In early 2015, the FCC approved rules that allow the unfettered distribution of content on the internet, effectively prohibiting the concept of tolls by providers of the internet infrastructure. In a separate but parallel universe, the Eaton Vance NextShares product is explicitly being held up for tolls by the providers of the distribution channels to the investor community, the Broker/Dealers. No surprise there. But it does beg the question, “Who, exactly, put the brokerage industry in charge of determining what financial products see the light of day?” Is this really the most responsible way to provide financial services products to investors? Particularly new and innovative products?
The B/D resistance, at least in the media, is being framed as “operational challenges.” It is not unusual, and in fact it’s pretty typical, to get significant pushback from operations teams when launching new financial product packages. Sometimes there really are new operations protocols that need to be implemented, and operations staffs, as you would expect, tend to be less focused on innovation and more on doing a great job with the procedures already in place. So there can be quite legitimate concern about new processes and expenses.
And sometimes, organizations use ops as something to hide behind when they don’t want to say what they mean about the business reasons for saying no to something new. In the case of NextShares, we think the resistance is mostly revenue-related. As in, mutual funds have rev share, ETMFs don’t.
It’s unfortunate that Eaton Vance, after having done such a great job on the product innovation side, did not line up a big distributor or custodian as launch partner – a shop not wholly dependent on traditional brokerage rev share. We could see Envestnet in that role, or Pershing. Some others, as well. Generally, the B/Ds tend to wait until one brave shop has taken a leadership role (i.e, accepted the inevitable margin erosion on the product side and figured out a non-compensable revenue offset) and then they all jump in using the same/similar model.
We expect that the Eaton Vance team was wary of irritating the B/D relationships they have in place now in their ETMF rollout. Understandable. But unavoidable, too. The ETMF is a groundbreaking product package – we’ve said that before – because it solves the active money management problem outside the shareholder services-heavy traditional mutual fund model. But it is not a package that is particularly helpful to the revenue streams of the Broker/Dealers. Something it shares with ETFs. The only other option is to take it direct. Talk about causing channel conflict. Not to mention the expense of getting to scale. We don’t see this as a viable option in the near term.
So rather than pay to solve a “systems” problem at the B/Ds (which probably doesn’t exist and is impossible to scope), and in so doing start down what may become a very slippery slope, we think investors both in the company and in the funds would benefit greatly from NextShares focusing on building out a distribution model that brings ETMFs to advisors who are likely users – those managing advisory accounts – and does not destabilize the current set of B/D relationships. There are lots of ways to do this, but it will require distribution innovation.
Platform neutrality for financial products seems to be a third rail for manufacturers and regulators in our industry. Platform neutrality for movies and other internet media was important enough for the manufacturers to agitate about and for the FCC to address. Interesting.
