10-K 1 ck0000815917-10k_20171231.htm 10-K ck0000815917-10k_20171231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission file number 0-16633

 

 

THE JONES FINANCIAL COMPANIES, L.L.L.P.

(Exact name of registrant as specified in its charter)

 

 

MISSOURI

 

43-1450818

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

12555 Manchester Road

 

 

Des Peres, Missouri

 

63131

(Address of principal executive offices)

 

(Zip Code)

Registrant's telephone number, including area code (314) 515-2000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

None

 

None

Securities registered pursuant to Section 12(g) of the Act:

Limited Partnership Interests

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES      NO  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES      NO  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES      NO  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES      NO  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

 

As of February 23, 2018,  893,733 units of limited partnership interest (“Interests”) were outstanding, each representing $1,000 of limited partner capital.  There is no public or private market for such Interests.

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 


 

THE JONES FINANCIAL COMPANIES, L.L.L.P.

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I

 

 

 

 

 

 

 

 

 

Item 1

 

Business

 

3

Item 1A

 

Risk Factors

 

12

Item 1B

 

Unresolved Staff Comments

 

25

Item 2

 

Properties

 

25

Item 3

 

Legal Proceedings

 

25

Item 4

 

Mine Safety Disclosures

 

25

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

Item 5

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

26

Item 6

 

Selected Financial Data

 

26

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

Item 7A

 

Quantitative and Qualitative Disclosures about Market Risk

 

45

Item 8

 

Financial Statements and Supplementary Data

 

46

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

70

Item 9A

 

Controls and Procedures

 

70

Item 9B

 

Other Information

 

70

 

 

 

 

 

PART III

 

 

 

 

 

 

 

 

 

Item 10

 

Directors, Executive Officers and Corporate Governance

 

71

Item 11

 

Executive Compensation

 

77

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

79

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

 

80

Item 14

 

Principal Accounting Fees and Services

 

82

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

 

 

Item 15

 

Exhibits and Financial Statement Schedules

 

83

Item 16

 

Form 10-K Summary

 

83

 

 

Signatures

 

88

 

 

 

 

2


PART I

 

ITEM 1.

BUSINESS

The Jones Financial Companies, L.L.L.P. (“JFC”) is a registered limited liability limited partnership organized under the Missouri Revised Uniform Limited Partnership Act.  Unless expressly stated, or the context otherwise requires, the terms “Registrant” and “Partnership” refer to JFC and all of its consolidated subsidiaries.  The Partnership’s principal operating subsidiary, Edward D. Jones & Co., L.P. (“Edward Jones”), was organized in February 1941 and reorganized as a limited partnership in May 1969. JFC was organized in June 1987 and, along with Edward Jones, was reorganized in August 1987.

As of December 31, 2017, the Partnership operates in two geographic segments, the United States (“U.S.”) and Canada.  Edward Jones is a registered broker-dealer and investment adviser in the U.S. and one of Edward Jones’ subsidiaries is a registered broker-dealer in Canada.  JFC is the ultimate parent company of Edward Jones and is a holding company.  Edward Jones is a retail brokerage business and primarily derives revenues from fees for providing investment advisory and other account services to its clients, fees for assets held by clients, the distribution of mutual fund shares, and commissions for the purchase or sale of securities and insurance products.  The Partnership conducts business throughout the U.S. and Canada with its clients, various brokers, dealers, clearing organizations, depositories and banks.  For financial information related to segments for the years ended December 31, 2017, 2016 and 2015, see Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 8 – Financial Statements and Supplementary Data – Note 13 to the Consolidated Financial Statements.

 

 

 

3


PART I

 

Item 1.

Business, continued

 

Organizational Structure.

At December 31, 2017, the Partnership was organized as follows:

 

For additional information about the Partnership’s other subsidiaries and affiliates, see Exhibit 21.1.  

Branch Office Network.  The Partnership primarily serves serious, long-term individual investors through its extensive network of branch offices.  The Partnership's business model is designed to serve clients through personal relationships with financial advisors and branch office administrators ("BOA") located in the communities where clients live and work.  Financial advisors and BOAs provide tailored solutions and services to clients while leveraging the resources of the Partnership's home office.  The Partnership operated 13,449 branch offices as of December 31, 2017, primarily staffed by a single financial advisor and a BOA.  Of this total, the Partnership operated 12,853 branch offices in the U.S. (located in all 50 states) and 596 branch offices in Canada.

 

4


PART I

 

Item 1.

Business, continued

 

Governance.  Unlike a corporation, the Partnership is not governed by a board of directors and has no individuals who are designated as directors.  Moreover, none of its securities are listed on a securities exchange and therefore the governance requirements that generally apply to many companies that file periodic reports with the U.S. Securities and Exchange Commission (“SEC”) do not apply to it.  Under the terms of the Partnership’s Nineteenth Amended and Restated Agreement of Registered Limited Liability Limited Partnership, dated June 6, 2014, as amended (the “Partnership Agreement”), the Partnership’s Managing Partner (as defined in the Partnership Agreement) has primary responsibility for administering the Partnership’s business, determining its policies, and controlling the management and conduct of the Partnership's business.  Under the terms of the Partnership Agreement, the Managing Partner's powers include, without limitation, the power to admit and dismiss general partners of JFC and the power to adjust the proportion of their respective interests in JFC.  As of   December 31, 2017, JFC was composed of 418 general partners, 18,942 limited partners and 412 subordinated limited partners.  See Part III, Item 10 – Directors, Executive Officers and Corporate Governance for a description of the governance structure of the Partnership.

Revenues by Source.  The following table sets forth the sources of the Partnership’s revenues for the past three years.  Due to the interdependence of the activities and departments of the Partnership’s business and the inherently subjective assumptions required to allocate overhead, it is impractical to identify and specify expenses applicable to each aspect of the Partnership’s operations.  Further information on revenue related to the Partnership’s segments is provided in Part II, Item 8 – Financial Statements and Supplementary Data – Note 13 to the Consolidated Financial Statements and Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

($ millions)

 

2017

 

 

2016

 

 

2015

 

Fee revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based fees

 

$

5,047

 

 

 

66

%

 

$

3,705

 

 

 

56

%

 

$

3,399

 

 

 

51%

 

Account and activity fees

 

 

678

 

 

 

9

%

 

 

719

 

 

 

10

%

 

 

690

 

 

10%

 

Total fee revenue

 

 

5,725

 

 

 

75

%

 

 

4,424

 

 

 

66

%

 

 

4,089

 

 

61%

 

Trade revenue

 

 

1,547

 

 

 

20

%

 

 

1,981

 

 

 

30

%

 

 

2,425

 

 

 

36%

 

Interest and dividends

 

 

265

 

 

 

4

%

 

 

193

 

 

 

3

%

 

 

158

 

 

3%

 

Other revenue

 

 

60

 

 

 

1

%

 

 

34

 

 

 

1

%

 

 

22

 

 

0%

 

Total revenue

 

$

7,597

 

 

 

100

%

 

$

6,632

 

 

 

100

%

 

$

6,694

 

 

100%

 

 

Asset-based Fees

The Partnership earns fees from investment advisory services offered in the U.S. through the Edward Jones Advisory Solutions® program (“Advisory Solutions”) and the Edward Jones Guided Solutions® program ("Guided Solutions") and in Canada through the Edward Jones Portfolio Program® (“Portfolio Program”) and the Edward Jones Guided Portfolios® program (“Guided Portfolios”).  Advisory Solutions and Guided Solutions are both investment advisory programs created under the Investment Advisers Act of 1940, as amended (the "Advisers Act").  Portfolio Program and Guided Portfolios are not subject to the Advisers Act as services from these programs are only offered in Canada.    

Through Advisory Solutions, financial advisors provide investment advisory services to clients for an annual fee based upon the average daily market value of their assets in the program.  Clients can choose to invest in Advisory Solutions Fund Models, which invest in affiliated mutual funds, unaffiliated mutual funds, and exchange-traded funds or Advisory Solutions Unified Managed Account Models, which also includes separately managed allocations.  When investing in Advisory Solutions, the client may elect either a research or a custom model.  If the client elects a research model, the Partnership assumes full investment discretion on the account and the client assets will be invested in one of numerous different research models developed and managed by Edward Jones.  If the client elects to build a custom model, the Partnership assumes limited investment discretion on the account, and the investments are selected by the client and his or her financial advisor.  The vast majority of client assets within Advisory Solutions are invested in research models.

 

The Partnership formed the Bridge Builder® Trust (the "BB Trust") to accommodate the size and expected growth in investment advisory services offered through Advisory Solutions, to reduce the concentration of client investments in third party funds and to lower client investment management expenses.  The BB Trust has eight active sub-advised funds in its series and may add additional funds in the future, at its discretion.  Olive Street Investment Advisers, LLC ("Olive Street"), a wholly-owned subsidiary of JFC and a Missouri limited liability company, is the investment adviser to the sub-advised

 

5


PART I

 

Item 1.

Business, continued

 

mutual funds of the BB Trust and has primary responsibility for setting the overall investment strategies and for selecting and managing sub-advisers, subject to the review and approval of the BB Trust's Board of Trustees. The BB Trust pays Olive Street for performing investment advisory services and Olive Street pays fees to the sub-advisers of the funds in the BB Trust.  Olive Street has contractually agreed to waive any investment advisory fees which exceed the investment advisory fees paid to sub-advisers, resulting in no impact on the Partnership's net income.  

Guided Solutions is a client-directed advisory program where financial advisors work with clients to build a portfolio that is aligned with the Partnership's investment philosophy and guidance.  Clients retain control over investment decisions and financial advisors help guide clients through a required process of identifying their financial goals and selecting an appropriate portfolio objective.  Guided Solutions offers two options, a Fund account or Flex account, which provide different investment options depending on a client's account size.  The Partnership earns an annual fee based on the average daily market value of client assets in the program.  The sub-advised mutual funds of the BB Trust are not currently eligible investments in Guided Solutions.  

Through the Portfolio Program, financial advisors provide discretionary investment advisory services to clients by using independent investment managers and proprietary asset allocation models.  Guided Portfolios is a non-discretionary, fee-based program with structured investment guidelines.  Fees for these programs are based on the average daily market value of client assets in the program as well as the portfolio model selected.

The Partnership also earns revenue on clients’ assets through service fees and other revenues received under agreements with mutual fund and insurance companies.  The fees generally range from 15 to 25 basis points (0.15% to 0.25%), but can be up to 100 basis points (1.0%), of the value of the client assets held in the U.S. and up to 100 basis points (1.0%) of the value of client assets held in Canada.

The Partnership earns revenue sharing from certain mutual fund and insurance companies.  In most cases, this is additional compensation paid by investment advisers, insurance companies or distributors based on a percentage of average assets held by the Partnership’s clients.

In addition to the advisory programs mentioned above, the Partnership earns asset-based fees from the trust services and investment management services offered to its clients through Edward Jones Trust Company (“Trust Co.”), a wholly-owned subsidiary of JFC.

Asset-based fee revenue also includes investment management fees earned by Passport Research, Ltd. ("Passport Research") a wholly-owned subsidiary of JFC, as the investment adviser to the Edward Jones Money Market Fund.    

Account and Activity Fees

Account and activity fees include shareholder accounting service fees, insurance contract service fees, Individual Retirement Account (“IRA”) custodial service fees, and other product/service fees.

The Partnership charges fees to certain mutual fund companies for shareholder accounting services, including maintaining client account information and providing other administrative services for the mutual funds.  Insurance contract service fees are fees charged to certain insurance companies for administrative support.  The Partnership acts as the custodian for clients’ IRAs and the clients are charged an annual fee for this and other account services.  Account and activity fees also include sales-based revenue sharing fees and various transaction fees.

Trade Revenue

Trade revenue is composed of commissions earned from the purchase or sale of mutual fund shares, equities and insurance products, and principal transactions.  Trade revenue is impacted by the number of financial advisors, trading volume (client dollars invested), mix of the products in which clients invest, size of trades, margins earned on the transactions, and market volatility.  

 

 

 

6


PART I

 

Item 1.

