How ETFs may ultimately kill mutual funds

Chaikin Analytics CEO Carlton Neel and PineBridge Investments Chief Risk Officer Kamala Anantharam are among the executives who discussed industry regulations with Money Management Executive.
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Are mutual funds in a death spiral?

Perhaps, says Chaikin Analytics CEO Carlton Neel. The SEC's recently passed ETF modernization rule, which expands choice in the market, "is probably the end of the mutual fund industry," Neel predicts.

Money Management Executive contacted industry leaders to get their take on this and other regulatory trends, including cybersecurity, data protection, risk management, retirement savings and fiduciary standards.

"Ultimately, we as asset managers have to satisfy our clients and our regulators, too," says PineBridge Investments Chief Risk Officer Kamala Anantharam.

For more on what Neel, Anantharam and other execs have to say, turn to our special report.

Chaikin Analytics CEO Carlton Neel
The end of the mutual fund industry?
The SEC passed the landmark Rule 6c-11, commonly known as the ETF Rule on Sept. 26. The rule most notably allows ETFs to come to market more quickly without the delay of applying for individual exemptive relief, which will likely lead to a further expansion of the number of ETFs. This may crowd the space and potentially confuse clients with even more choice.

This regulatory change relaxes the rules on actively managed ETFs, thus opening the door to a proliferation of managed ETFs — those not tied to a specific index, which are currently far more common than truly active ETFs.

As a result, financial advisors and other clients need a systematic approach to building better portfolios. The rule streamlines the regulatory environment, giving smaller fund companies a better understanding of compliance and legal costs. Instead of managing a mutual fund, an advisory company can conveniently and cost effectively launch a lower-cost ETF, benefiting the end client and the advisors who recommend the funds to clients.

The tax efficiency of ETFs over mutual funds is undeniable. Furthermore, their management fees are consistently lower, and now the regulatory burden (the need for exemptive relief) has been lifted. At the risk of overstating the magnitude, this could be the death knell of the mutual fund industry.

That said, with additional proliferation of ETFs from various issuers, the landscape will get complicated. Our approach at Chaikin Analytics has been to create an ETF rating system that helps advisors and their clients distill the complex landscape to find ETFs.

We believe third-party research tools overall will be more critical than ever to help focus advisors on ETFs that best serve client needs.

PineBridge Investments Chief Risk Officer Kamala Anantharam
Satisfying clients and regulators

The SEC's recent enacting of liquidity risk management rules for asset managers was an important step for the U.S. money management industry. New regulations and requirements added another level of accountability for managers, but added complexity to the wide range of liquidity rules required by global regulators in their own jurisdictions.

This raised the question for us as a global firm: How do we find the most efficient way to comply with a range of global regulatory reporting requirements, maintain a high level of transparency, ensure we are monitoring across our asset classes and have the strongest oversight structure in the most efficient way?

What that meant for us was making sure we took a holistic and convergent approach to liquidity risk management, globally. We had a global liquidity committee that not only ensured compliance with requirements, but beyond that stayed ahead of global regulatory changes in a proactive way.

It's important to fully understand the commonalities of the global rules and the best practices outlined for each as it pertains to governance, oversight, monitoring and reporting. Then these must be enacted as the standard for global operations and risk management. To manage costs under this environment, you must deliver your information in a sophisticated way, and use innovation to acquire and analyze the needed information in a cost-efficient manner as well.

Ultimately, we as asset managers have to satisfy our clients and our regulators, too. Another important component of this is ensuring portfolio managers have the liquidity data, bucketed by asset class as classified by the SEC, available to them daily so they are also able to address risk management with clients.

As managers, by looking at liquidity risk holistically and globally, we can ensure we are aligned with our regulators in protecting the best interests of our clients.

Foreside Senior Managing Director Jennifer E. Hoopes
A catalyst for innovation

It's been a busy regulatory stretch for the asset management industry — from 2008 to the present. At Foreside, we see regulation as a catalyst for innovation. As regulators continue to enact substantive regulations with significant impact on the industry, now is the time for asset managers to turn to technology.

In addition, managers should also identify areas where they can outsource, particularly in compliance, so they can focus their efforts on what they do best — distribution and managing assets.
Key areas for asset managers to consider for the upcoming year are cybersecurity and data protection, ESG, liquidity risk management and fiduciary obligations.

With the passage of the General Data Protection Regulation in the EU, and more U.S. states passing privacy legislation such as the California Consumer Privacy Act, asset managers must have robust policies and procedures, along with appropriate technology, to protect client data.

Liquidity risk management continues to be at the forefront of regulators' minds as well, both in the U.S. and abroad. Technology, as well as appropriate policies and procedures, should be in place to address liquidity requirements.

The SEC's Regulation Best Interest rule places requirements on asset managers dealing with natural persons, and imposes multiple disclosure obligations and management of conflicts of interest that all asset managers need to understand and address. Ensuring they have the right policies in place and communicating those to their sales teams will be crucial for asset managers.

ESG will also continue to dominate the conversation. The European Securities and Markets Authority is directly addressing the use of ESG in funds, while the U.S. continues to lag behind. The Trump administration has even raised concerns about ESG conflicting with a manager's fiduciary obligations. Asset managers will need to be prepared to address potentially conflicting requirements and investor demands with respect to ESG.

It will be important to keep an eye on developments in this area to determine the best approach.

Natixis Investment Managers Head of Retirement Edward Farrington
Expanding retirement savings

Every year we take a snapshot of retirement well-being in developed nations across the globe. The 2019 Natixis Global Retirement Index found the U.S. in a more precarious position than last year.

Global risks weighing on retirement security include low interest rates, longer lifespans and the high cost of climate change. The good news is that Congress is considering the most substantial change to retirement plan access since the 1990s.

The SECURE Act is aimed at easing the way businesses with 100 employees or less help workers save for retirement. The bill, which passed the House of Representatives by a wide margin, would aid smaller businesses by easing previous restrictions on multi-employer plans and giving tax credits to small business owners who adopt a new MEP. The bill would affect the structure of Stretch IRAs, which currently allow people to stretch an inherited IRA over their lifetime.

The SECURE Act would shorten the required payout period to 10 years in the House version, or five years with a $450,000 upfront exemption in the Senate version. To be sure, this change would represent a sizable tax burden for those who inherit large IRAs. However, the rule addresses substantial burdens faced by small business owners.

If passed by the Senate, the bill would help workers save for a longer time and would make it easier to port retirement savings between employers. By giving retirement plan access to millions more Americans, retirement security can rise. Money managers and advisors will then have the important job of working to expand and preserve retirement savings for these new savers.

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Asset management Financial regulations SEC ETFs Mutual funds Portfolio construction Money Management Executive