BrokerDealer.com update is courtesy of column from financial industry news curator MarketsMuse
MarketsMuse ETF update profiles a novel “payment-for-order-flow” approach on the part of ETF issuers who vie to whoo broker-dealers to promote their products to investors. 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. Below extract is courtesy of Reuters’ Jessica Toonkel reporting
In an unprecedented move, Eaton Vance Corp will offer to help some brokerages pay their technology costs to make the fund company’s new breed of exchange-traded managed funds (ETMFs) available to investors, Tom Faust, Eaton’s chief executive officer, told Reuters this week. ETMFs are a hybrid between actively managed mutual funds and exchange-traded funds.
The Boston-based company also plans to pay brokerage firms a share of the revenues from the sale of the funds, which Faust hopes will be available by year-end.
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Big-name firms like Fidelity Investments and TD Ameritrade told Reuters they will not sell the funds until they see demand.
Helping to cover technology costs of distributors is new, but so are the Eaton Vance products, which require brokerages to take a new kind of order from investors, experts said.
“This is the first time I have ever heard of a firm offering to pay some brokerage costs for a new product,” said Ben Johnson, an ETF analyst at Morningstar.
He said the cost of gearing up to sell the product has been a sticking point for brokers. However, a number of executives at brokerage firms and industry consultants told Reuters that questions about whether there will be investor demand, and how they will get compensated to sell the new products, are even bigger issues that could keep them from selling the funds even with the Eaton Vance offer on the table.
Faust said figuring out the economic incentives and getting the systems up and running is top of mind for Eaton Vance.
“The biggest challenge we see at this stage of the game is getting broker dealers,” Faust said. “If we are looking to launch before the end of the year, we need the broker dealers to start making systems changes and otherwise preparing themselves to offer this to clients.”
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.