On the latest episode of Nate Geraci’s ETF Prime, VettaFi’s financial futurist Dave Nadig discussed recent SEC regulatory initiatives and the potential impact on advisors and ETF issuers. Goldman Sachs Asset Management’s Wilson-Elizondo highlighted their approach to ETF model portfolios. Natixis’ Elward explained the merits of active management utilizing the semi-transparent ETF wrapper.
SEC chair Gary Gensler is “taking no prisoners with his regulatory approach,” according to Geraci, who dug into two big rule changes that could have a huge impact on the ETF space.
Nadig concurred that Gensler has been aggressive in his approach but noted that there’s been a steady drip of well broadcasted activity in the space since the ETF rule passed. He said, “my big issue right now would be we’ve got a lot of activity going on right now around things that frankly don’t seem like such a big deal to me.”
Geraci thinks Gensler has caught people off guard with how fast he’s been moving. Nadig doesn’t think that the pace has necessarily been that fast, just that more of it has been happening within the ETF sandbox.
The Compliance Officer Full Employment Act of 2022
One new rule would “prohibit registered investment advisors from outsourcing certain services and functions without conducting due diligence and monitoring of the service providers.”
Nadig joked, “it’s the compliance officer full employment act of 2022.” He continued, “the problem with this is it is very disproportional in terms of how it will effect different advisors’ practices.” Nadig thinks that one of the main reasons we’re in a golden age of dynamic and interesting advisor practices is that it is relatively easy to be a small RIA these days. The new rule raises the bar significantly, making it challenging for small RIAs to thrive. “The requirements here for both due diligence and even more to the point, monitoring, going back to and assessing again whether or not this provider who is just doing CRM for you but manages to check one box, whether their security protocols are updated every year. It’s a pretty invasive and intrusive piece of rule-making,” said Nadig.
The target here is likely a few narrow use cases. “I feel like there are several things that got mashed together here,” Nadig observed, “I’m hopefully that in the comments section we can tease apart the actual business of being an FA and maybe exclude most of that.”
Geraci and Nadig think this rule has potential to be a massive headache for smaller advisors. “I think this is one of the silliest pieces of rule-making I’ve seen. I get where it came from, it seems like a thing people should be concerned about, but to your point, Nate, there’s so many checks and balances on this stuff already,” Nadig said.
Regulatory Initiatives Around Prospectuses
A rule that was recently approved would require mutual funds and ETFs to “transmit concise, visually engaging shareholder reports and to promote transparent and balanced presentations of fees and expenses in investment company advertisement.”
Nadig sees this rule as making a lot of sense once you read the actual rule-making part and weed out the narrative. “Really what this is about is changing how the summary prospectus presents fee information.”
Going over the many tweaks in the new ruling, Nadig noted, “it’s all pretty minor, it’s all designed to bring all of these cost impacts way further forward literally further into the front of these documents.” Nadig is a fan of standardizing these, as very few people read prospectuses given how hard they are to read.
Asked by Geraci if this will impact smaller issuers more, Nadig said he didn’t think that was the case. “There’s not a lot of new here – it’s just different,” he said. “This standardizes things and makes it easier.”
Proxy Best Practices
A few weeks ago, Charles Schwab announced that they were piloting a new polling solution where they would aim to put some power into the hands of shareholders when it comes to proxy voting.
“My opinion is this is great. It’s a great first step,” Nadig said, but also noted that “it seemed like baby steps.” Quibbles aside with some of the process and implementation Schwab is starting with, Nadig affirmed that this a promising start, tying into this current moment where stewardship is suddenly mattering a great deal to many investors. “All of sudden, people seem to care. I actually think this is a natural reaction to the perceived zeitgeist in the developed world that corporate power seems to be mattering more than at any time any of us can remember,” Nadig continued.
There have always been corporations that can wield enormous power but Nadig observed that it feels like that power is more than at any other point. “Look at what Elon Musk gets away with in terms of what he’s doing at Twitter right now,” Nadig pointed to the recent story about Musk moving 50 engineers from Tesla over to Twitter – a private company that has nothing to do with Tesla. “We hang on the every word of major CEOs – this is not normal.”
Though there are hurdles to allowing shareholders to vote through their funds, Nadig believes these hurdles can be knocked down in a few years. Schwab’s move could be seen as a canary in the coal mine. Geraci and Nadig are sympatico on this, with Nadig making the case that advisors should pay attention to this, “corporate power is going to become an issue particularly for wealthy clients.”
Model Model Portfolios
Geraci was joined by Wilson-Elizondo to dig into model portfolios. Prior to joining Goldman Sachs, Wilson-Elizondo was at Vanguard and has a storied career. She noted that Goldman’s multi-asset solutions team has $14 billion in model assets under management.
“What I think really differentiates us is we use the same exact investment chassis that we do for our Institutional OCIO business, which is actually one of the largest globally we’re we’re servicing some of the world’s largest corporates,” Wilson-Elizondo said.
According to Geraci assets in models have doubled over the past 5 years and are expected to hit $10 trillion by 2025. “This is an incredible and growing strategic business for us,” Wilson-Elizondo pointed to how beneficial models can be to advisors. Embracing models gives advisors the ability to partner with Goldman Sachs, which frees up time that can be better spent with clients.
Getting Transparent About Active Semi-Transparent
Natixis uses a multi-affiliate model, using 8 U.S. affialiates and 12 international affiliates. With $1.1 trillion in assets, they leverage the specializations and talents of their affiliates to create products that play to their affiliate’s strengths.
“For us it all comes down to understanding what our financial advisors are interested in,” Elward said. They determined that the active semi-transparent wrapper is what their clients are looking for, creating four ETFs: The Natixis ETF Trust (LSST ); the Natixis Vaughan Nelson Select ETF (VNSE ); the Natixis U.S. Equity Opportunities ETF (EQOP ); and the Natixis Vaughan Nelson Mid Cap ETF (VNMC ). LSST is a 5-star Morningstar product. Elward also boasted about VNSE’s exceptional performance, spanning both risk on and risk off markets.
Asked by Geraci if cloaking holdings helps performance, Elward said, “our goal was to allow more of our portfolio managers who had concerns about predatory investors front-running or free-riding their trades, so with that concern, they would only enter the ETF market if we could use active semi-transparent ETFs. So that was our basis for doing it.”
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