Business, continued

 

Commissions. As a distributor of mutual fund shares, the Partnership receives a selling concession which generally ranges from 1% to 5% of the purchase price of the shares, depending on the terms of each fund’s prospectus and the amount of the purchase.  The Partnership also receives a commission when it acts as an agent for a client in the purchase or sale of securities.  The commission is based on the value of the securities purchased or sold.  In addition, the Partnership sells life insurance, long-term care insurance, disability insurance, fixed and variable annuities and other types of insurance products of unaffiliated insurance companies to its clients through its financial advisors who hold insurance sales licenses.  As an agent for the insurance companies, the Partnership receives commissions on the premiums paid for the products.

Principal Transactions. Revenue is primarily earned from the Partnership's distribution of and participation in principal trading activities in municipal obligations, over-the-counter corporate obligations and certificates of deposit.  The Partnership’s principal trading activities are conducted with other dealers where the Partnership acts as a dealer buying from and selling to its clients.  In principal trading of securities, the Partnership exposes its capital to the risk of fluctuation in the fair value of its security positions.  The Partnership maintains securities positions in inventory solely to support its business of buying securities from and selling securities to its retail clients and does not seek to profit by engaging in proprietary trading for its own account.  The related unrealized gains and losses for these securities are recorded within trade revenue.  Also included within principal transactions revenue is revenue derived from the Partnership's distribution of unit investment trusts and participation as a syndicate member in underwriting activities.

Interest and Dividends

Interest and dividends revenue is earned on client margin (loan) account balances, cash and cash equivalents, cash and investments segregated under federal regulations, securities purchased under agreements to resell, Partnership loans, investment securities and inventory securities.  Loans secured by securities held in client margin accounts provide a source of income to the Partnership.  The Partnership is permitted to use securities owned by margin clients having an aggregate market value of generally up to 140% of the debit balance in margin accounts as collateral for the borrowings.  The Partnership may also use funds provided by free credit balances in client accounts to finance client margin account borrowings.

The Partnership’s interest income is impacted by the level of client margin account balances, cash and cash equivalents, cash and investments segregated under federal regulations, securities purchased under agreements to resell, Partnership loans, investment securities and inventory securities and the interest rates earned on each.

Significant Revenue Source

As of December 31, 2017, the Partnership distributed mutual funds for approximately 72 mutual fund companies.  One company, American Funds Distributors, Inc. and its affiliates, represented 16% of the Partnership’s total revenue for the year ended December 31, 2017.  The revenue generated from this company relates to business conducted with the Partnership’s U.S. segment.

 

BUSINESS OPERATIONS

Research Department.  The Partnership maintains a Research department to provide specific investment recommendations and market information for clients.  The department supplements its own research with independent third-party research services.  The Partnership does not offer its research for sale.  

Investment Policy Committee.  The Partnership has an Investment Policy Committee ("IPC") which serves as a steward of the Partnership's investment philosophy and develops and aligns the advice and guidance necessary to help clients meet their financial goals ("IPC Guidance").  Such IPC guidance is primarily related to investments and solutions and how they are incorporated into portfolios and tailored to meet clients' needs.

Client Account Administration and Operations.  The Partnership has an Operations division that is responsible for activities relating to client securities and the processing of transactions with other broker-dealers, exchanges and clearing organizations.  These activities include receipt, identification and delivery of funds and securities, internal financial controls, accounting and personnel functions, office services, custody of client securities and handling of margin accounts.

 

7


PART I

 

Item 1.

Business, continued

 

To expedite the processing of orders, the Partnership’s branch offices are linked to the home office locations through an extensive communications network.  Orders for securities are generally captured at the branch electronically, routed to the home office and forwarded to the appropriate market for execution.  The Partnership’s processing following the execution of a security transaction is generally automated.

The volume of transactions the Partnership processes fluctuates considerably.  The Partnership records such transactions and posts its books and records on a daily basis.  The Partnership has a computerized branch office communication system which is principally utilized for entry of security orders, quotations, messages between offices, research of various client account information, and cash and security receipts functions.  Home office personnel, including those in the Operations and Compliance divisions, monitor day-to-day operations to determine compliance with applicable laws, rules and regulations.  Failure to keep current and accurate books and records can render the Partnership liable to disciplinary action by governmental and self-regulatory organizations (“SROs”).

The Partnership clears and settles virtually all of its equity, municipal bond, corporate bond, mutual fund and annuity transactions for its U.S. broker-dealer through the National Securities Clearing Corporation (“NSCC”), Fixed Income Clearing Corporation (“FICC”) and Depository Trust Company (“DTC”), which are all subsidiaries of the Depository Trust and Clearing Corporation located in New York, New York.

In conjunction with clearing and settling transactions with NSCC, the Partnership holds client securities on deposit with DTC in lieu of maintaining physical custody of the certificates.  The Partnership uses a major bank for custody and settlement of U.S. treasury securities and Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation issues.  The Partnership also uses a major broker for custody and settlement of foreign securities.

The Partnership's Canada broker-dealer subsidiary handles the routing and settlement of client transactions.  In addition, the Partnership's Canada broker-dealer subsidiary is a member of the Canadian Depository of Securities (“CDS”) and FundServ for clearing and settlement of transactions.  CDS effects clearing of securities on the Canadian National Stock Exchange, Toronto Stock Exchange (“TSX”) and TSX Venture Exchange (“CDNX”).  Client securities on deposit are also held with CDS and National Bank Correspondent Network.

The Partnership is substantially dependent upon the operational capacity and ability of NSCC, DTC, FICC, and CDS.  Any serious delays in the processing of securities transactions encountered by these clearing and depository companies may result in delays of delivery of cash or securities to the Partnership’s clients.

Broadridge Financial Solutions, Inc. (“Broadridge”), along with its U.S. business, Securities Processing Solutions, U.S., and its international business, Securities Processing Solutions, International, provide automated data processing services for client account activity and related records for the Partnership in the U.S. and Canada, respectively.  The Partnership does not employ its own floor brokers for transactions on exchanges.  The Partnership has arrangements with other brokers to execute the Partnership’s transactions in return for a commission based on the size and type of trade.  If, for any reason, any of the Partnership’s clearing, settling or executing agents were to fail, the Partnership and its clients would be subject to possible loss.  To the extent that the Partnership would not be able to meet the obligations to the clients, such clients might experience delays in obtaining the protections afforded them.

 

The Partnership's Canada broker-dealer subsidiary has an agreement with Computershare Trust Company of Canada to act as trustee for cash balances held by clients in their retirement accounts.  The Canada broker-dealer subsidiary is the custodian for client securities and manages all related securities and cash processing, such as trades, dividends, corporate actions, client cash receipts and disbursements, client tax reporting for certain holdings and statements.

Employees.  The Partnership’s financial advisors are employees (or general partners) of the Partnership.  As of December 31, 2017, the Partnership had approximately 45,000 full-time and part-time employees and general partners, including its 16,095 financial advisors.  The Partnership’s financial advisors are generally compensated on a commission basis and may be entitled to bonus compensation based on their respective branch office profitability and the profitability of the Partnership.  The Partnership pays bonuses to its non-financial advisor employees pursuant to a discretionary formula established by management based on the profitability of the Partnership.

 

8


PART I

 

Item 1.

Business, continued

 

Employees of the Partnership in the U.S. are bonded under a blanket fidelity bond.  The Partnership has an aggregate annual coverage of $50,000,000 subject to deductibles.  Employees of the Partnership in Canada are bonded under a blanket policy as required by the Investment Industry Regulation Organization of Canada (“IIROC”).  The Partnership has an annual aggregate amount of coverage in Canada of C$50,000,000 with a per occurrence limit of C$25,000,000, subject to a deductible.

The Partnership maintains a comprehensive initial training program for prospective financial advisors which includes preparation for regulatory exams, on-line modules, concentrated instruction in the classroom and on-the-job training in a branch office.  During the first phase, U.S. and Canada trainees study for and take the requisite examinations.  After passing the requisite examinations, trainees complete on-line modules and a comprehensive training program in one of the Partnership’s home office training facilities, followed by on-the-job training in their respective markets in nearby branch locations.  This training includes reviewing investments, compliance requirements and office procedures, understanding client needs, and establishing a base of potential clients.  Trainees complete the initial training program at a home office training facility.  The Partnership offers periodic training to its experienced financial advisors for the entirety of their careers.  Training programs for the more experienced financial advisors continue to focus on meeting client needs and effective management of the branch office.

The Partnership considers its employee relations to be good and believes that its compensation and employee benefits, which include medical, life and disability insurance plans, and benefit plans, are competitive with those offered by other firms principally engaged in the securities business.

Competition.  The Partnership is subject to intense competition in all phases of its business from other securities firms, some of which are larger than the Partnership in terms of capital, brokerage volume and underwriting activities.  In addition, the Partnership encounters competition from other organizations such as banks, insurance companies, and others offering financial services and advice.  The Partnership also competes with a number of firms offering discount brokerage services, usually with lower levels of personalized service to individual clients.  Further, the financial services industry continues to evolve technologically, with an increasing number of firms providing lower cost, computer-based "robo-advice" with limited or no personalized service to clients or to supplement full-service offerings.  Clients are able to transfer their business to competing organizations at any time.  There is also intense competition among firms for financial advisors.  The Partnership experiences continued efforts by competing firms to hire away its financial advisors, although the Partnership believes its rate of turnover of financial advisors is in line with comparable firms.

REGULATION

Broker-Dealer and Investment Adviser Regulation.  The securities industry is subject to extensive federal and state laws, rules and regulations that cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of client funds and securities, client payment and margin requirements, capital structure of securities firms, record-keeping, standards of care, and the conduct of directors, officers and employees.

 

The SEC is the U.S. agency responsible for the administration of the federal securities laws.  Its mission is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.  Edward Jones is registered as a broker-dealer with the SEC.  Edward Jones is subject to periodic examinations by the SEC, review by a designated examining authority, and certain periodic and ad hoc reporting requirements of securities and customer funds.  Much of the regulation of broker-dealers has been delegated by the SEC to SROs, principally the Financial Industry Regulatory Authority ("FINRA").  FINRA adopts rules (which are subject to approval by the SEC) that govern the broker-dealer industry and conducts periodic examinations of Edward Jones’ operations.

Securities firms are also subject to regulation by securities and insurance regulators in each U.S. state (as well as the District of Columbia) and U.S. territory where they conduct business.  Since Edward Jones is registered as a broker-dealer and sells insurance products in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, Edward Jones is subject to regulation in each of these jurisdictions.

 

 

9


PART I

 

Item 1.

Business, continued

 

The SEC, SROs, state authorities and other regulators may conduct administrative proceedings which can result in censure, fine, suspension or expulsion of a securities firm, its officers or employees.  Edward Jones has in the past been, and may in the future be, the subject of regulatory actions by various agencies that have the authority to regulate its activities (see Part I, Item 3 – Legal Proceedings for more information).

As an investment dealer registered in all provinces and territories of Canada, the Partnership's Canada broker-dealer subsidiary is subject to provincial, territorial and federal laws.  All provinces and territorial jurisdictions have established securities administrators to fulfill the administration of securities laws.  The Partnership's Canada broker-dealer subsidiary is also subject to the regulation of the Canada SRO, IIROC, which oversees the business conduct and financial affairs of its member firms, as well as all trading activity on debt and equity marketplaces in Canada.  IIROC fulfills its regulatory obligations by implementing and enforcing rules regarding the proficiency, business and financial conduct of member firms and their registered employees, and marketplace integrity rules regarding trading activity on Canada debt and equity marketplaces.

In addition, Edward Jones, Olive Street and Passport Research are subject to the rules and regulations promulgated under the Advisers Act, which requires certain investment advisers to register with the SEC.  Edward Jones, Olive Street and Passport Research are registered investment advisers with the SEC.  The rules and regulations promulgated under the Advisers Act govern all aspects of the investment advisory business, including registration, trading practices, custody of client funds and securities, record-keeping, advertising and business conduct.  Edward Jones, Olive Street and Passport Research are subject to periodic examinations by the SEC, which is authorized to institute proceedings and impose sanctions for violations of the Advisers Act.

