Eaton Vance offers to pay broker-dealers that adopt ‘NextShares’ active funds

Eaton Vance Corp. said Thursday it may help brokerages foot the bill to make its new type of actively managed exchange-traded products, called NextShares, available to their clients.
“We’re not a blank check here. We’re a little investment manager. We’re not a behemoth,” said Eaton Vance Chief Executive Thomas E. Faust Jr. “But if there’s a reasonable systems cost for a broker-dealer that’s willing to take leadership role in offering this to their clients, we absolutely will consider participating in some of the costs that they incur to make this happen.”
Eaton Vance and other asset managers that license NextShares face a steep challenge in convincing broker-dealers to sell the funds.
Eight outside fund managers, including Mario J. Gabelli’s GAMCO Investors Inc., have licensed the right to sell NextShares. But large broker-dealers have not yet indicated that they’re taking the steps to offer them to financial advisers.
Investors will need to be informed by broker-dealers of the unique qualities of the funds when they trade, and they will place exchange orders in a way that differs from stocks or ETFs.
EXPENSIVE UPGRADES
That could involve significant and expensive upgrades to the technologies that enable advisers to access and trade securities and other investment products on behalf of their clients, industry officials said. Intermediaries such as financial advisers will be primarily responsible for selling these funds to investors, not the fund managers. (Eaton Vance has said the upgrades will not cause a significant expense.)
Now, in addition to revenue-sharing payments, Eaton Vance is offering broker-dealers a novel payment to help support their technology upgrades.
The backers of NextShares want to cause the extinction of mutual funds, a lucrative product for broker-dealers, and replace it with a product they say is cheaper for investors.
News that Eaton Vance would offer payments to broker-dealers was first reported by Reuters.
NextShares combine characteristics of mutual and exchange-traded funds. Like mutual funds, investors purchase shares in the fund at a price equal to the value of their underlying securities, plus a transaction fee. Like ETFs, they trade on exchanges and could benefit from the tax and other cost efficiencies associated with those products.
Most traditional ETFs are not actively managed. Many active managers resist offering the products because they would have to regularly disclose the stocks, bonds and other investments they buy and sell. NextShares are not bound by that requirement.
EARNING REVENUE
But broker-dealers often earn revenue on accounting and other back-office administration of mutual fund accounts as well as the distribution and service fees generally collected by fund distributors and paid out to broker-dealers. Those fees are known by the regulatory rule that approved their use, 12b-1.
NextShares lack a similar well of potential revenue.
In order to commit to those upgrades, broker-dealers will need to see that consumers — both advisers and their clients — actually want the products, which are also known by the generic name exchange-traded managed funds.
U.S. securities regulators first announced approval of the NextShares concept in November.