 advisors and other employees are limited partners, giving them a share of the firm's profits.

In terms of advisor headcount, the firm's ranks stayed roughly flat in 2022, with the number of brokers ticking down by a net 10 to 17,961. Attrition has slowed considerably after a hiring freeze during the COVID-19 pandemic pushed down headcount by 2% in 2021. Across the U.S. and Canada, an attrition rate of 5.8% came in 80 basis points below the prior year's level. Late last year, the company released a plan to hire 1,500 to 1,700 advisors in 2023.

"The firm has continued executing its strategy to grow and promote branch team success and has begun offering options for greater flexibility, autonomy and choice to its financial advisors including co-locating branches with one or more financial advisors in shared office space while maintaining individual client relationships, an expanded variety of branch team roles and a pilot of multi-financial advisor team models," according to a statement released by the firm. "This is part of a larger focus on strengthening the firm's colleague experience and capabilities while growing and retaining talent needed to deliver on the work of the firm."

Client assets

By the end of 2022, its 100th anniversary as a firm, Edward Jones counted more than 8 million clients in the U.S. and Canada. Despite slumping stock and bond values, net new assets jumped 10% year over year to $98.6 billion in 2022. Still, weaker markets last year pushed down the amount of client assets by 10% to $1.6 trillion.

Noting a "significant revenue source," the company said that investments in mutual funds issued by American Funds Distributors and its affiliates comprised 11% of the partnership's total revenue in 2022. Edward Jones advisors recommend products from at least 131 other mutual fund companies.

Chief executive pay

Managing Partner Penny Pennington, who made Financial Planning sister publication American Banker's list of the most powerful women in finance last year, joined firm more than two decades ago as a financial advisor. In 2022, she received total compensation of $21.4 million, which is 235 times the median compensation of the firm's more than 50,000 employees.

The pay and benefits package for Pennington, age 50, was 5% below 2021's level.

She and other members of the executive leadership team "are encouraged to balance short-term and long-term results of the partnership as they have a significant amount of capital at risk," the annual report said. "Also, by sharing in any annual operating loss of the partnership, all general partners, including ELT members, have a direct incentive to manage risk and focus on the short- and long-term financial results of the partnership."

Diversity metrics

Edward Jones — which agreed to pay $34 million and make company-wide changes as part of a landmark 2021 settlement with Black financial advisors — saw marginal progress toward modest goals for 2025 of having 15% of its brokers be self-identified "people of color" and 30% of them be women. The share of minority financial advisors stayed at 9%, while the percentage of female brokers ticked up one percentage point to 23%.

As for leaders in the corporate office, though, the company has moved much closer to its targets for two years from now. At least 19% of those executives are "people of color," which is just a point below the mark. And 49% are women, which is also one point lower than the 2025 goal.

SEC investigation

The company disclosed that it's cooperating with one of the latest Securities and Exchange Commission investigations into electronic communications with clients. Prior probes of Wall Street led to a raft of fines against Goldman Sachs, Morgan Stanley and Bank of America. Wealth management firms are required to retain records of client communications, but investigators say firms often fail to capture text messages, WhatsApp conversations and personal emails.

Edward Jones "has been responding to requests from the SEC in connection with its publicly reported investigation of compliance by broker-dealers, investment advisors and other financial institutions with recordkeeping requirements," the annual report said. "The investigation relates to retention of electronic communications stored on personal devices or messaging platforms that have not been approved by Edward Jones for business use by its employees."

Expenses

The company spent more money on technology and less on advisor compensation in 2022. Capital expenditures of $302 million went to investments in software, construction and other upgrades to the firm's offices and facilities last year, with an expected $320 million slated for further spending in those areas in 2023. The slightly lower advisor headcount and smaller commission revenues last year caused variable broker compensation to tumble by 11% year over year to $1.69 billion in 2022.

Operating expenses outside those variable costs rose 5% to $8.85 billion, due to pay for branch and corporate office personnel and the capital spending.

Bottom line

The company generated net income before allocations to partners of $1.36 billion on revenue of $11.9 billion in 2022. While asset-based fee revenue increased 1% to $9.55 billion due to cash holdings tied to rising interest rates, revenue ticked down by $44 million, or less than 1%, due to the lower levels of trade revenue and slumping asset values. Profits plunged 14%, with the stock and bond losses wiping out income from advisory fees linked to securities' underlying values and commissions stemming from investors' choice whether to buy or sell.