Pursuant to U.S. federal law, Edward Jones as a broker-dealer belongs to the Securities Investors Protection Corporation (“SIPC”).  For clients in the U.S., SIPC provides $500,000 of coverage for missing cash and securities in a client's account, with a maximum of $250,000 for cash claims.  Pursuant to IIROC requirements, the Partnership's Canada broker-dealer subsidiary belongs to the Canadian Investor Protection Fund (“CIPF”), a non-profit organization that provides investor protection for investment dealer insolvency.  For clients in Canada, CIPF limits coverage to C$1,000,000 in total, which can be any combination of securities and cash.

The Partnership currently maintains additional protection for U.S. clients through a contract with Underwriters at Lloyd’s, which protects clients’ accounts in excess of the SIPC coverage subject to specified limits.  This policy covers theft, misplacement, destruction, burglary, embezzlement or abstraction of cash and client securities up to an aggregate limit of $900,000,000 (with maximum cash coverage limited to $1,900,000 per client) for covered claims of all U.S. clients of Edward Jones.  Market losses are not covered by SIPC or the additional protection.  In addition, the Partnership has cash and investments segregated in special reserve bank accounts for the benefit for U.S. clients pursuant to the Customer Protection Rule 15c3-3 (“Customer Protection Rule”) of the Securities Exchange Act of 1934, as amended ("Exchange Act").  

 

Under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Department of Labor ("DOL") has rulemaking authority over retirement savings, which includes retirement accounts and retirement plans, and regulatory authority over retirement plans.

 

Additional legislation, changes in rules promulgated by the SEC, the DOL, SROs, state authorities and other regulators, and/or changes in the interpretation or enforcement of existing laws and rules, may directly affect the operations and profitability of broker-dealers and investment advisers.  See Part I, Item 1A – Risk Factors – Legislative and Regulatory Initiatives for additional information.  

Regulation of Trust Co. and Regulation of JFC as Trust Co.’s Parent.  Trust Co. is a federally chartered savings and loan association that operates under a limited purpose “trust-only” charter, which generally restricts Trust Co. to acting solely in a custodial or fiduciary capacity, including as a trustee.  Trust Co. and JFC are subject to supervision and regulation by the Office of the Comptroller of the Currency (“OCC”).

Uniform Net Capital Rule.  As a result of its activities as a broker-dealer and a member firm of FINRA, Edward Jones is subject to the Uniform Net Capital Rule 15c3-1 (“Uniform Net Capital Rule”) of the Exchange Act which is designed to measure the general financial integrity and liquidity of a broker-dealer and the minimum net capital deemed necessary to meet the broker-dealer’s continuing commitments to its clients.  The Uniform Net Capital Rule provides for two methods of

 

10


PART I

 

Item 1.

Business, continued

 

computing net capital and Edward Jones has adopted what is generally referred to as the alternative method.  Minimum required net capital under the alternative method is equal to the greater of $250,000 or 2% of the aggregate debit items, as defined under the Customer Protection Rule.  The Uniform Net Capital Rule prohibits withdrawal of equity capital whether by payment of dividends, repurchase of stock or other means, if net capital would thereafter be less than minimum requirements.  Additionally, certain withdrawals require the approval of the SEC to the extent they exceed defined levels even though such withdrawals would not cause net capital to be less than 5% of aggregate debit items.  In computing net capital, various adjustments are made to exclude assets which are not readily convertible into cash and to provide a conservative valuation of other assets, such as securities owned.  Failure to maintain the required net capital may subject Edward Jones to suspension or expulsion by FINRA, the SEC and other regulatory bodies and/or exchanges and may ultimately require liquidation.  Edward Jones has, at all times, been in compliance with the Uniform Net Capital Rule.

The Partnership's Canada broker-dealer subsidiary and Trust Co. are also required to maintain specified levels of regulatory capital.  Each of these subsidiaries has, at all times, been in compliance with the applicable capital requirements in the jurisdictions in which it operates.

Customer Protection Rule.  As a result of its activities as a broker-dealer and a member firm of FINRA, Edward Jones is subject to the Customer Protection Rule which is designed to ensure that customer securities and funds in a broker-dealer's custody are adequately safeguarded.  The Customer Protection Rule requires broker-dealers to promptly obtain and maintain physical possession or control of all fully paid and excess margin securities and to segregate all customer cash or money obtained from the use of customer property that has not been used to finance transactions of other customers.  Combined, these requirements substantially limit a broker-dealer's ability to use customer securities and restrict a broker-dealer to only use customer cash or margin securities for activities directly related to financing customer securities purchases.  Edward Jones has, at all times, been in compliance with the Customer Protection Rule.  

AVAILABLE INFORMATION

The Partnership files annual, quarterly, and current reports and other information with the SEC. The Partnership’s SEC filings are available to the public on the SEC’s website at www.sec.gov.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, and in particular Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of U.S. securities laws.  You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “will,” “should,” and other expressions which predict or indicate future events and trends and which do not relate to historical matters.  You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Partnership.  These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Partnership to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

 

Some of the factors that might cause differences between forward-looking statements and actual events include, but are not limited to, the following: (1) general economic conditions, including an economic downturn or volatility in the U.S. and/or global securities markets; (2) regulatory actions; (3) changes in legislation or regulation, including new regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") and rules promulgated by the DOL, including without limitation, rules promulgated under ERISA, and the SEC; (4) actions of competitors; (5) litigation; (6) the ability of clients, other broker-dealers, banks, depositories and clearing organizations to fulfill contractual obligations; (7) changes in interest rates; (8) changes in technology and other technology-related risks; (9) a fluctuation or decline in the fair value of securities; (10) our ability to attract and retain qualified financial advisors and other employees; and (11) the risks discussed under Part I, Item 1A – Risk Factors.  These forward-looking statements were based on information, plans, and estimates at the date of this report, and the Partnership does not undertake to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

 

 

11


PART I

 

ITEM 1A.

RISK FACTORS

The Partnership is subject to a number of risks potentially impacting its business, financial condition, results of operations and cash flows.  In addition to the risks and uncertainties discussed elsewhere in this Annual Report on Form 10-K, or in the Partnership’s other filings with the SEC, the following are some important factors that could cause the Partnership’s actual results to differ materially from results experienced in the past or those projected in any forward-looking statement.  If any of the matters included in the following risks were to occur, the Partnership’s business, financial condition, results of operations and cash flows could be materially adversely affected.  The risks and uncertainties described below are not the only ones the Partnership faces.  Additional risks and uncertainties not presently known to the Partnership or that the Partnership currently deems immaterial could also have a material adverse impact on the Partnership’s business and operations.  

RISK RELATED TO THE PARTNERSHIP’S BUSINESS

Market Conditions and Inflation As a part of the securities industry, a downturn in the U.S. and/or global securities markets historically has, and in the future could have, a significant negative effect on revenues and could significantly reduce or eliminate profitability of the Partnership.  In addition, an increase in inflation could affect securities prices and as a result, the profitability of the Partnership.

General political and economic conditions and events such as U.S. fiscal and monetary policy, economic recession, natural disasters, terrorist attacks, war, changes in local and national economic and political conditions, regulatory changes or changes in the law, or interest rate or currency rate fluctuations could create a downturn in the U.S. and/or global securities markets.  The securities industry, and therefore the Partnership, is highly dependent upon market prices and volumes which are highly unpredictable and volatile in nature.  Events such as global recession, frozen credit markets, and institutional failures could make the capital markets increasingly volatile.  Weakened global economic conditions and unsettled financial markets, among other things, could cause significant declines in the Partnership’s net revenues which would adversely impact its overall financial results.  

The Partnership’s composition of net revenue is heavily weighted towards asset-based fee revenue and a decrease in the market value of assets would have a negative impact on the Partnership’s financial results due to the fact that asset-based fees are earned on the market value of the underlying client assets.  A market decline could have a greater negative impact on revenues and profitability than experienced in prior years due to the increasing proportion of asset-based revenues.

Market volatility could also cause clients to move their investments to lower margin products, or withdraw them, which could have an adverse impact on the profitability of the Partnership.  The Partnership could also experience a material reduction in volume and lower securities prices in times of market volatility, which would result in lower trade revenue, decreased margins and losses in dealer inventory accounts.  As mentioned, lower securities prices would also result in lower asset-based fees.  This would have a material adverse impact on the profitability of the Partnership’s operations.

Furthermore, if the market were to experience a downturn or the economy were to enter into a recession, the Partnership would be subject to increased risk of its clients being unable to meet their commitments, such as margin obligations.  If clients are unable to meet their margin obligations, the Partnership has an increased risk of losing money on margin transactions and incurring additional expenses defending or pursuing claims.  Developments such as lower revenues and declining profit margins could reduce or eliminate the Partnership’s profitability.

Inflation and future expectations of inflation can negatively influence securities prices, as well as activity levels in the securities markets.  As a result, the Partnership’s profitability may be adversely affected by inflation and inflationary expectations.   Additionally, the impact of inflation on the Partnership’s operating expenses may affect profitability to the extent that additional costs are not recoverable through increased prices of services offered by the Partnership.

 

12


PART I

Item 1A.

Risk Factors, continued

 

Reputation RiskDamage to the Partnership's reputation could negatively impact the Partnership's profitability and future growth opportunities.

Managing the Partnership's reputation is critical to attracting and retaining clients and financial advisors.  The Partnership's reputation could be damaged by certain legal or regulatory actions, unethical behavior, cybersecurity breaches, poor investment performance, or compliance failures, depending on their nature, size and scope.  The Partnership attempts to mitigate these risks through its control environment and compliance framework.  Significant control deficiencies, however, could negatively impact the Partnership's reputation, profitability and future growth opportunities.

Legislative and Regulatory InitiativesProposed, potential and recently enacted federal and state legislation, rules and regulations (“Legislative and Regulatory Initiatives”) could significantly impact the regulation and operation of the Partnership and its subsidiaries.  In addition, Legislative and Regulatory Initiatives may significantly alter or restrict the Partnership’s historic business practices, which could negatively affect its operating results.

The Partnership is subject to extensive regulation by federal and state regulatory agencies and by SROs and other regulators.  The Partnership operates in a regulatory environment that is subject to ongoing change and has seen significantly increased regulation in recent years.  The Partnership may be adversely affected as a result of new or revised legislation or regulations, by changes in federal, state or foreign tax laws and regulations, or by changes in the interpretation or enforcement of existing laws and regulations.  

 

Legislative and Regulatory Initiatives may impact the manner in which the Partnership markets its products and services, manages its business and operations, and interacts with clients and regulators, any or all of which could materially impact the Partnership’s results of operations, financial condition, and liquidity.  Regulatory changes or changes in the law could increase compliance costs which would adversely impact profitability.  

 

There is a high degree of uncertainty surrounding Legislative and Regulatory Initiatives.  As such, the Partnership cannot reliably predict when or if any of the proposed or potential Legislative and Regulatory Initiatives will be enacted, when or if any enacted Legislative and Regulatory Initiatives will be implemented, whether there will be any changes to enacted or proposed Legislative and Regulatory Initiatives or the impact that any Legislative and Regulatory Initiatives will have on the Partnership.

The Partnership continues to monitor several Legislative and Regulatory Initiatives, including, but not limited to:

The Dodd-Frank Act.  The Dodd-Frank Act, signed into law in July 2010, includes provisions that could potentially impact the Partnership’s operations.  Since the passage of the Dodd-Frank Act, the Partnership has not been required to enact material changes to its operations.  However, the Partnership continues to review and evaluate the provisions of the Dodd-Frank Act and the impending rules to determine what impact or potential impact they may have on the financial services industry, the Partnership and its operations.  Among the numerous potentially impactful provisions in the Dodd-Frank Act are: (i) pursuant to Section 913 of the Dodd-Frank Act, the SEC staff issued a study recommending a universal fiduciary standard of care applicable to both broker-dealers and investment advisers when providing personalized investment advice about securities to retail clients, and such other clients as the SEC provides by rule; and (ii) pursuant to Section 914 of the Dodd-Frank Act, a new SRO to regulate investment advisers could be proposed.  In addition, the Dodd-Frank Act contains new or enhanced regulations that could impact specific securities products offered by the Partnership to investors and specific securities transactions.  Proposed rules related to all of these provisions have not yet been adopted by regulators.  The Partnership cannot predict what impact any such rules, if adopted, would have on the Partnership.

