May 14, 2015 / 2:10 PM / 4 years ago

Exclusive: Eaton Vance to help cover broker costs on new ETFs

(Reuters) - 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 funds available to investors, Tom Faust, Eaton’s chief executive officer, told Reuters this week.

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.

The moves come as a number of industry officials question whether there will be investor demand for Eaton Vance’s new NextShares exchange-traded managed funds (ETMFs), which are a hybrid between actively managed mutual funds and exchange-traded funds.

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.”

Like traditional active mutual funds, NextShares will not be required to disclose their holdings on a daily basis as traditional ETFs must, but will trade on an exchange, like an ETF. While investors can place orders for the funds throughout the day, they will be priced according to their end-of-day net asset value.

The U.S. Securities and Exchange Commission approved the NextShares funds last year, even as it declined to approve other forms of so-called non transparent active ETFs.

Faust said the funds will be cheaper, more tax efficient and better performing than mutual funds. Eaton Vance plans to launch 18 mutual funds that on average charge 0.1 percentage point less per year than the institutional shares of their mutual funds.

Institutional shares of Eaton Vance’s equity funds on average cost 1.02 percent of assets a year, slightly higher than the industry average of 0.94 percent, according to Morningstar.

Though Eaton Vance has met skepticism from brokerage firms, it has made money licensing the structure of its NextShares to asset managers, such as Gabelli Investors, which will use it to launch their own branded funds. Eaton expects within the next few weeks to announce three more firms signing up.


Brokerage firms that want to offer these funds will have to change their trading systems to accommodate the new orders. In March, Nasdaq OMX Group, the company that runs the exchange on which the funds will be traded, provided brokerages with information on what steps they need to take to allow investors to trade the funds.

It is a bit of a “chicken and egg” issue for Eaton Vance because investors will not ask for the funds until they know about them, but they will not know about them unless brokers tell them, Faust said. Eaton Vance launched an ad campaign last week promoting NextShares, which includes ads in a number of trade and industry publications that will run through the fall.

“At this stage, there is limited awareness of the product and investors are not currently asking us to trade ETMFs when they become available” a Fidelity spokesman wrote in a e-mail to Reuters.

Eaton Vance said it will reach out to brokerage firms over the next several weeks and discuss offsetting some expenses for firms that are first-movers, Faust said.

One brokerage firm has already told Eaton Vance that it would cost around $200,000 to sell the funds, Faust said.

“We don’t think this is an overwhelming task for broker-dealers,” Faust said.

Eaton Vance has not said how much of the technology costs it will bear and how much revenue share it will offer. “Those conversations will begin in the next several weeks,” Faust said.

Reporting By Jessica Toonkel; editing by Linda Stern and Nick Zieminski

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