August 14, 2013

Edward Jones ‘Not Altering Direction of Ship’ With Proprietary Fund, Says Exec

Bond fund designed for lower fees and simpler management changes, the broker-dealer says

Edward Jones said Wednesday that it was introducing its own fixed-income mutual fund to clients using its fee-based platform, a move that the St. Louis-based broker-dealer says represents a course correction rather than a radical shift in corporate strategy.

Steve Seifert“We are not altering the direction of the ship and are putting the needs of our clients first,” said Steve Seifert (left), principal with the firm’s investment-advisory operations, in an interview with ThinkAdvisor. “As we continue to grow and look for the best ways to perform for our clients, this is an important step forward for Edward Jones.”

Olive Street Investment Advisers, a unit of the St. Louis-based broker-dealer, filed a prospectus for the Bridge Builder Bond Fund on Aug. 6. The fund’s subadvisors are Robert W. Baird, J.P. Morgan Investment Management and Prudential Investment Management.

Today, the average expense ratio for funds on Edward Jones’ fee-based platform, known as Edward Jones Advisory Solutions, is more than 50 basis points. The prospectus states that the proposed fixed-income fund would have an initial fee of 38 basis points.

“This is not a for-profit initiative,” Seifert said, “so the opportunity is there to realize lower expenses for clients relative to the average core bond fund in the program today.”

The platform currently has about $100 billion in client assets out of total client assets of roughly $700 billion, or about 14% of total client assets. Edward Jones Advisory Solutions, introduced in 2008, is now the fourth-largest mutual funds advisory program in the country, according to the firm, and has close to 500,000 accounts.

“A basic tenet of our program is that we do not want our research department to be encumbered by competitive issues,” Seifert said. “It works on what makes most sense for our clients.”

The new bond fund will be available only to the firms' fee-based clients, according to the privately owned Edward Jones, which has about 12,000 advisors. Plus, its structure means that research staff can look more critically at money managers working on the fund and choose from a wider variety of managers to contribute to the fund, the broker-dealer says.

Also, the new fund should “alleviate some challenges for clients,” he notes, “especially when we have to remove or replace a money manager.” Typically, these shifts would set off a taxable event, for instance.

“With the subadvisor structure, we can make changes in the core-bond space, in terms of managers, without this being a taxable event or saleable event for the client,” added Seifert. “At the end of the day, it gives us access to those managers that our research department has the most conviction in, without being constrained by capacity limitations.”

Culture Shock?

Still, Edward Jones' move into the world of proprietary products is causing some experts to scratch their heads.

“It’s an interesting development, because the days of the wirehouse firms manufacturing and distributing their own funds are long gone,” said Mark Elzweig, a New York-based executive-search consultant, in an interview. “Everyone these days is very sensitive to potential conflicts of interest.”

But Seifert, who is in his 25th year with the company, says the client-centric culture of Edward Jones “is rooted pretty deeply.”

“In the past, our intent was never to be a product manufacturer,” he explained, “except when client needs would cause us to move in that direction, and there was no appropriate solution in the marketplace.”

Scott Burns, director of fund research for Morningstar, has a bit of a split opinion on the matter.

"On the one hand, this is interesting because it’s about them entering the fund business," Burns said in an interview. "But on other, they are already doing this to a certain extent, as they run a lot of fund-of funds wrap programs already on their internal platform."

The fund expert, who says he looks at the investing world with a "vehicle-agnostic view," believes Edward Jones is just "delivering a particular set of strategies, a fund of funds, wrapped it in a ‘40 Act mutual fund that's being made available on its platform."

As for the motivation behind the proprietary product, "It’s possibly easier to investment in due to a lower minimum, say, and easier to manage from the back office, since all investors are in one vehicle as opposed to being in separate accounts," explained Burns.

References to Edward Jones’ lack of proprietary products on its website are “in the process of being revised,” the company says.

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Check out Edward Jones to Recruit 450-500 Military Vets in ’13 on ThinkAdvisor.

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