DOL Fiduciary Rule.  The DOL issued its final rule defining the term "fiduciary" and exemptions related thereto in the context of ERISA and retirement accounts in April 2016.  On February 3, 2017, a Presidential Memorandum was issued that directed the DOL (i) to examine the rule to determine, among other things, whether it may adversely affect the ability of Americans to gain access to retirement information and retirement advice, (ii) as part of this examination, to prepare an updated economic and legal analysis concerning the likely impact of the rule, and (iii) to rescind or revise the rule, if the DOL makes certain affirmative determinations regarding the rule's impact.  In light of this directive, the DOL is currently reviewing the rule.  Certain provisions of the rule, including the impartial conduct standards, became applicable on June 9, 2017, with the remaining provisions scheduled to become applicable on July 1, 2019.  

 

13


PART I

Item 1A.

Risk Factors, continued

 

The Partnership has dedicated significant resources to interpret and implement the rule, including its personnel, information systems resources and financial resources.  Implementation of the rule required changes in the manner in which the Partnership serves clients with retirement accounts, which represents a substantial portion of the Partnership's business.  As a result, the Partnership's solutions available to retirement accounts include fee-based solutions, such as its advisory programs, and certain transaction-based solutions.  The Partnership continues to evaluate the solutions available to retirement accounts, with additional changes possible.

Historically, the Partnership has served a majority of retirement accounts using transaction-based solutions.  As a result of the rule, clients may choose fee-based solutions a higher percentage of the time than they have historically, and not all solutions traditionally provided are available for all retirement accounts.  The Partnership has experienced a decrease in transaction-based revenue and an increase in fee-based revenue.  The overall impact of the rule ultimately may be materially adverse to the Partnership's financial condition, results of operations and liquidity.  

Standard of Care Initiatives. The SEC announced that it is in the process of drafting a proposed rule to address the standard of care for broker-dealers and investment advisers.  In addition, state legislators and other regulators are proposing laws and rules to articulate their required standard of care.  To the extent laws and regulations are not aligned, the Partnership could be negatively impacted.

Competition — The Partnership is subject to intense competition for clients and personnel, and some of its competitors have greater resources.

All aspects of the Partnership’s business are highly competitive.  The Partnership competes for clients and personnel directly with other securities firms and increasingly with other types of organizations and other businesses offering financial services, such as banks and insurance companies.  Some of these organizations have greater capital and additional resources, and some entities offer a wider range of financial services.  Over the past several years, there has been significant consolidation of firms in the financial services industry, forcing the Partnership to compete with larger firms with greater capital and resources, brokerage volume and underwriting activities, and more competitive pricing.  The Partnership continues to compete with a number of firms offering discount brokerage services, usually with lower levels of personalized service to individual clients.  Further, the financial services industry continues to evolve technologically, with an increasing number of firms providing lower cost, computer-based "robo-advice" with limited or no personalized service to clients or to supplement full-service offerings.  Industry and technology changes may result in increased prevalence of robo-advisors.  Clients are able to transfer their business to competing organizations at any time.  The Partnership's continued ability to compete based on a business model designed to serve clients through personalized relationships with financial advisors and branch teams in order to provide tailored solutions may be impacted by the evolving financial services industry, including technology changes, robo-advisors and other lower cost options.  The Partnership may be subject to operational risk if the Partnership is unable to keep pace with this rapidly changing environment, which includes industry, technology and regulatory changes.  In addition, the Partnership's ability to compete and adapt its business model may be impacted by changing client demographics and preferences.  If financial advisors do not meet client needs, the Partnership could lose clients, thereby reducing revenues and profitability.  Further, the Partnership faces increased competition for clients from larger firms in its non-urban markets, and from a broad range of firms in the urban and suburban markets in which the Partnership competes.

Competition among financial services firms also exists for financial advisors and other personnel.  The Partnership’s continued ability to expand its business and to compete effectively depends on the Partnership’s ability to attract qualified employees and to retain and motivate current employees.  If the Partnership’s profitability decreases, then bonuses paid to financial advisors and other personnel, along with profit-sharing contributions, may be decreased or eliminated, increasing the risk that personnel could be hired away by competitors.  During an extended downturn in the economy, there is increased risk the Partnership’s more successful financial advisors may leave because a significant portion of their compensation is variable based on the Partnership’s profitability.  In addition, the Partnership's business is dependent on financial advisors' ability to compete for clients in order to attract and retain clients and clients' assets.        

The competitive pressure the Partnership experiences could have an adverse effect on its business, results of operations, financial condition and cash flow.  For additional information, see Part I, Item 1 – Business – Business Operations – Competition.

 

 

14


PART I

Item 1A.

Risk Factors, continued

 

Branch Office SystemThe Partnership’s system of maintaining branch offices primarily staffed by one financial advisor may expose the Partnership to risk of loss or liability from the activities of the financial advisors and to increases in rent related to increased real property values.

 

The vast majority of the Partnership’s branch offices are staffed by a single financial advisor and a BOA.  Branch offices do not have an onsite supervisor as would be found at broker-dealers with multi-broker branches.  The Partnership’s primary supervisory activity is conducted from its home offices.  Although this method of supervision is designed to comply with all applicable industry and regulatory requirements, it is possible that the Partnership is exposed to a risk of loss arising from alleged imprudent or illegal actions of its financial advisors.  Furthermore, the Partnership may be exposed to further losses if additional time elapses before its supervisory personnel detect problem activity.

 

The Partnership maintains personal financial and account information and other documents and instruments for its clients at its branch offices, both physically and in electronic format.  Despite reasonable precautions, because the branch offices are relatively small and some are in remote locations, the security systems at these branch offices may not prevent theft of such information.  If security of a branch is breached and personal financial and account information is stolen, the Partnership’s clients may suffer financial harm and the Partnership could incur financial harm, suffer reputational damage and face regulatory issues.

In addition, the Partnership leases its branch office spaces and a material increase in the value of real property across a broad geography may increase the amount of rent paid, which will negatively impact the Partnership’s profitability.  Further, the Partnership is currently focused on placing financial advisors in urban markets, which tend to have higher rent costs and could negatively impact the Partnership's profitability.

Inability to Retain Financial Advisors or Grow the Number of Financial AdvisorsIf the Partnership experiences attrition rates of its financial advisors that are higher than its expectations or is unable to grow the number of financial advisors, the Partnership may not be able to maintain its current number of financial advisors or meet its planned growth rates.

A significant number of the Partnership’s financial advisors have been licensed as financial advisors for less than three years.  As a result of being new to the business, many of these financial advisors have encountered or may encounter difficulties developing or expanding their businesses.  Consequently, the Partnership has periodically experienced higher rates of attrition, particularly with respect to financial advisors who are new to the business and especially during times of market volatility.  The Partnership generally loses more than half of its financial advisors who have been licensed for less than three years.  The Partnership may experience increased financial advisor attrition due to increased competition from other financial services companies and efforts by those firms to recruit its financial advisors.  Lower attrition in recent periods has positively impacted the Partnership's net financial advisor growth.  However, given changes to regulatory requirements, performance standards and financial advisor compensation, there can be no assurance that the attrition rates the Partnership has experienced in the past will not increase in the future.

Historically, during times of market volatility and industry change, it is more difficult for the Partnership to attract qualified applicants for financial advisor positions.  In addition, the Partnership relies heavily on referrals from its current financial advisors in recruiting new financial advisors.  During times of market volatility and industry change, current financial advisors may be less effective in recruiting potential new financial advisors through referrals.  There can be no assurance that the Partnership will be able to grow at desired rates in future periods or maintain its current number of financial advisors.

Either the failure to achieve an attrition rate lower than anticipated or net growth in the number of financial advisors may result in a decline in the revenue the Partnership receives from asset-based fees, commissions and other securities-related revenues.  The Partnership may not be able to either maintain its current number of financial advisors or achieve the level of net growth upon which its business model is based and its revenues and results of operations may be adversely impacted.

 

 

15


PART I

Item 1A.

Risk Factors, continued

 

Tax Law ChangesThe tax law changes signed in 2017 may put the Partnership at a disadvantage in recruiting and retaining financial advisors.

On December 22, 2017, President Trump signed tax reform legislation that created favorable tax treatment for owners of pass-through entities with taxable income.  The Partnership's financial advisors are employees and do not qualify for the favorable tax treatment.  Further, the tax reform legislation limits the deductibility of certain business expenses.  As a result, the Partnership's ability to recruit and retain financial advisors against certain competitor models could be impacted.  The Partnership is reviewing the new tax legislation and considering, what, if any, responses are appropriate, in accordance with the new tax law, that would help retain financial advisors.

Increased Financial Advisor CompensationCompensation paid to new financial advisors, as well as current financial advisors participating in a retirement transition plan, could negatively impact the Partnership’s profitability and capital if the increased compensation does not help retain financial advisors and clients.

In order to attract candidates to become financial advisors, the Partnership provides new financial advisors, for specified periods of time, a minimum base compensation as well as certain bonuses based on the amount of new assets gathered.  The intent is to attract a greater number of high quality recruits with an enhanced level of base compensation in order to serve more clients and meet the Partnership’s growth objectives.  If financial advisor compensation does not result in a corresponding increase in the level of productivity and retention rate of these financial advisors, then this additional compensation could negatively impact the Partnership’s financial performance in future periods.

 

Additionally, to better transition clients to a new financial advisor when their current financial advisor retires, as well as to retain quality financial advisors until retirement, the Partnership, in certain circumstances, offers individually tailored retirement transition plans to financial advisors.  These retirement transition plans may offer increased financial consideration prior to and after retirement for financial advisors who provide client transition services in accordance with a retirement and transition employment agreement.  If this increased financial consideration does not increase client asset retention or help to retain quality financial advisors until retirement, the additional financial consideration could negatively impact the Partnership’s profitability and capital in future periods.  In addition, the Partnership expects that the retirement transition plans will result in higher financial advisor compensation expense in the future.

Litigation and Regulatory Investigations and ProceedingsAs a financial services firm, the Partnership is subject to litigation involving civil plaintiffs seeking substantial damages and regulatory investigations and proceedings, which have increased over time and are expected to continue to increase.

Many aspects of the Partnership’s business involve substantial litigation and regulatory risks.  The Partnership is, from time to time, subject to examinations, informal inquiries and investigations by regulatory and other governmental agencies, as well as SROs and other regulators.  

Such matters have in the past, and could in the future, lead to formal actions, which may impact the Partnership’s business.  In the ordinary course of business, the Partnership also is subject to arbitration claims, lawsuits and other significant litigation such as class action suits.  Over time, there has been increasing litigation involving the financial services industry, including class action suits that generally seek substantial damages.

The Partnership has incurred significant expenses to defend and/or settle claims in the past.  In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages or in actions which are at very preliminary stages, the Partnership cannot predict with certainty the eventual loss or range of loss related to such matters.  Due to the uncertainty related to litigation and regulatory investigations and proceedings, the Partnership cannot determine if such matters will have a material adverse effect on its consolidated financial condition.  Such legal actions may be material to future operating results for a particular period or periods.  See Part I, Item 3 – Legal Proceedings for more information regarding certain unresolved claims.

 

 

16


PART I

Item 1A.

Risk Factors, continued

 

Reliance on Third PartiesThe Partnership’s dependence on third-party organizations exposes the Partnership to disruption if their products and services are no longer offered or supported or develop defects.

The Partnership incurs obligations to its clients which are supported by obligations from firms within the industry, especially those firms with which the Partnership maintains relationships by which securities transactions are executed.  The inability of an organization with which the Partnership does a large volume of business to promptly meet its obligations could result in substantial losses to the Partnership.

