CHANGING COURSE New Legg Mason is part broker, part money manager


On the sales floor atop the Legg Mason Tower in downtown Baltimore, 18 trainees, shoes polished, suits dark, hair freshly cut, listened early last week as the brokerage firm's president, James Brinkley, began the parade of inspirational speakers that would, with any luck, initiate a enriching cycle for themselves, their clients and the firm.

"Try to identify people with money and gain their trust," they are told.

So simple, so difficult and yet so pivotal for the brokerage business. For decades, the quality of an investment firm's salesmen has been critical in determining whether it can retain the business of customers who can purchase the underlying products -- securities -- from an almost unlimited array of sources.

Thus, for Legg Mason, these routine classes and the character judgments that have led to the compilation of the class have been the backbone of its growth.

The 1,000 mandatory contacts from cold calls each of these seventeen men and one woman must make during the next 90 days are the first step in opening new channels of revenue.

Be attentive, honest, and, last but hardly least, make the clients money, and the rewards can be substantial.

Proof that Legg Mason's system works is that over the past 20 years it has prospered while innumerable other competitors have been consumed or closed.

Recently, though, Legg Mason has been tempering past practices, even as its profitability is hitting records and even as major competitors including Prudential Securities, Shearson Lehman Bros. and Merrill Lynch are piling hundreds of new brokers into sales offices to capture every squeal of enthusiasm from the current bull market.

The 85 brokers trained by Legg Mason this year won't do much more than replace the 25 who will be "career counseled" by the firm to seek other employment and the 50 others who leave for other reasons.

Why the plateau? A different philosophy is emerging at Legg Mason at a time that the firm is celebrating some notable anniversaries. Thirty years ago this month, Raymond "Chip" lTC Mason opened a two-person outfit in Newport News, Va. Only 25 at the time, he had an expansive exuberance and quickly built Mason & Co. and the older Baltimore-based Legg & Co. he merged with in 1970, into a major regional brokerage.

The key to the future probably emerged a decade ago, when the firm began its first mutual fund, the Legg Mason Value Trust.

Its investment return has been spotty: It beat the averages for the 10-year period and for the past year but trailed badly during the five-year period.

The investment goal is to buy securities in good companies when they are cheap, as opposed to the other common investment philosophy of willingly paying more for securities in a superlative company in the hope of being rewarded by particularly fast growth.

Not surprisingly, given the Value Trust's mandate, it often does better in less speculative times. It is a fund for conservative investors, and if it hasn't made many a fortune, it hasn't cost them anything either. That hardly sounds like a vast engine for Legg Mason's growth, but, as the firm's flagship product, it has done well.

The company estimates that even during a year in which the volume of share trading soared, income from the Value Trust and nine other mutual funds accounted for almost one-fifth of profits. Additional contributions from institutional money management, acquired in 1986, were responsible for another 12 percent.

Assets under management from the mutual funds and the institutional business exceed $10.5 billion, 10th among brokerages and more than many small to medium-sized mutual funds have. Had the year been more subdued, those money-management profits could have been almost half of profits, and the firm is looking to them for growth.

Welcome to the new Legg Mason, a curious cross between a traditional money-management company such as T.Rowe Price and the traditional broker, structured to survive in a competitive world that Mr. Mason believes will soon include hungry banks as well as traditional adversaries, all eager to manage the savings of the affluent.

Like Price, it will offer managed investment funds, but unlike firms geared to newspaper advertisements and automated telephone transactions, it will continue to use a broker as an intermediary.

Unlike in the traditional arrangement, however, the broker won't profit only by making transactions, and therefore more brokers aren't needed to provide more revenues.

Fees from the Legg Mason mutual funds are charged annually as a percentage of holdings and therefore steadily grow as the firm expands the amount of money it manages.

Succeeding won't require another geographic stretch. An explosive expansion in the 1980s that quintupled the number of branches and brokers ceased in 1988.

And even now, after a four-year lull, the company intends to grow no faster than 7 percent or 8 percent a year.

"We needed to slow down to regain our balance," Mr. Mason said. Any move to make Legg Mason into a national firm will not come during his tenure, he said.

That has drawn some criticism from the security analysts who follow Legg Mason's prospects.

"They should grow the firm more than they have, adding brokers, and buy other firms east of the Mississippi," said Perrin Long, an analyst with First Michigan Securities. "That's necessary for a broker-dealer."

But such a course has little appeal to Mr. Mason, who suggests that even the earlier pell-mell rush to expand offices and people remains in question, despite the firm's heady current success. Others brokerages expressed similar reservations when the 1980s ended in a vicious slump for Wall Street, but those doubts were buried beneath the blizzard of order tickets in a rising market.

Initially, Mr. Mason said, he believed that getting bigger was a matter of survival. It provided a broader base to spread the cost of expensive systems and research brokerage firms must provide.

But the size came at a cost. "The bigger you grow, the more your ability to manage shrinks," he said.

Until recently, Mr. Mason said, he could routinely get to every office. That ceased in the latter half of the 1980s. His once-tiny firm now stretches from New Haven to Houston, and there's a reluctance to broaden it.

"If you can just concentrate on a narrow band of real estate, it's amazing how involved you can be relative to your competitors," he said.

That may become all the more critical in the near future.

Almost every company in the investment business is in the midst of good times. The industry posted record profits for the first quarter of 1992 and has been on a roll since early last year.

Legg Mason itself has been posting the type of gains to make any manager's eyes glitter with every division seeming to contribute large gains. Recently disclosed earnings were up 56 percent, marking the third consecutive year of record profits.

A harbinger of the future? "The growth we have had in recent years makes you wonder whether it can continue," Mr. Mason said.

"Are we trying to prepare for a slow market? If we weren't, we'd be crazy."

Legg Mason's growth

1981.. .. .. .. .. .. .1991


$200 million.. .. .. ..$10.9 billion


$31.3 million.. .. .. .$250.9 million

NET INCOME $2.1 million.. .. .. ..$13.5 million


19.. .. .. .. .. .. .. 80


164.. .. .. .. .. .. ..807

SOURCE: Legg Mason

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