Edward Jones Tries to Dodge Pitfalls of Prop Funds
One of 2015’s most popular mutual fund families is a well-known name in wealth management, Edward Jones. The U.S. advisory shop’s push to deliver more of its proprietary Bridge Builder series to clients raked in the fourth-biggest net inflows in the industry. And that performance, says Morningstar, was good enough to top much larger asset managers – including the likes of JPMorgan, BlackRock and Fidelity.
Launching a series of in-house managed funds is hardly a unique concept.
“It’s something that everyone did in the '80s and '90s – from Smith Barney and Dean Witter to American Express,” says Russ Kinnel, director of fund research at Morningstar.
So what’s making Bridge Builder such a hit? For one, Edward Jones counts 13,799 advisors under its wing, giving it a huge distribution channel to tap into.
But as Kinnel observes, proprietary funds have something of a murky past, raising concerns on the part of both consumer watchdogs and government regulators about conflicts of interests.
“It’s a practice that can be very profitable over the shorter-term,” he says. “But in the long-term, relying too much on proprietary funds has shown a tendency in the past to blow up in a lot of brokers’ faces.”
The Bridge Builder family came out with a core bond fund in 2013, then last year launched two other fixed-income and five equity funds. In all, those funds collectively have amassed a total of more than $22.5 billion, according to Morningstar.
Perhaps more impressively, the family attracted $15.6 billion in net inflows in 2015 – despite the fact most weren’t even in existence for the entire year. Only three mutual fund manufacturers appear to have done better in generating net flows last year – Vanguard, Dimensional Fund Advisors and Metropolitan West (see chart).
Learning the lessons of the past
Bill Fiala, head of Edward Jones’ investment advisory group, says his team has studied the history of proprietary funds and gone to great lengths to make sure advisors aren’t lowering their fiduciary standards.
One of those safeguards he lists: Bridge Builder funds are using a fund-of-funds structure, which typically combine anywhere from three to five different third-party managers.
Also, Edward Jones is waiving any fees above each subadvisor’s charge for its clients. “So we aren’t profiting from these funds directly,” says Fiala. “That’s a feature we feel is important in making sure our advisors don’t feel conflicted if they choose to use any Bridge Builder funds in our advisory platform.”
The Edward Jones advisory services platform consists primarily of model portfolios managed by investment specialists in the home office.
Of the firm’s $876 billion in assets under management, Fiala estimates about $140 billion is managed on a fee basis. Of the 80-plus different models available to FAs and their clients, only about a quarter include any of the Bridge Builder family.
“If you look at it in terms of advisory assets we manage, the Bridge Builder funds only represent about 17% of our total,” he says.
The creation of such proprietary funds came from portfolio management teams and analysts at the full-service broker to tackle a growing problem, notes Fiala. Namely, that centered around the fact that as more clients arrive and assets climb, Edward Jones’ ownership stake in some outside funds was becoming quite large.
More funds, more purchasing power
By going the fund-of-funds route, where management selection is handled internally, Fiala says client assets can be spread more efficiently among a greater number of outside managers.
Indeed, he estimates that its advisory platform has added roughly 30 new fund companies since the new series came on the scene. The result, says longtime Edward Jones advisor John Peacock, is that the firm can now negotiate better deals and get institutional pricing on funds.
“The beautiful thing is that these funds are actually helping us to reduce our clients’ investment costs,” says the Pensacola, Fla.-based FA, whose practice manages $280 million.
Over time, lower expenses paid to fund managers can prove to be a major benefit in helping people reach their financial goals, observes Morningstar’s Kinnel.
But another part of Bridge Builder's success will likely be tied to each fund’s performance.
“The proof will be in the pudding,” says Kinnel. “It might take at least five years to tell whether Edward Jones’ new family of funds will prove beneficial in terms of providing clients with competitive returns.”