The Partnership is particularly dependent on Broadridge, which acts as the Partnership’s primary vendor for providing accounting and record-keeping for client accounts in both the U.S. and Canada.  The Partnership’s communications and information systems are integrated with the information systems of Broadridge.  There are relatively few alternative providers to Broadridge and although the Partnership has analyzed the feasibility of performing Broadridge’s functions internally, the Partnership may not be able to do it in a cost-effective manner or otherwise.  The Partnership also utilizes certain products and services of The Bank of New York Mellon Corporation (“BNY Mellon”) for mutual fund investments held by the Partnership’s clients and for certain trading activities.  BNY Mellon’s products and services enable the Partnership to provide certain services to mutual funds, primarily shareholder accounting.  Consequently, any new computer systems or software packages implemented by these third parties which are not compatible with the Partnership’s systems, or any other interruption or the cessation of service by these third parties as a result of systems limitations or failures, could cause unanticipated disruptions in the Partnership’s business which may result in financial losses and/or disciplinary action by governmental agencies, SROs and/or other regulators.

Canada OperationsThe Partnership has made, and may be required to continue to make, substantial investments to support its Canada operations, which have not yet achieved profitability.

The Partnership commenced operations in Canada in 1994 and plans to continue to expand its branch system in Canada.  Canada operations have operated at a substantial deficit from inception.  The Partnership intends to continue to operate in Canada, which may require substantial additional investments in its Canada operations to address short-term liquidity, capital, or expansion needs.  The Partnership has initiatives in place designed to accomplish the objectives of increasing revenue, controlling expenses and growing the number of financial advisors in order to achieve profitability in Canada.  Even though client assets under care in Canada have grown, the Partnership has not historically been able to grow the number of financial advisors and client assets under care to a level that would result in achieving its objectives.  There is no assurance Canada operations will ultimately become profitable.  For further information on Canada operations, see Part II, Item 8 – Financial Statements and Supplementary Data – Note 13 to the Consolidated Financial Statements.

Capital Requirements; Uniform Net Capital and Customer Protection RulesThe Uniform Net Capital Rule imposes minimum net capital requirements and could limit the Partnership’s ability to engage in certain activities which are crucial to its business.  The Customer Protection Rule may limit the rate of return the Partnership could earn on cash and investments depending on trends in the banking industry.

Adequacy of capital is vitally important to broker-dealers, and lack of sufficient capital may limit the Partnership’s ability to compete effectively.  In particular, lack of sufficient capital or compliance with the Uniform Net Capital Rule may limit Edward Jones’ ability to commit to certain securities activities such as trading and its ability to expand margin account balances, as well as its commitment to new activities requiring an investment of capital.  FINRA regulations and the Uniform Net Capital Rule may restrict Edward Jones’ ability to expand its business operations, including opening new branch offices or hiring additional financial advisors.  Consequently, a significant operating loss or an extraordinary charge against net capital could adversely affect Edward Jones’ ability to expand or even maintain its present levels of business.

Pursuant to the Customer Protection Rule, the Partnership has cash and investments segregated in special reserve bank accounts for the benefit of U.S. clients.  Increased regulations for the banking industry may impact trends in the banking industry and the Partnership's ability to find financial institutions to place those segregated client funds and earn a reasonable rate of return on those funds or Partnership cash and investments.  

In the U.S., Edward Jones may be required to restrict its withdrawal of partnership capital in order to meet its net capital requirements.  In addition to the regulatory requirements applicable to Edward Jones, Trust Co. and the Partnership's Canada broker-dealer subsidiary are subject to regulatory capital requirements in the U.S. and in Canada, respectively.  Failure by the Partnership to maintain the required net capital for any of its subsidiaries may subject it to disciplinary actions by the SEC, FINRA, IIROC, OCC or other regulatory bodies, which could ultimately require its liquidation.  

 

17


PART I

Item 1A.

Risk Factors, continued

 

LiquidityThe Partnership’s business in the securities industry requires that sufficient liquidity be available to maintain its business activities, and it may not always have access to sufficient funds.

Liquidity, or ready access to funds, is essential to the Partnership’s business.  A tight credit market could have a negative impact on the Partnership’s ability to maintain sufficient liquidity to meet its working capital needs.  Short-term and long-term financing are two sources of liquidity that could be affected by a tight credit market.  In a tight credit market, lenders may reduce their lending to borrowers, including the Partnership.  There is no assurance that financing will be available at attractive terms, or at all, in the future.  A significant decrease in the Partnership’s access to funds could negatively affect its business and financial management in addition to its reputation in the industry.  

Many limited partners finance their Partnership capital contributions by obtaining personal bank loans.  Any such bank loan agreement is between the limited partner and the bank.  The Partnership performs certain administrative functions for the majority of limited partner bank loans, but does not guarantee limited partner bank loans, nor can limited partners pledge their Interests as collateral for the bank loans.  Limited partners who finance all or a portion of their Interests with bank loans may be more likely to request the withdrawal of capital to repay such obligations should the Partnership experience a period of reduced earnings.  Any withdrawals by limited partners are subject to the terms of the Partnership Agreement and would reduce the Partnership’s available liquidity and capital.

The Partnership makes loans available to those general partners and, in limited circumstances, subordinated limited partners (in each case, other than members of the Executive Committee, as defined in the Partnership Agreement, which consists of the executive officers of the Partnership) who require financing for some or all of their Partnership capital contributions.  In limited circumstances, a general partner may withdraw from the Partnership and become a subordinated limited partner while he or she still has an outstanding Partnership loan.  Loans made by the Partnership to such partners are generally for a period of one year, but are expected to be renewed and bear interest at an interest rate defined in the loan documents.  The Partnership has full recourse against any partner that defaults on loan obligations to the Partnership.  However, there is no assurance that partners will be able to repay the interest and/or the principal amount of their Partnership loans at or prior to maturity.  If partners are unable to repay the interest and/or the principal amount of their Partnership loans at or prior to maturity, the Partnership could be adversely impacted.

Upgrade of Technological SystemsThe Partnership will engage in significant technology initiatives in the future which may be costly and could lead to disruptions.

From time to time, the Partnership has engaged in significant technology initiatives and expects to continue to do so in the future.  Such initiatives are not only necessary to better meet the needs of the Partnership’s clients, but also to satisfy new industry standards and practices, better secure the transmission of clients’ information on the Partnership’s systems, and improve operational efficiency.  With any major system replacement, there will be a period of education and adjustment for the branch and home office associates utilizing the system.  Following any upgrade or replacement, if the Partnership’s systems or equipment do not operate properly, are disabled or fail to perform due to increased demand (which might occur during market upswings or downturns), or if a new system or system upgrade contains a major problem, the Partnership could experience unanticipated disruptions in service, including interrupted trading, slower response times, decreased client service and client satisfaction, and delays in the introduction of new products and services, any of which could result in financial losses, liability to clients, regulatory intervention or reputational damage.  Further, the inability of the Partnership’s systems to accommodate a significant increase in volume of transactions also could constrain its ability to expand its business.

Interest Rate EnvironmentThe Partnership’s profitability could be impacted by interest rate changes.

The Partnership is exposed to risk from changes in interest rates.  Such changes in interest rates impact the income from interest-earning assets, primarily receivables from clients on margin balances and short-term investments.  The changes in interest rates may also have an impact on the expense related to liabilities that finance these assets, such as amounts payable to clients.  The Partnership's interest bearing liabilities are less sensitive to changes in short-term interest rates compared to its interest earning assets, resulting in interest income being more sensitive to interest rate changes than interest expense.

 

The Partnership's revenue earned from certain cash solutions products is impacted by changes in interest rates, with lower interest rates negatively impacting revenue.  Further, in low interest rate environments the Partnership has waived certain fees to maintain a positive client yield, which could happen in the future if interest rates were to decline.  

 

18


PART I

Item 1A.

Risk Factors, continued

 

Credit RiskThe Partnership is subject to credit risk due to the nature of the transactions it processes for its clients.

The Partnership is exposed to the risk that third parties who owe it money, securities or other assets will not meet their obligations.  Many of the transactions in which the Partnership engages expose it to credit risk in the event of default by its counterparty or client, such as cash balances held at various major U.S. financial institutions, which typically exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage limits.  In addition, the Partnership’s credit risk may be increased when the collateral it holds cannot be realized or is liquidated at prices insufficient to recover the full amount of the obligation due to the Partnership.  See Part III, Item 10 – Directors, Executive Officers and Corporate Governance for more information about the Partnership’s credit risk.

 

Lack of Capital PermanencyBecause the Partnership’s capital is subject to mandatory redemption either upon the death or withdrawal request of a partner, the capital is not permanent and a significant mandatory redemption could lead to a substantial reduction in the Partnership’s capital, which could, in turn, have a material adverse effect on the Partnership’s business.

Under the terms of the Partnership Agreement, a partner’s capital is required to be redeemed by the Partnership in the event of the partner's death, subject to compliance with ongoing regulatory capital requirements.  In addition, partners may request withdrawals from their capital accounts, subject to certain limitations on the timing of those withdrawals and regulatory capital requirements.  Accordingly, the Partnership’s capital is not permanent and is dependent upon current and future partners to both maintain their existing capital and make additional capital contributions in the Partnership.  Any withdrawal requests by general partners, subordinated limited partners or limited partners would reduce the Partnership’s available liquidity and capital.  The Managing Partner may decline a withdrawal request if that withdrawal would result in the Partnership violating any agreement, such as a loan agreement, or any applicable laws, rules or regulations.

Under the terms of the Partnership Agreement, limited partners requesting withdrawal from the Partnership are repaid their capital in three equal annual installments beginning no earlier than 90 days after their withdrawal notice is received by the Managing Partner.  The capital of general partners requesting withdrawal from the Partnership is converted to subordinated limited partnership capital or, at the discretion of the Managing Partner, redeemed by the Partnership.  Subordinated limited partners requesting withdrawal are repaid their capital in six equal annual installments beginning no earlier than 90 days after their request for withdrawal of capital is received by the Managing Partner.  The Partnership’s Managing Partner has discretion to waive or modify these withdrawal restrictions and to accelerate the return of capital.  Redemptions upon the death of a partner are generally required to be made within six months of the date of death.  Due to the nature of the redemption requirements of the Partnership's capital as set forth in the Partnership Agreement, the Partnership accounts for its capital as a liability, in accordance with U.S generally accepted accounting principles (“GAAP”).  If the Partnership’s capital declines by a substantial amount due to partner deaths or withdrawals, the Partnership may not have sufficient capital to operate or expand its business or to meet withdrawal requests by partners.

Syndicate and Trading Position RisksThe Partnership engages in underwriting activities and maintains inventory in securities, both of which can expose the Partnership to material losses and liability.

Participation as a syndicate member in the underwriting of securities subjects the Partnership to substantial risk.  As a syndicate member, the Partnership is subject to risk of substantial liability, expense and adverse publicity resulting from possible claims against it as a syndicate member under federal and state securities laws.  Over the past several years, there has been increased litigation in these areas.  Further, the Partnership may incur losses if it is unable to resell the securities it is committed to purchase or if it is forced to liquidate all or part of its commitment at less than the agreed upon purchase price.  In maintaining inventory in fixed income securities, the Partnership is exposed to a substantial risk of loss, depending upon the nature and extent of fluctuations in market prices.

 

 

 

 

 

19


PART I

Item 1A.

Risk Factors, continued

 

Security BreachesSecurity breaches of the Partnership’s systems, or those of its clients or third parties, could lead to significant financial loss to the Partnership’s business and operations, significant liability, and harm to the Partnership’s reputation and client relationships.

The Partnership relies heavily on communications and information systems to conduct its business, including the secure processing, storage and transmission of confidential and other information.  The Partnership’s home office facilities and its existing communications and information systems, including its backup systems, are vulnerable to security breaches, damages and interruptions from human error, sabotage, cybersecurity attacks, computer viruses and other malicious code, intentional acts of vandalism, attempts by others to gain unauthorized access to the Partnership’s systems, and similar events.  The risk of these types of security breaches occurring is growing, in part due to increased use of the internet and mobile devices, as well as increased sophistication of external parties who may attempt to cause harm.  The Partnership has not experienced, to date, any material losses related to cybersecurity attacks or other information security breaches.  The Partnership has processes in place designed to safeguard and monitor against security breaches and other disruptions.  However, there can be no assurance the Partnership will not suffer such losses in the future, particularly as techniques used in security breaches continually change and originate from a wide variety of sources.  

