MARYLAND HEIGHTS, Mo. -- Spencer Burke knows his place among investment bankers, and it is one that the can live with. "It's a food chain of investment banking," said Mr. Burke, a principal and head of investment banking at Edward D. Jones & Co. "You've got Goldman Sachs at the top, and we're somewhere near the bottom."
There is enough down there to keep him busy. The former bond lawyer and his staff of four municipal investment bankers handle the mammoth task of providing tax-exempt bonds for the country's largest network of retail offices -- 1,600 and growing.
The firm's underwriting is certainly not going to worry Wall Street. At midyear, Edward D. Jones had been senior manager on 16 deals totaling $86.6 million and co-manager on 60 transactons that came to $754.6 million, according to Securities Data Co./Bond Buyer.
But rivals and analysts are looking past the statistics. The firm could become a major regional underwriter, they say, because its system of brokers can direct it to deals of all sizes.
"They are in just about as many places as the Post Office," remarked a senior executive at a rival St. Louis firm. "Of course, they usually deliver better results."
An investment banker at a Kansas City, Mo., firm put it more bluntly. In a business where a first-person relationship is the foundation for many deals, he said, the Edward D. Jones network could put the firm just a handshake away from hundreds of deals.
"Think about it. If a county is going to issue bonds, chances are their [local] broker knows the guy or sits on the chamber of commerce board or goes to church with somebody who will be making the decision," he said. "That's a big plus -- and I don't have it."
That advantage, according to Perrin Long, First of Michigan Corp.'s senior vice president for research, makes the firm "a sleeping giant."
Still, the top priorities at Edward D. Jones remain serving its 1 million-plus clients and pressing on with ambitious plans to expand its broker network by 15% a year.
"We're just not prepared to build up a cost side to do that yet," said Mr. Burke of focus on investment banking. "When there is a scarcity of dollars, we'd rather spend it on brokers than bankers."
John Bachmann, managing principal at the firm, amplified the point. "We're very cautious about staffing up because we're allergic to overhead."
But the firm is still expanding its retail network -- it hired 106 new brokers in August alone -- and is adding major metropolitan areas to the small towns that have earned it the reputation of the nation's big little brokerage house.
Mr. Bachmann said this does not signify any real departure from the policy of growth in out-of-the-way places laid down by the late Ted Jones, son of the firm's founder. "Our heritage is the individual investor and the one-person office near the customer, wherever they may be," he said.
Building up the network has produced consistent profits, something not associated nowadays with underwriting municipals. As razor-thin spreads drive out many big Wall Street names, Mr. Bachmann said he does not see that field as a potential profit center.
If it were not for the Tax Reform Act of 1986, Edward D. Jones may never have committed as much effort to underwriting as it now does. The firm satisfied customers from an oversupply of bonds, then found it would have to start underwriting to keep its more conservative clients happy.
In 1985, when bond volume nationally peaked at a record $204 billion, Edward D. Jones was lead manager on four issues totaling $29.7 million. This year, the firm expects to underwrite five times that.
And whether the firm turns a profit from its investment banking is not important, Mr. Burke said. Salaries and bonuses do not hinge on the performance of any one department, a philosophy that tends to foster a different attitude among bankers at Jones.
"If we have a bad year in investment banking, we may be depressed about it," said Scott Soucy, an accountant-turned-banker at the firm. "But if that happens, I don't think we are going to be out on the street."
Such thoughts would border on treason on Wall Street, but this is suburban St. Louis and a firm where success means keeping customers happy -- not working toward mega-bonuses.
"Our investment bankers aren't competing with our brokers. They are working for them," said Mr. Burke. "This is a firm that is not run by investment bankers."
Mr. Soucy and his three colleagues are not paid the six-figure base salaries common at Wall Street firms and do not worry about bonuses for each deal or at yearend. Instead, they are among more than 1,000 partners in Edward D. Jones who look for a payoff that grows each year.
Bankers at other firms may jump from job to job, but not here. "I grew my own guys," Mr. Burke said. "I don't have one banker that was a banker before."
The differences do not end there. When the firm's investment bankers propose to underwrite an issue, they aim for retail customers and the customers generally hold the securities until maturity.
Today, many firms shuttle their bonds to institutional clients for a quick profit and little risk to their capital. Any retail demand from their customers is satisfied by buying marked-up bonds in the secondary market.
"We don't buy bonds to flip it back out to the Street," said Bob Beck, head of trading at Edward D. Jones. "We sell to the Street only if we cannot sell it retail."
On this point, Mr. Burke is critical of other firms -- especially wirehouses with thousands of brokers.
"Underwriters are not taking risks anymore. They set up to blow out of a deal right away," he said. "When we underwrite, we put our money where our mouth is."
Retail Strategy
At Edward D. Jones, retailing bonds is seldom difficult. Already this year, the firm is more than halfway toward a record $2 billion in tax exempt sales.
Rather than sales in large blocks, the firm moves its paper one small customer at a time. "They sell in 5s and 10s and 15s to moms and pops, and then they are gone forever," Mr. Beck said.
Of course, the strategy of putting individuals before institutions is not entirely benevolent.
Salesmen at other brokerages have little incentive to move municipal bonds because they make little commission, particularly when compared with selling mutual funds or equities. But a broker at Edward D. Jones works under a commission structure that doubles what other firms offer for selling munis.
"A guy selling bonds for Jones will get five points, not 2.5 points," said Mr. Long, the analyst. "The firm makes money, and the broker makes money."
The highly developed, computer-linked network of brokers also is critical to Mr. Burke's strategy for his investment banking department, because he wants issuers to know the firm's ability to sell bonds locally.
In one such recent presentation, Mr. Burke assembled a ceiling-to-floor map of the firm's offices in the state he was visiting and offered a computer printout that listed town by town the exact dollar value of the last bond sale the firm handled for an issuer there.
Mr. Burke and his bankers want to convince issuers that they can save interest rate costs by selling to a retail-based firm that markets bonds to individuals -- not institutions.
"We tell them that we want to sell their bonds to the people who will value the tax advantage and recognize the name of their agency," he said.
No Fancy Briefcases
That task is not easy in a business where many issuers do not see a difference between investment banks. Clearly, that frustrates him.
"In the municipal market, you can have the best deal and you can't even get in the room," he said. "You're fighting ignorance and snake oil salesmen. These guys drive up in their BMWs and carry fancy briefcases, and they are not doing the issuer any good."
When an issuer is sold on his theory, Mr. Burke and his bankers include retail-friendly features in the bonds, such as a death benefit for small investors.
The provision ensures that if an investor dies, his estate can cash put the bond at par at any time -- even if the security is noncallable. To protect the issuer, a limit is set on the total amount of bonds eligible for the death benefit.
While that feature may not seem like much, Mr. Burke says it makes the bonds more attractive to individuals because it is comparable to provisions they get when investing in certificates of deposit or some mortgage-backed securities.
"Those things help to persuade someone to put up their money to buy the bonds," he said. "Other investment bankers think we're idiots for targeting the bonds at retail buyers."
But Mr. Burke is not worried. Noting that three-fourths of all bonds are now sold to individuals, he smiled and added, "I think the market is definitely moving our way."
