Edward Jones makes unexpected leap into proprietary products

Is the regional broker-dealer changing its strategy on investment sales?

Aug 13, 2013 @ 3:25 pm

By Bruce Kelly and Jason Kephart

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Contrary to its long-stated message to its financial advisers, Edward Jones is getting into the proprietary-investment-product business.

The firm, known for its one-man shops and mass of trainees, is launching a line of affiliated mutual funds that will be used in Jones' recently introduced registered investment adviser platform, Edward Jones Advisory Solutions.

The Bridge Builder Bond fund, managed by Jones subsidiary Olive Street Investment Advisors LLC, will be subadvised by J.P. Morgan Asset Management, Prudential Investments and Robert W. Baird & Co. Inc.

The move goes against the long-stated policy at the closely held partnership to not sell proprietary products and instead rely on a cadre of outside money managers, led by American Funds Distributors Inc. That strategy has paid off.

Jones last year earned $30 million in revenue sharing from sales of American Funds mutual funds, according to the firm's website.

In a page from its website titled, Edward Jones vs. the Competition, the company states: “Edward Jones offers no proprietary products.”

Independent investment advisers routinely tout the absence of proprietary products from their platforms as being in the best interests of clients.

The new fund will be available only to those clients on Jones' fee-based Advisory Solutions platform, which had more than $90 billion in assets as of the end of June. Jones won't offer the new product through brokers who earn commissions on sales of products.

It is expected to launch in September, according to Financial Times GatekeeperIQ.

“This is just a starting point, but does it mean a bigger shift at the firm? It's a big change for them, and waters down their key message,” said Alois Pirker, research director with Aite Group LLC.

“It's going against your own beliefs. It's something we need to watch going forward if Jones does more and more of,” Mr. Pirker said.

The firm has no plans to introduce other funds this year but won't rule out adding others, said Jones partner Steve Seifert.

“Our intent is not to be manufacturers of products,” he said.

The new fund “meets the needs of clients,” Mr. Seifert said. “That's what we're doing here.”

The growth of the firm's Advisory Solutions program means that it holds some very large positions in quite a few mutual funds, Mr. Seifert said.

“The practicality of owning individual funds becomes a challenge when you reach the asset size we are today, particularly when removing or replacing a manager,” he said.

The firm wants to minimize the impact on clients and potentially lower expenses, Mr. Seifert said.

“This is not about creating a new profit center,” he said, stressing that there is no retail share class available for commission-oriented brokers to sell.

The new proprietary fund will join the crowded field of almost 300 mutual funds, exchange-traded funds and separately managed accounts already available on the advisory platform.

“What they're doing is looking to build out a product line with a more predictable revenue stream and more control over the client relationship,” said Geoffrey Bobroff, a mutual fund industry consultant.

An affiliated fund should have greater sticking power in a portfolio than an unaffiliated fund. If the manager of an unaffiliated fund is underperforming, the fund has to be sold, which could trigger capital gains or losses and could be disruptive to a client's portfolio.

By using subadvisers inside the affiliated fund, Jones can replace an underperforming manager without having to trigger a taxable event or affecting shareholders directly.

Getting a sticky piece of the fee-based accounts is becoming more important as the financial advice industry shifts away from commission-based sales.

Fee-based account business at regional broker-dealers, for example, is expected to grow to 57% of compensation by 2016, from 42% last year, according to Cogent Research LLC.

Jones, which has a sales force of 12,000 registered representatives, has revenue-sharing agreements with a number of mutual fund companies, including American Funds, Franklin Resources Inc. and The Hartford Financial Services Group Inc.

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