Edward Jones revives bank plans in bid to boost services — and revenue

Nearly three years after abandoning an attempt to start a state-chartered bank, Edward Jones is back at it again with a new proposal.

The St. Louis-based firm says its goal in seeking to set up Edward Jones Bank is to be able to offer products like certificates of deposit to its more than 9 million customers. But industry experts think Edward Jones clearly also wants to add to its revenue sources at a time when technological innovation and commission-fee trading have squeezed brokerages' old ways of making money.

Edward Jones announced last week that it has submitted an application to the Federal Deposit Insurance Corporation and the Utah Department of Financial Institutions to start what's known as an industrial bank, a state-chartered institution that would be allowed to offer many traditional banking products. Edward Jones already provides its clients with bank-like services. For instance, securities held in Edward Jones accounts can be put up as collateral for loans. And later this year, it plans to offer checking accounts and credit cards through a partnership with U.S. Bank.

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The proposed Edward Jones Bank would add to those services by enabling customers to do more securities-backed borrowing and take out certificates of deposit — savings instruments that often offer high returns to investors who are willing to lock their money for set periods of time. The bank would also participate in Edward Jones' Insured Bank Deposit Program, which has the Federal Deposit Insurance Corp. as a backstop. (The FDIC insures deposits as high as $250,000 in individual accounts.)

Looking beyond the traditional brokerage business

Tim Welsh, the president of consulting firm Nexus Strategy, said the example Edward Jones is clearly following is that of Charles Schwab, which diversified the revenue sources of its traditional brokerage business by starting a federally chartered bank in 2003. 

Schwab's bank experienced contretemps amid regional banking collapses two years ago. Like many banking institutions, it saw its customers respond to raised interest rates by pulling their deposits and putting the cash into higher-yielding money markets and other investments.

But on the whole Schwab's bank has proved a reliable source of income. Welsh said one of the main ways firms can profit from affiliated banks is through a process known as "cash sweeps." Firms can take uninvested cash sitting in brokerage accounts and sweep it over to their bank, where it can be lent out or invested for a relatively high return.

Welsh said he has little doubt this is what Edward Jones has in mind.

"This gives you more of the balance sheet for advisors to sell into," he said. "Having a bank is a pretty low-risk venture. Your raw material is federal interest rates.You then have capital that you lend out, and you make a spread on it."

Welsh said many brokerage firms have been under pressure to find new ways to make money ever since innovations like commission-free trading began to curtail their traditional means of generating revenue. The popular online brokerage Robinhood announced in 2013 that it would cease collecting commissions on stocks traded through its system. Many industry rivals were eventually forced by competitive pressures to follow suit; Charles Schwab, for instance, introduced commission-free trading in 2019.

The loss of commission revenue has made firms even more reliant on money makers like cash sweeps, Welsh said. He called Edward Jones' proposed bank a "sign of the times."

"All of these financial services are blurring together," he said. "How you used to make money commission is gone forever. So now there is an inevitable shift and change."

Sweeping allegations

The cash sweeps policies of Charles Schwab and other large brokerage houses have become targets of a series of lawsuits over the past year questioning if the firms aren't keeping too much of their sweeps returns for themselves and sharing too little with clients. Welsh said he imagines Edward Jones thinks it can learn from any missteps made by its competitors while adding more cushion to its bottom line.

But Rick Rummage, an industry recruiter and the CEO of The Rummage Group, thinks Edward Jones will have a hard time finding clients for its new bank. Edward Jones may have upward of 9 million clients working with more than 20,000 financial advisors, but those people likely already have banking relationships with other firms.

Edward Jones, Rummage said, will have a hard time convincing clients they'd be better off going through the hassle of moving their accounts over.

"This is too little, too late," he said. "Here Edward Jones has more branch locations than any of the wirehouses by far and all across the country, they have this captive audience. But they should have done this 20 years ago."

Clients want a one-stop shop

In an interview in September, Lena Haas, head of wealth management advice and solutions for Edward Jones, told Financial Planning that surveys of the firm's clients consistently reveal a desire for more banking services.

"Specifically, folks really appreciate the convenience of having banking functionality in the same place as financial advice," she said.

Edward Jones declined to be interviewed for this article. In a release announcing the plans for Edward Jones Bank, Alison Carnie, principal and head of the firm's banking business unit, said, "Our clients' financial needs are increasingly complex. An affiliated bank would allow us to better meet those needs in order to achieve clients' long-term financial goals."

Edward Jones' latest application marks its second try at entering the banking business. Its previous attempt came in July 2020 but was abandoned just over two years later amid heightened scrutiny of industrial banks by the FDIC.

Edward Jones also announced plans in 2023 to begin offering banking products through a partnership with Citi. Those plans were also abandoned, about a year later, as a result of a wide-ranging reorganization at Citi.

Edward Jones said it plans to appoint Andrea Moss as the president and CEO of its bank, which would have its main office in or near Salt Lake City. Moss is now president and CEO of Draper, Utah-based Nelnet Bank.