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A.G. Edwards Battles History

It's instituting a pay cut as concerns grow about its cost structure.

An austerity program being instituted by

A.G. Edwards

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represents the brokerage's first serious assault on a cost structure that some believe threatens its independence.

The St. Louis-based firm, in a move to boost profitability and rein in expenses, is clamping down on compensation to its nationwide force of 7,000 brokers. A.G. Edwards appears to be responding to criticism on Wall Street that its pay structure is out of whack with the revenue it generates.

Sources say the firm recently informed its brokers, most of whom are located in the Midwest and Southeast, that they must generate an additional 5% to 10% in commission revenue this year in order to maintain their past level of compensation.

A.G. Edwards hinted of the pay cuts in a press release last week, saying that beginning April 3 it would "make adjustments to the compensation of its financial consultants."

The news about the broker pay cuts was overshadowed by the firm's simultaneous announcement that it was boosting commission fees for customers by 5% on most stock and option trades. A.G. Edwards also is adding a 50-cent "postage and handling fee'' on stock, bond, commodity and certain mutual fund transactions.

On Wall Street, A.G. Edwards has one of the highest compensation ratios, a measurement of profitability that's closely watched by brokerage analysts. In the company's third quarter, the gauge, which measures compensation as a percent of net revenue, rose to 65%.

The average compensation ratio for Wall Street firms is a little over 50%. At big securities firms, it is much lower. The compensation ratio at

Morgan Stanley


, for instance, is about 38%.

"This is exactly the thing that needs to be done at that place,'' says Brad Hintz, an analyst with Sanford Bernstein. "Their comp ratio is out of control."

In October, Hintz downgraded his rating on A.G. Edwards' stock to underperform.

Indeed, criticisms like those from Hintz appear to have resonated with A.G. Edwards' management. A company spokeswoman said, "We recognized our overall compensation expenses were not where we wanted them to be.''

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The spokeswoman adds that the changes in broker payout "reflect the heightened costs of doing business in the current environment, including rising office and health care costs, along with the added expenses resulting from new regulatory requirements."

It's not just soaring expenses that have many on Wall Street looking down their nose at A.G. Edwards. The firm's also doing poorly on what should be its bread-and-butter -- collecting commissions on stock trades.

For the first nine months of its fiscal year, commission revenue was down 2%, or $13 million, to $744 million. The decline stands it stark contrast to what's been going on at other Wall Street firms. For instance,

Merrill Lynch


recently reported that commission revenue rose 10% for all of 2005 to $5.3 billion.

The combination of outsized compensation expenses and declining commission revenue has weighed on A.G. Edwards' stock. Since the beginning of 2005, the stock has risen 7%. But that pales in comparison to the 40% gain in the Amex Broker Dealer Index over that same period.

So far this year, A.G. Edwards shares have largely treaded water, most recently fetching a little above $47. Yet shares of other midsize securities firms have been on fire. For the year,


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is up 18%,

Raymond James Financial

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is up 12%, and

E*Trade Financial

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is up 10%.

The lackluster performance of A.G. Edwards' stock has led many to speculate that the brokerage might become an acquisition target for either a big bank, or another Wall Street firm looking to add retail muscle in the Midwest. The firm repeatedly has denied it has any intention of selling out, but analysts and investors continue to speculate.

Hintz says A.G. Edwards could make a good addition, at some point, for either

J.P. Morgan Chase

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Bank of America

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"They are an undeveloped franchise,'' says Hintz. "These guys are loved by their clients. There's nothing fundamentally wrong with the broker group. It is mainly expense control.''

Of course, what's good for Wall Street and for stockholders is not always good for employees.

The pay cuts at A.G. Edwards come after a year of record bonuses at many big Wall Street firms. The reduced compensation could lead to some grumbling at the firm and endanger its perennial ranking as one of


100 best companies to work for in the U.S.

An A.G. Edwards spokeswoman disputed that notion, saying that even after the payout reductions, "our compensation system will remain one of the most attractive in the industry."

But Wall Street recruiters are eyeing an opportunity to help disgruntled brokers look to jump ship.

"This reduction in the overall compensation plan actually brings the firm into the real world of commission structures. '' says Carri Degenhardt-Burke, president of Degenhardt Consulting, a New Jersey recruiting firm. "However, it may prove to have an adverse effect on over all retention."