Edward Jones' decision to start selling proprietary investment products is a sharp departure from its past practice but makes perfect sense when you look at where the company's revenue increasingly is being generated.
After launching a fee-based advisory platform just five years ago, the firm last year generated 53% of its $4.97 billion in revenue from fees, compared with trade revenue, which includes commissions on securities transactions.
Now Jones, with 12,000 representatives and advisers in the United States, is launching at least one affiliated mutual fund that will be used in its 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.
It is expected to be launched next month, according to Financial Times GatekeeperIQ.
Jones managing partner Jim Weddle said that he expects the Bridge Builder Bond Fund to remain relatively small, growing potentially to $5 billion in client assets, or about 5% of the firm's Advisory Solutions assets.
The firm's intention wasn't to chase fee-based business but to pursue clients that the firm may have missed before it launched its advisory program, Mr. Weddle said.
Some investors “didn't want to pay by transaction, and we couldn't appeal to those clients,” Mr. Weddle said.
“Now we can. We've got a very nice balance now between transaction- and asset-based revenue.”
Still, the move by Jones to launch proprietary funds is contrary to its long-stated message to its financial advisers to rely not on proprietary products but instead 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.
Fee-based clients only
The new bond 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 it through brokers who earn commissions on sales of products.
“It's a big change for them, and waters down their key message,” said Alois Pirker, research director with Aite Group LLC. “It's something we need to watch going forward if Jones does more and more of.”
Plans to launch more funds in the line aren't firm yet, said Jones partner Steve Seifert.
“Our intent is not to be manufacturers of products,” he said.
The new bond 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.
“This is not about creating a new profit center,” Mr. Seifert said, stressing that there is no retail share class available for commission-oriented brokers to sell.
A crowded field
The new proprietary funds 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.