If a security breach were to occur, such an event could substantially disrupt the Partnership’s business by harming its home office facilities and communications and information systems, jeopardizing the Partnership’s, its clients’ or third parties’ confidential information, or causing interruptions or malfunctions in the Partnership’s, its clients’ or third parties’ operations.  In order to serve clients, the Partnership maintains personal information about clients that is subject to various laws and regulations.  Security breaches of this type of information could subject the Partnership to significant liability and expenses that may not be covered by insurance.  In addition, the Partnership’s reputation and business may suffer if clients experience data or financial loss from a significant security breach.

Business Continuity RiskAny substantial disruption to the Partnership’s business and operations, could lead to significant financial loss to the Partnership’s business and operations, as well as harm the Partnership’s reputation and client relationships.

The Partnership's business and operations relies heavily on its branch office network, home office facilities and its existing computer system and network, which are all vulnerable to damage or interruption from natural disasters, power loss, acts of terrorism, and other similar events. The Partnership has processes in place designed to safeguard against and monitor for business interruptions and related losses.  However, there can be no assurance the Partnership will not suffer such losses in the future.  Such an event could substantially disrupt the Partnership’s business by causing physical harm to its branch office network, home office facilities and its technological systems, as well as cause interruptions or malfunctions in the Partnership’s, its clients’ or third parties’ operations.  In addition, the Partnership’s reputation and business may suffer if clients experience data or financial loss from a significant interruption.

The Partnership has data centers in two separate regions of the United States.  These data centers act as disaster recovery sites for each other.  While these data centers are designed to be redundant for each other, a prolonged interruption of either site might result in a delay in service and substantial costs and expenses.  While the Partnership has disaster recovery and business continuity planning processes, and interruption and property insurance to mitigate and help protect it against such losses, there can be no assurance that the Partnership is fully protected from such an event.

Transaction Volume VolatilitySignificant increases and decreases in the number of transactions by the Partnership’s clients can have a material negative effect on the Partnership’s profitability and its ability to efficiently process and settle these transactions.

Significant volatility in the number of client transactions may result in operational problems such as a higher incidence of failures to deliver and receive securities and errors in processing transactions, and such volatility may also result in increased personnel and related processing costs.  In the past, the Partnership has experienced adverse effects on its profitability resulting from significant reductions in securities sales and has encountered operational problems arising from unanticipated high transaction volume.  The Partnership is not able to control such decreases and increases, and there is no assurance that it will not encounter such problems and resulting losses in future periods.

In addition, significant transaction volume could result in inaccurate books and records, which would expose the Partnership to disciplinary action by governmental agencies, SROs and other regulators.

 

20


PART I

Item 1A.

Risk Factors, continued

 

Investment Advisory ActivitiesThe Partnership’s investment advisory businesses may be affected by the investment performance of its portfolios and operational risks associated with the size of the programs.

Poor investment returns, due to either general market conditions or underperformance of programs constructed by the Partnership (relative to the programs of the Partnership’s competitors or to benchmarks) may affect the Partnership's ability to retain existing assets under care and to attract new clients or additional assets from existing clients.  Should there be a reduction in assets under care in programs which generate asset-based fees, the Partnership would experience a decrease in net revenue.  

 

Based on the current size of the investment advisory programs, the programs may experience concentration risks associated with the level and percentage of holdings in individual funds within the programs which could result in additional operational and regulatory risks for the Partnership.  As a result of the size of the programs, the Partnership is also exposed to the risk that trading volumes and program activity could impact the Partnership's ability to process transactions in a timely manner. 

 

 

Proprietary Mutual FundsThe Partnership’s business may be affected by operational risks, investment performance and the heightened regulatory requirements it faces as a result of sponsoring proprietary mutual funds and managing sub-advisers and other third party service providers.

As a sponsor and investment adviser to proprietary mutual funds, the Partnership, through its ownership of Olive Street and Passport Research, may experience additional operational risk and regulatory requirements attributed to Olive Street's and Passport Research's responsibilities to oversee the investment management of mutual funds.  Due to the size and number of sub-advisers within the proprietary mutual funds, there is a heightened risk associated with the Partnership's ability to perform ongoing due diligence and supervision.  Poor investment returns, due to either general market conditions or underperformance, of proprietary mutual funds may affect the Partnership's ability to expand the BB Trust, develop new mutual funds, attract new client assets, and retain existing client assets.  

RISKS RELATED TO AN INVESTMENT IN LIMITED PARTNERSHIP INTERESTS

Holding CompanyJFC is a holding company; as a consequence, JFC’s ability to satisfy its obligations under the Partnership Agreement will depend in large part on the ability of its subsidiaries to pay distributions or dividends to JFC, which is restricted by law and contractual obligations.

Since JFC is a holding company, the principal sources of cash available to it are distributions or dividends from its subsidiaries and other payments under intercompany arrangements with its subsidiaries.  Accordingly, JFC’s ability to generate the funds necessary to satisfy its obligations with respect to the Interests, including the 7.5% “guaranteed payment” (for tax purposes, within the meaning of the Internal Revenue Code of 1986, as amended (the “IRC”)) to limited partners pursuant to the Partnership Agreement (the “7.5% Payment”), will be dependent on distributions, dividends, and intercompany payments from its subsidiaries, and if those sources are insufficient, JFC may be unable to satisfy such obligations.

JFC’s principal operating subsidiaries, including Edward Jones, are subject to various statutory and regulatory restrictions applicable to broker-dealers generally that limit the amount of cash distributions, dividends, loans and advances that those subsidiaries may pay to JFC. Regulations relating to capital requirements affecting some of JFC’s subsidiaries also restrict their ability to pay distributions or dividends and make loans to JFC.  See Part I, Item 1 – Business – Regulation for a discussion of these requirements.

In addition, JFC’s subsidiaries may be restricted under the terms of their financing arrangements from paying distributions or dividends to JFC, or may be required to maintain specified levels of capital.  Moreover, JFC or its subsidiaries may enter into financing arrangements in the future which may include additional restrictions or debt covenant requirements further restricting distributions to JFC, which may impact JFC’s ability to make distributions to its limited partners.

 

 

 

21


PART I

Item 1A.

Risk Factors, continued

 

Sufficiency of Distributions to Repay FinancingLimited partners may finance their purchase of the Interests with a bank loan.  The Partnership does not guarantee those loans and distributions may be insufficient to pay the interest or principal due on the loans.

Many limited partners finance the purchases of their Interests by obtaining personal bank loans.  Any such bank loan agreement is between the limited partner and the bank.  The Partnership performs certain administrative functions for the majority of limited partner bank loans, but does not guarantee the bank loans, nor can limited partners pledge their Interests as collateral for the bank loan.  Limited partners who have chosen to finance a portion of the purchase price of their Interests assume all risks associated with the loan, including the legal obligation to repay the loan.

There is no assurance that distributions from the Partnership will be sufficient to pay the interest on a limited partner’s loan or repay the principal amount of the loan at or prior to its maturity.  Furthermore, in the event the Partnership experiences a loss which leads to its liquidation, there is no assurance there will be sufficient capital available to distribute to the limited partners for the repayment of any loans.

Status As Partner For Tax Purposes and Tax RisksLimited partners are subject to income tax liabilities on the Partnership’s income, whether or not income is distributed, and may have an increased chance of being audited.  Limited partners may also be subject to passive loss rules as a result of their investment.

Limited partners are required to file tax returns and pay income tax in those states and foreign jurisdictions in which the Partnership operates, as well as in the limited partner’s state of residence or domicile.  Limited partners are liable for income taxes on their share of the Partnership’s taxable income.  The amount of income the limited partner pays tax on can significantly exceed the net income earned on the Interests and the income distributed to such limited partner, which results in a disproportionate share of income being used to pay taxes.  The Partnership’s income tax returns may be audited by government authorities, and such audit may result in the audit of the returns of the limited partners (and, consequently, an amendment of their tax returns with the possibility of interest and penalty assessments).  

A limited partner’s share of the Partnership’s income or losses could be subject to the passive loss rules.  Under specific circumstances, certain income may be classified as portfolio income or passive income for purposes of the passive loss rules.  In addition, under certain circumstances, a limited partner may be allocated a share of the Partnership’s passive losses, the deductibility of which will be limited by the passive loss rules.

Non-Voting Interests; Non-Transferability of Interests; Absence of Market, Price For InterestsThe Interests are non-voting and non-transferable, no market for the Interests exists or is expected to develop, and the price only represents book value.

None of the limited partners in their capacity as limited partners may vote or otherwise participate in the management of the Partnership’s business.  The Managing Partner has the authority to amend the Partnership Agreement without the consent of the limited partners, subordinated limited partners or general partners.  None of the limited partners may sell, pledge, exchange, transfer or assign their Interests without the express written consent of the Managing Partner (which is not expected to be given).

Because there is no market for the Interests, there is no fair market value for the Interests.  The price ($1,000 per Interest) at which the Interests were offered represents the book value of each Interest.  The Partnership's capital could decline to a point where the book value of the Interests could be less than the price paid.

 

 

 

 

 

 

22


PART I

Item 1A.

Risk Factors, continued

 

Risk of DilutionThe Interests may be diluted from time to time, which could lead to decreased returns to the limited partners.

The Managing Partner has the ability, in his or her sole discretion, to issue additional Interests or Partnership capital.  The Partnership filed a Registration Statement on Form S-8 with the SEC on January 17, 2014, to register $350 million of Interests to be issued pursuant to the Partnership’s 2014 Employee Limited Partnership Interest Purchase Plan (the “2014 Plan”).  The Partnership previously issued approximately $298 million of Interests under the 2014 Plan.  The remaining $52 million of Interests may be issued under the 2014 Plan at the discretion of the Partnership in the future.  The Partnership filed a Registration Statement on Form S-8 with the SEC on January 12, 2018, to register $450 million of Interests to be issued pursuant to the Partnership's 2018 Employee Limited Partnership Interest Purchase Plan (the "2018 Plan").  The Partnership intends to offer initial Interests under the 2018 Plan during the latter part of 2018 and the initial offering under the 2018 Plan is expected to close early in 2019.  Proceeds from the offering under the 2018 Plan are expected to be used for working capital and general corporate purposes and to ensure there is adequate general liquidity of the Partnership for future needs.

The issuance of Interests will reduce the percentage of participation in net income by general partners and subordinated limited partners.  Further, the issuance of additional Interests will decrease the Partnership’s net interest income by the 7.5% Payment for the additional Interests, and holders of existing Interests may suffer decreased returns on their investment because the amount of the Partnership’s net income they participate in may be reduced as a consequence.  Accordingly, the issuance of additional Interests will reduce the Partnership’s net interest income and profitability.

 

 

In 2017, the Partnership retained 13.8% of the general partners’ net income as capital which is credited monthly to the general partners’ Adjusted Capital Contributions (as defined in the Partnership Agreement).  Retention for 2018 is expected to remain at a similar level as 2017.  Such retention, along with any additional capital contributions by general partners, will reduce the percentage of participation in net income by limited partners.  There is no requirement to retain a minimum amount of general partners’ net income, and the percentage of retained net income could change at any time in the future.  In accordance with the Partnership Agreement, the percentage of income allocated to limited partners is reset annually and the amount of retained general partner income reduces the income allocated to limited partners.

Limitation of Liability; IndemnificationThe Partnership Agreement limits the liability of the Managing Partner and general partners by indemnifying them under certain circumstances, which may limit a limited partner’s rights against them and could reduce the accumulated profits distributable to limited partners.

The Partnership Agreement provides that none of the general partners, including the Managing Partner, will be liable to any person for any acts or omissions performed or omitted by such partner on behalf of the Partnership (even if such action, omission or failure to act constituted negligence) as long as such partner has (a) not committed fraud, (b) acted in subjective good faith or in a manner which did not involve intentional misconduct, a knowing violation of law or which was grossly negligent, and (c) not derived improper personal benefit.

