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

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.

“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.

Hussman: Gonna Party Like It’s 1929

Worries about the Federal Reserve retreating from monetary stimulus make little sense as a cause of the market’s recent slide, suggesting other factors are at play, according to John Hussman in his current comment to Hussman Funds shareholders.

Rather, the portfolio manager and former finance manager suggests that sentiment has shifted from risk seeking to risk aversion and reiterates his long-held view that current market conditions match those that have preceded panics and crashes of the past.

Hussman (left) ridicules the view that a hawkish Fed is the cause of the market’s doldrums, saying the Fed actually confirmed its dovishness and that investors “just got a handwritten, perfumed note from Bernanke to keeping buying.”

All the Fed chairman actually said was that, despite a balance sheet that is leveraged nearly 60 to 1 against its capital, “the Fed might possibly reduce the rate at which it expands that position…There was no talk of risks. Not a whisper about diminishing benefits….While QEternity will become QEventualTaper, the Bernanke Fed does not actually contemplate stopping until the unemployment rate comes down.”

Consequently, Hussman argues that other factors—such as credit strains in China or expectations of disappointing earnings—may be spooking investors. “But whatever the reason, investors appear to be shifting from risk seeking to risk aversion,” he says.

And that new mood is consonant with Hussman’s longstanding warning that market history is not on the side of stock market buyers today.

Besides today, Hussman sees just four other times—1929, 1987, 2000 and 2007, none joyous for investors—marked by a combination of deterioration in interest-rate securities, “overvalued, overbought, overbullish conditions” and a broad deterioration in market internals.

Indeed, the former finance professor and fund manager’s reputation got a boost from just such a warning in his July 30, 2007, market comment.

“To believe that the present instance is a good time to accept significant market risk, one has to rely on the premise that this time is different,” Hussman says in his current note, adding that valuations today are “near or above every historic bull market peak except 1929, 2000 and 2007.”

A difference between those crashes and today, however, is that the Fed was tightening whereas today it merely hints of tapering.

Hussman is unimpressed with this distinction:

“The Fed is unlikely to raise its policy rates (Fed funds, discount rate) for years, but it seems unlikely that this will be sufficient to forestall the course of normal bull-bear market cycles. Ask Japan.”

Despite the vulnerability he sees for stocks, the portfolio manager actually put in a good word for bonds, saying their recent sell-off may make them a reasonable investment, “particularly if yields rise further.”

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