ST LOUIS -- It was six months after the October 1987 stock market crash when Benjamin Edwards 3d, the patrician chairman of A.G. Edwards & Sons, got a lesson in investing from three farmers.
Still shell-shocked by the plunge in the market, the firm was advising its clients to seek refuge in certificates of deposits. Curious about their thoughts, Mr. Edwards polled the trio about their investment strategy during a visit to the firm's Terre Haute, Ind., office.
Their answer: Buy stocks now.
"Our customers were ready to buy when the Dow was down 300 points, but we were too scared to recommend anything," Mr. Edwards said. "I think the individual investor is smarter than we are. They are not as close to the trees, so they can see the forest."
Analysts and competitors say A.G. Edwards got to be the largest brokerage off Wall Street and sixth ranked nationally because of its own ability to see beyond the trees. Now, the firm is focusing on an ambitious plan to expand its investment banking operations in a move that could help Edwards finally be recognized as a national firm.
"We were never a regional. We just got called that," said Mr. Edwards, the fourth generation of his family to run the 104-year-old firm. "We're in 48 states, and if somebody asked me what region we're in, I wouldn't be able to answer them because we are more national than the New York firms.
"If you're not based in New York, you're usually called a regional," he said.
"So far, the firm has made major pushes into tough markets like Denver, New Jersey, and California by hiring well-known local bankers -- many of them victims of retrenchment by other firms. Two years into the expansion, the firm now has 60 municipal investment bankers in 14 public finance offices nationally.
"None of those offices were what I called planned growth," said Dan Schaub, senior vice president and head of investment banking at the firm. "I feel you need to be within the general area which you're servicing so that you are closer to the situation and have a feeling of what's going on."
Rather than focus on issues of specific size or types, A.G. Edwards instead hopes to build relationships with key issuers that will be beneficial in the long run.
"We have historically been willing to do smaller deals that Wall Street wouldn't do, mainly because we feel it adds value to that client," Mr. Schaub said. "It's not really the size of an issue that we target, it's the issuer."
There have been setbacks amid the expansion. In Michigan, four bankers who specialized in school bonds defected to Chicago-based Kemper Securities Group. But Edwards has tried to turn that situation into an advantage by diversifying its practice in the state while maintaining market share.
"That setback didn't set them back at all," said a Michigan-based investment banker. "They brought in new people and picked up where they left off, and then some."
The expansion already may be paying off. Through the first eight months of 1991, A.G. Edwards ranked 18th as a senior manager and as a co-manager. During that time, the firm was lead manager on 87 deals totaling $1.167 billion and co-managed 317 deals totaling $7.3 billion -- a 7.2% market share.
According to Securities Data Co./Bond Buyer, the firm also holds a 10% market share as co-manager in four states: Colorado, Massachusetts, Michigan and Missouri.
Like other firms, A.G. Edwards is investing in a national underwriting operation to ensure that its customer will be able to buy bonds.
"The way underwriting has gone in the past 10 years is that if you have a good deal that is well priced, you are going to sell it all yourself and other members of the syndicate are not going to get any of the bonds," he said.
It is not yet clear what the expanded banking operation means to the profits of the publicly held company.
But in fiscal 1991, the firm reported revenues of $55.3 million for its corporate and municipal banking operations. That was up slightly after revenues plunged 19% last year from a record $66.3 million in 1989, according to financial reports.
Mr. Edwards acknowledged that it is more difficult to make money in municipal banking because of tighter spreads, even though many major firms have left the business.
"So far, the removal of their competition has not widened the spreads," he said.
Even if banking is not profitable, A.G. Edwards expects to stay in the business because of customer demand and the growing need for debt.
"That market is huge, and we'd be dumb if we didn't try to compete," he said. "So far, public finance is the fastest-gnowing area of our business, probably because we started late."
As A.G. Edwards continues to grow as an underwriter, it could eventually become more competitive with Wall Street firms. But analysts say that will only happen if the firm continues to develop its retail sales force.
"They have been on the institutional side for some time, but retail is their weak link," said Perrin Long, senior vice president for research at First of Michigan Corp. in Detroit and a stockholder. "They can be a major competitor."
Others say A.G. Edwards is at a turning point. While it sells itself as a national firm, many issuers see it as a regional too small for major transactions. But for longtime clients in the Midwest, issuers may see the firm as outgrowing them.
"It's kind of like an identity crisis," said an executive at a Chicago brokerage. "They are making a transition in how they are recognized by potential new clients, while not changing too much to affect their existing relationships."
Whether the firm is successful in parlaying its expanding investment operations into major growth remains to be seen. But if the past is a guide, A.G. Edwards is expected to continue the kind of profitable growth that has made it a favorite with analysts.
"It would take a lot to get me to give up my stock," said Mr. Long. A read of the company's annual report offers some insight into why he feels that way.
In fiscal 1991, the firm reported a profit of $59.1 million on record revenues of $674.9 million. That amounts to per share earnings of $2.57 and a cash dividend of 68 cents. Also, the firm says its shares have a book value of$16.85, which is more than triple the value a decade earlier.
That is not bad for a company that in the 1960s decided that profit was not a corporate goal. Analysts credit the leadership of Mr. Edwards with the firm's success, but he says his smartest moves were in hiring good middle-managers and in not chasing new profit centers that have stung other brokerages.
While Wall Street firms spent much of the last decade playing follow-the-leader in money-making schemes, A.G. Edwards kept to its conservative roots and does not appear to have missed much.
In the five years since the 1986 tax reforms changed the securities industry, A.G. Edwards has outperformed national broker-dealers. Since fiscal 1987, the firm has built a 25.1% pretax return on average equity, compared with an industry average of minus 8.3%, according to the Securities Industry Association.
"The seed for destruction in any human institution is when you get greedy personally," said Mr. Edwards. While admitting that his firm has sometimes been guilty of that, he said the company has always tried to focus on the customer.
"In the 1980s, the scorecard was money," he said. "Some people fell in love with the scorecard, and they forgot really what game they were in. They forgot they were there to serve a customer.
"All this money comes from customers, it isn't just printed," Mr. Edwards said, adding: "In the long run, the customer has to come out. If that doesn't happen, then we don't have a customer and we don't have a business."