The Partnership also must indemnify any general partner, including the Managing Partner, from any claim in connection to acts or omissions performed in connection with the business of the Partnership and from costs or damages stemming from a claim attributable to acts or omissions by such partner, unless such act or omission was not in good faith on behalf of the Partnership, was not in a manner reasonably believed by the partner to be within the scope of his or her authority, and was not in the best interests of the Partnership.  The Partnership does not have to indemnify any general partner, including the Managing Partner, in instances of fraud, for acts or omissions not in good faith or which involve intentional misconduct, a knowing violation of the law, or gross negligence, or for any acts or omissions where such partner derived improper personal benefit.

As a result of these provisions, the limited partners have more limited rights against such partners than they would have absent the limitations in the Partnership Agreement.  Indemnification of the general partners could deplete the Partnership’s assets unless the Partnership's indemnification obligation is covered by insurance, which the Partnership may or may not obtain, or which insurance may not be available at a reasonable price or at all or in an amount sufficient to cover the indemnification obligation.  The Partnership Agreement does not provide for indemnification of limited partners.

 

 

23


PART I

Item 1A.

Risk Factors, continued

 

Risk Of LossThe Interests are equity interests in the Partnership.  As a result, and in accordance with the Partnership Agreement, the right of return of a limited partner’s Capital Contribution (as defined in the Partnership Agreement) is subordinate to all existing and future claims of the Partnership’s general creditors, including any of its subordinated creditors.

In the event of a partial or total liquidation of the Partnership or in the event there were insufficient Partnership assets to satisfy the claims of its general creditors, the limited partners may not be entitled to receive their entire Capital Contribution amounts back.  Limited partner capital accounts are not guaranteed.  However, as a class, the limited partners would be entitled to receive their aggregate Capital Contributions back prior to the return of any capital contributions to the subordinated limited partners or the general partners.  If the Partnership suffers losses in any year but liquidation procedures described above are not undertaken and the Partnership continues, the amounts of such losses would be absorbed in the capital accounts of the partners as described in the Partnership Agreement, and each limited partner in any event remains entitled to receive annual 7.5% Payments on his or her contributed capital under the terms of the Partnership Agreement.  However, as there would be no accumulated profits in such a year, limited partners would not receive any sums representing participation in net income of the Partnership.  In addition, although the amount of such annual 7.5% Payments to limited partners are charged as an expense to the Partnership and are payable whether or not the Partnership earns any accumulated profits during any given period, no reserve fund has been set aside to enable the Partnership to make such payments.  Therefore, such payments to the limited partners are subject to the Partnership’s ability to service this annual 7.5% Payment, of which there is no assurance.

Foreign Exchange Risk For Canada ResidentsEach foreign limited partner has the risk that he or she will lose value on his or her investment in the Interests due to fluctuations in the applicable exchange rate; furthermore, foreign limited partners may owe tax on a disposition of the Interests solely as the result of a movement in the applicable exchange rate.

All investors purchase Interests using U.S. dollars.  As a result, limited partners who reside in Canada may risk having the value of their investment, expressed in Canadian currency, decrease over time due to movements in the applicable currency exchange rates.  Accordingly, such limited partner may have a loss upon disposition of his or her investment solely due to a downward fluctuation in the applicable exchange rate.

In addition, changes in exchange rates could have an impact on Canadian federal income tax consequences for a limited partner, if such limited partner is a resident in Canada for purposes of the Income Tax Act (Canada).  The disposition by such limited partner of an Interest, including as a result of the withdrawal of the limited partner from the Partnership or the Partnership’s dissolution, may result in the realization of a capital gain (or capital loss) by such limited partner.  The amount of such capital gain (or capital loss) generally will be the amount, if any, by which the proceeds of disposition of such Interest, less any reasonable costs of disposition, each expressed in Canadian currency using the exchange rate on the date of disposition, exceed (or are exceeded by) the adjusted cost base of such Interest, expressed in Canadian currency using the exchange rate on the date of each transaction that is relevant in determining the adjusted cost base.  Accordingly, because the exchange rate for those currencies may fluctuate between the date or dates on which the adjusted cost base of a limited partner’s Interest is determined and the date on which the Interest is disposed of, a Canadian-resident limited partner may realize a capital gain or capital loss on the disposition of his or her Interest solely as a result of fluctuations in exchange rates.

 

 

 

24


PART I

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

The Partnership primarily conducts its U.S. home office operations from two campus locations in St. Louis, Missouri and one campus location in Tempe, Arizona.  As of December 31, 2017, the Partnership’s U.S. home office consisted of 13 separate buildings totaling approximately 2.0 million square feet.  Of the 13 U.S. home office buildings, one building is leased through an operating lease and the remaining 12 are owned by the Partnership.  The land for the Tempe, Arizona campus location is leased.  

In addition, the Partnership leases its Canada home office facility in Mississauga, Ontario through an operating lease.  

The Partnership also maintains facilities in 13,449 branch locations as of December 31, 2017, which are located in the U.S. and Canada and are predominantly rented under cancelable leases.  See Part II, Item 8 – Financial Statements and Supplementary Data – Notes 11 and 14 to the Consolidated Financial Statements for information regarding non-cancelable lease commitments and related party transactions, respectively.

 

ITEM 3.

LEGAL PROCEEDINGS

 

In the normal course of its business, the Partnership is involved, from time to time, in various legal matters, including arbitrations, class actions, other litigation, and investigations and proceedings by governmental organizations, self-regulatory organizations and other regulators.

 

Mutual Fund Share Class Waivers. As previously disclosed, on October 26, 2015, Edward Jones, without admitting or denying the findings, entered into a settlement agreement with FINRA in connection with its investigation of possible violations of the federal securities laws or rules with respect to mutual fund purchases and sales charge waivers for certain retirement plan and charitable organization accounts.  On June 12, 2015, the Division of Enforcement of the SEC informed Edward Jones that it is also investigating this matter.  The SEC’s review is ongoing.  Consistent with its practice, Edward Jones is cooperating fully with the SEC with respect to its investigation.

 

Retirement Plan Litigation. On August 19, 2016, JFC, Edward Jones and certain other defendants were named in a putative class action lawsuit (McDonald v. Edward D. Jones & Co., L.P., et al.) filed in the U.S. District Court for the Eastern District of Missouri brought under ERISA, by a participant in the Edward D. Jones & Co. Profit Sharing and 401(k) Plan (the "Retirement Plan").  The lawsuit alleges that the defendants breached their fiduciary duties to Retirement Plan participants and seeks declaratory and equitable relief and monetary damages on behalf of the Retirement Plan.  The defendants filed a motion to dismiss the McDonald lawsuit which was granted in part dismissing the claim against JFC, and denied in part as to all other defendants on January 26, 2017.

 

On November 11, 2016, a substantially similar lawsuit (Schultz, et al. v. Edward D. Jones & Co., L.P., et al.) was filed in the same court.  The plaintiffs consolidated the two lawsuits by adding the Schultz plaintiffs to the McDonald case, and the Schultz action was dismissed.  The plaintiffs filed their first amended consolidated complaint on April 28, 2017.  The defendants filed a motion to dismiss the lawsuit on May 26, 2017, which has been fully briefed by both parties and is pending.

 

Wage-and-Hour Class Action.  On September 22, 2017, Edward Jones was named as a defendant in a purported collective and class action lawsuit (White v. Edward D. Jones & Co., L.P.) filed in the U.S. District Court for the Northern District of Ohio by a former branch office administrator.  The lawsuit was brought under the Fair Labor Standards Act as well as Ohio law and alleges that Edward Jones underpaid overtime compensation to branch office administrators.  The lawsuit seeks compensatory damages in the amount of the unpaid wages as well as liquidated damages in an equal amount.  On February 20, 2018, the court entered an order of dismissal, without prejudice, on the basis that the parties reached a settlement in principle subject to final court approval. 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

 

 

25


PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There is no established public trading market for the Partnership’s Interests and their assignment or transfer is prohibited without the express written consent of the Managing Partner (which is not expected to be given).  As of February 23, 2018, the Partnership was composed of 18,885 limited partners.

ITEM 6.

SELECTED FINANCIAL DATA

The following information sets forth, for the past five years, selected financial data from the audited financial statements.

Summary Consolidated Statements of Income Data:

 

 

 

For the years ended December 31,

 

($ millions, except per unit information and units outstanding)

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

7,506

 

 

$

6,557

 

 

$

6,619

 

 

$

6,278

 

 

$

5,657

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before allocations to partners

 

$

872

 

 

$

746

 

 

$

838

 

 

$

770

 

 

$

674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income allocated to limited partners per weighted

   average $1,000 equivalent limited partnership

   unit outstanding

 

$

121.15

 

 

$

110.55

 

 

$

131.42

 

 

$

129.40

 

 

$

121.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average $1,000 equivalent limited

   partnership units outstanding

 

 

896,566

 

 

 

908,919

 

 

 

921,747

 

 

 

636,481

 

 

 

644,856

 

 

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 480, Distinguishing Liabilities from Equity (“ASC 480”), the Partnership presents net income of $0 on its Consolidated Statements of Income.  See Part II, Item 8 – Financial Statements and Supplementary Data – Note 1 to the Consolidated Financial Statements for further discussion.

Summary Consolidated Statements of Financial Condition Data:

 

 

 

As of December 31,

 

($ millions)

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

17,176

 

 

$

19,424

 

 

$

16,356

 

 

$

14,770

 

 

$

13,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities exclusive of subordinated liabilities

   and partnership capital subject to mandatory

   redemption

 

$

14,381

 

 

$

16,790

 

 

$

13,746

 

 

$

12,552

 

 

$

11,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subordinated liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partnership capital subject to mandatory redemption

 

 

2,795

 

 

 

2,634

 

 

 

2,610

 

 

 

2,218

 

 

 

2,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

17,176

 

 

$

19,424

 

 

$

16,356

 

 

$

14,770

 

 

$

13,795

 

 

 

 

26


PART II

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and the financial condition of the Partnership.  Management’s Discussion and Analysis should be read in conjunction with the Partnership’s Consolidated Financial Statements and accompanying notes included in Part II, Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10-K.  All amounts are presented in millions, except as otherwise noted.

Basis of Presentation

The Partnership broadly categorizes its net revenues into four categories: fee revenue, trade revenue (revenue from client buy or sell transactions of securities), net interest and dividends revenue (net of interest expense) and other revenue.  In the Partnership’s Consolidated Statements of Income, fee revenue is composed of asset-based fees and account and activity fees.  Asset-based fees are generally a percentage of the total value of specific assets in client accounts.  These fees are impacted by client dollars invested in and divested from the accounts which generate asset-based fees and change in market values of the assets.  Account and activity fees and other revenue are impacted by the number of client accounts and the variety of services provided to those accounts, among other factors.  Trade revenue is composed of commissions earned from the purchase or sale of mutual fund shares, equities and insurance products, and principal transactions.  Trade revenue is impacted by the number of financial advisors, trading volume (client dollars invested), mix of the products in which clients invest, size of trades, margins earned on the transactions and market volatility.  Net interest and dividends revenue is impacted by the amount of cash and investments, receivables from and payables to clients, the variability of interest rates earned and paid on such balances, the number of Interests, and the balances of Partnership loans.

 

 

27


PART II

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

OVERVIEW

The following table sets forth the change in major categories of the Consolidated Statements of Income as well as several key related metrics for the last three years.  Management of the Partnership relies on this financial information and the related metrics to evaluate the Partnership’s operating performance and financial condition.

 

 

 

For the years ended December 31,

 

 

% Change

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based

 

$

5,047

 

 

$

3,705

 

 

$

3,399

 

 

 

36

%

 

 

9

%

Account and activity

 

 

678

 

 

 

719

 

 

 

690

 

 

 

-6

%

 

 

4

%

Total fee revenue

 

 

5,725

 

 

 

4,424

 

 

 

4,089

 

 

 

29

%

 

 

8

%

% of net revenue

 

 

76

%

 

 

67

%

 

 

62

%

 

 

 

 

 

 

 

 

Trade revenue

 

 

1,547

 

 

 

1,981

 

 

 

2,425

 

 

 

-22

%

 

 

-18

%

% of net revenue

 

 

21

%

 

 

30

%

 

 

37

%

 

 

 

 

 

 

 

 

Net interest and dividends

 

 

174

 

 

 

118

 

 

 

83

 

 

 

47

%

 

 

42

%

Other revenue

 

 

60

 

 

 

34

 

 

 

22

 

 

 

76

%

 

 

55

%

Net revenue

 

 

7,506

 

 

 

6,557

 

 

 

6,619

 

 

 

14

%

 

 

-1

%

Operating expenses

 

 

6,634

 

 

 

5,811

 

 

 

5,781

 

 

 

14

%

 

 

1

%

Income before allocations to partners

 

$

872

 

 

$

746

 

 

$

838

 

 

 

17

%

 

 

-11

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Client dollars invested(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade ($ billions)

 

$

88

 

 

$

98

 

 

$

114

 

 

 

-10

%

 

 

-14

%

Advisory programs ($ billions)

 

$

75

 

 

$

57

 

 

$

11

 

 

 

32

%

 

 

418

%

Client households at year end

 

 

5.2

 

 

 

5.2

 

 

 

5.0

 

 

 

 

 

 

4

%

Net new assets for the year ($ billions)(2)

 

$

49

 

 

$

40

 

 

$

49

 

 

 

23

%

 

 

-18

%

Client assets under care:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At year end ($ billions)

 

$

1,121

 

 

$

963

 

 

$

876

 

 

 

16

%

 

 

10

%

Average ($ billions)

 

$

1,041

 

 

$

915

 

 

$

881

 

 

 

14

%

 

 

4

%

Advisory programs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At year end ($ billions)

 

$

316

 

 

$

208

 

 

$

142

 

 

 

52

%

 

 

46

%

Average ($ billions)

 

$

265

 

 

$

166

 

 

$

142

 

 

 

60

%

 

 

17

%

Financial advisors (actual):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At year end

 

 

16,095

 

 

 

14,919

 

 

 

14,508

 

 

 

8

%

 

 

3

%

Average

 

 

15,435

 

 

 

14,647

 

 

 

14,294

 

 

 

5

%

 

 

2

%

Attrition %

 

 

7.2

%

 

 

9.1

%

 

 

9.7

%

 

n/a

 

 

n/a

 

Dow Jones Industrial Average (actual):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At year end

 

 

24,719

 

 

 

19,763

 

 

 

17,425

 

 

 

25

%

 

 

13

%

Average for year

 

 

21,742

 

 

 

17,925

 

 

 

17,587

 

 

 

21

%

 

 

2

%

S&P 500 Index (actual):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At year end

 

 

2,674

 

 

 

2,239

 

 

 

2,044

 

 

 

19

%

 

 

10

%

Average for year

 

 

2,448

 

 

 

2,094

 

 

 

2,061

 

 

 

17

%

 

 

2

%

 

(1)

Client dollars invested for trade revenue represents the principal amount of clients’ buy and sell transactions resulting in revenue and for advisory revenue represents the net of the inflows and outflows of client dollars into advisory programs.

(2)

Net new assets represents cash and securities inflows and outflows from new and existing clients and excludes mutual fund capital gain distributions received by U.S. clients.

 

28


PART II

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

2017 versus 2016 Overview

The Partnership surpassed two significant milestones during 2017: 15,000 financial advisors and $1 trillion in assets under care.  The Partnership ended 2017 with a record 16,095 financial advisors and $1.1 trillion in assets under care.

Financial advisors gathered $49 billion in net new assets during 2017 compared to $40 billion in 2016.  Average client assets under care increased 14% during 2017 compared to 2016, due to increases in the market value of client assets and net new assets gathered during the year.  Higher market values of the underlying client assets held reflected increases in the average S&P 500 Index and Dow Jones Industrial Average of 17% and 21%, respectively, during 2017.

Advisory programs' average assets under care increased 60% to $265 billion in 2017 compared to $166 billion in 2016 due to the continued investment of client assets into advisory programs driven by the Partnership's expanded advisory offerings, changes in available transaction-based retirement account solutions as a result of the implementation of the DOL fiduciary rule, and increased client adoption of the features, benefits and value proposition of advisory programs.  The majority of the increase in assets came from existing client assets.  In addition, a significant driver of the increase in the underlying clients' assets held was the strong market performance during 2017, as discussed above.  

Net revenue increased 14% to $7,506 in 2017.  Results reflected a 36% increase in asset-based fee revenue due to the increased investment of client assets into advisory programs driven by the factors discussed in the previous paragraph and increases in the market value of the underlying client assets held.  This increase was partially offset by a 22% decrease in trade revenue, primarily reflecting a reduction in client dollars invested in transaction-based solutions due to the increased investment of client assets into advisory programs and a decrease in the profit margin earned.

Operating expenses increased 14% to $6,634 in 2017 primarily due to an increase in financial advisor compensation, reflecting an increase in revenues on which commissions are earned, growth in the number of financial advisors and an increase in financial advisors qualifying for compensation programs, and higher home office and branch compensation and benefits expense, primarily due to an increase in the number of home office and branch personnel.  

Overall, the increase in net revenue, offset by the increase in operating expenses, generated income before allocations to partners of $872, a 17% increase over 2016.

 

2016 versus 2015 Overview

In 2016, the Partnership achieved record results in number of financial advisors and client assets under care.  As of December 31, 2016, the Partnership had 14,919 financial advisors and $963 billion of client assets under care, reflecting increases of 3% and 10%, respectively, compared to December 31, 2015.  Client assets under care increased due to net new assets gathered during the year and increases in the market value of client assets.

Financial advisors gathered $40 billion in net new assets during 2016 compared to $49 billion in 2015.  Average client assets under care increased 4% during 2016 compared to 2015, which included a 17% increase in advisory programs' average assets under care to $166 billion for 2016.  The launch of Guided Solutions in the second quarter of 2016 contributed to the increase in the average advisory programs' assets under care, the majority of which came from existing client assets.

Net revenue decreased 1% to $6,557 in 2016.  Results reflected an 18% decrease in trade revenue, primarily due to fewer client dollars invested as a result of potential industry changes and the increased investment of client assets into fee-based programs offered by the Partnership, as well as market uncertainties.  This decrease was mostly offset by a 9% increase in asset-based fee revenue due to the increase in client assets in fee-based programs and an increase in cash solutions revenue resulting from higher interest rates.

Operating expenses increased 1% in 2016 compared to 2015, primarily due to increased financial advisor compensation programs expense reflecting greater participation in existing programs and certain temporary enhancements to compensation implemented in September 2016, and higher home office and branch compensation and benefits resulting from higher wages and healthcare costs, as well as an increase in the number of home office and branch personnel.  This increase was partially offset by lower variable compensation due to the softening of financial results.

 

29


PART II

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Overall, the decrease in net revenue and the slight increase in operating expenses, generated income before allocations to partners of $746, an 11% decrease over 2015.    

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

The discussion below details the significant fluctuations and their drivers for each of the major categories of the Partnership’s Consolidated Statements of Income.

Fee Revenue

Fee revenue, which consists of asset-based fees and account and activity fees, increased 29% in 2017 to $5,725 and 8% in 2016 to $4,424.  A discussion of fee revenue components follows.

 

 

 

Years Ended December 31,

 

 

% Change

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

Fee Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisory programs fees

 

$

3,341

 

 

$

2,120

 

 

$

1,925

 

 

 

58

%

 

 

10

%

Service fees

 

 

1,259

 

 

 

1,243

 

 

 

1,211

 

 

 

1

%

 

 

3

%

Revenue sharing

 

 

181

 

 

 

186

 

 

 

184

 

 

 

-3

%

 

 

1

%

Fund adviser fees

 

 

130

 

 

 

57

 

 

 

30

 

 

 

128

%

 

 

90

%

Other asset-based fees

 

 

136

 

 

 

99

 

 

 

49

 

 

 

37

%

 

 

102

%

Total asset-based fee revenue

 

$

5,047

 

 

$

3,705

 

 

$

3,399

 

 

 

36

%

 

 

9

%

Account and activity fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder accounting service fees

 

 

412

 

 

 

441

 

 

 

424

 

 

 

-7

%

 

 

4

%

Other account and activity fees

 

 

266

 

 

 

278

 

 

 

266

 

 

 

-4

%

 

 

5

%

Total account and activity fee revenue

 

 

678

 

 

 

719

 

 

 

690

 

 

 

-6

%

 

 

4

%

Total fee revenue

 

$

5,725

 

 

$

4,424

 

 

$

4,089

 

 

 

29

%

 

 

8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average U.S. client asset values ($ billions)(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual fund assets held outside of advisory

   programs

 

$

406.4

 

 

$

399.3

 

 

$

392.2

 

 

 

2

%

 

 

2

%

Advisory programs

 

 

261.5

 

 

 

163.9

 

 

 

140.9

 

 

 

60

%

 

 

16

%

Insurance

 

 

80.7

 

 

 

73.5

 

 

 

73.3

 

 

 

10

%

 

 

0

%

Cash solutions

 

 

24.5

 

 

 

21.5

 

 

 

20.1

 

 

 

14

%

 

 

7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder accounting holdings serviced

 

 

26.6

 

 

 

25.7

 

 

 

24.2

 

 

 

4

%

 

 

6

%

 

(1)

Assets on which the Partnership earns asset-based fee revenue.  The U.S. portion of consolidated asset-based fee revenue was 98%, 97% and 98% for the years ended December 31, 2017, 2016 and 2015, respectively.

2017 vs. 2016

Asset-based fee revenue increased 36% in 2017 to $5,047 primarily led by an increase in advisory programs.  Growth in advisory programs fees reflected the cumulative impact of strong levels of net inflows over the last year into advisory programs, which was driven by the Partnership's expanded advisory offerings, changes in available transaction-based retirement account solutions as a result of the implementation of the DOL fiduciary rule, and increased client adoption of the features, benefits and value proposition of advisory programs.  In addition, a significant driver of the increase in the underlying clients' assets held was the strong market performance during 2017 compared to 2016, as discussed under "Overview" above, resulting in higher advisory program fees.  The increase in asset-based fee revenue in 2017 also reflected growth in fund adviser fees due to an increase in assets held in mutual funds in the BB Trust, however, this revenue was offset by the fees paid to the sub-advisers of the funds in the BB Trust.

 

30


PART II

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Account and activity fee revenue decreased 6% in 2017 to $678 primarily due to lower shareholder accounting services fees as new and existing clients adopted advisory programs.

2016 vs. 2015

Asset-based fee revenue increased 9% in 2016 to $3,705 primarily led by an increase in advisory programs fees due to the increased investment of client assets into advisory programs.  The increase in net inflows into advisory programs reflected the launch of Guided Solutions in the second quarter of 2016, regulatory uncertainty, and the continued client adoption of fee-based programs, the majority of which came from existing client assets.

The increase in asset-based fee revenue during 2016 also reflected increases in service fees and other asset-based fees.  Service fees revenue increased due to the continued investment of client assets and increases in the market value of the underlying client assets held.  Other asset-based fees increased due to higher cash solutions revenue which reflected higher yields earned on money market funds as a result of higher interest rates in 2016 compared to 2015.  The higher yields decreased the amount of fees waived by the Partnership in order to maintain positive client yields on the funds.  

Account and activity fee revenue increased 4% in 2016 to $719 primarily led by growth in shareholder accounting services fees due to the increase in the average number of client mutual fund holdings serviced.  Other account and activity fees increased in 2016 due to higher insurance contract service fees, which are fees earned for administrative support under contracts with certain insurance companies, due to the initiation of new contracts during 2015 that were in place for all of 2016.

Trade Revenue

Trade revenue, which consists of commissions and principal transactions, decreased 22% to $1,547 during 2017 and decreased 18% to $1,981 during 2016.    

 

 

 

Years Ended December 31,

 

 

% Change