On Tuesday, the Securities and Exchange Commission announced its examination priorities for 2023. The agency said it is going to focus on Regulation Best Interest, ESG, the new marketing rule, and a host of other issues. When it comes to investigating Reg BI violations, the SEC will zero in on advisors’ recommendations on complex investments such as derivatives and leveraged ETFs, and high-cost and illiquid products such as annuities and nontraded REITs. According to the division, SEC examiners analyzing Reg BI will look at investment advice and recommendations, disclosures made to clients, the processes firms have in place for making best-interest recommendations, and the kind of factors that are considered in light of an investor’s profile, including their goals and account characteristics. The report stated, “Examinations may also focus on recommendations or advice to certain types of investors, such as senior investors and those saving for retirement, and specific account recommendations, such as retirement account rollovers and 529 plans.” The division will also be focusing on the SEC’s new marketing rule, which reached its compliance date last November after taking effect in May 2021. Examiners will be looking at whether advisors have adopted written rules and procedures that “are reasonably designed” to prevent rule violations. Several experts also believe that SEC examiners will expect firms to apply Reg BI standards to ESG recommendations.

Finsum:The SEC's Examinations Division released its annual Exam Priorities this week, detailing its areas of focus for 2023, which includes Reg BI, ESG, and the new marketing rule.

There’s no question that ETFs are a popular way to gain access to the market. They’re low-cost and tax efficient when compared to mutual funds. But, according to a new research paper, ETFs are not the most profitable after taxes are paid. That distinction belongs to large baskets of individual stocks that aren't found in a fund. The paper, which was posted recently by Roni Israelov, the president and chief investment officer of NDVR, and Jason Lu, a research economist in the economic modeling division of the International Monetary Fund, sought to quantify tax-loss harvesting, the strategy of selling losing assets to offset taxable gains that arise when selling winning ones. The paper found that tax-loss harvesting produced the best results when it's used for groups of individual stocks, not ETFs. In a recent interview, Israelov said "You make more money harvesting single stocks across an entire portfolio than you do in an ETF." The paper adds to a growing body of wealth management firms that have been promoting the merits of tax-loss harvesting and boosting the case for direct indexing, a strategy in which investors chose a basket of securities that mirror an index, but is personalized to their specifications.

Finsum: A new research paper found that tax-loss harvesting produced the best results when it's used for groups of individual stocks, not ETFs, boosting the case for direct indexing.

Robin Döttling, an assistant professor of finance in the Rotterdam School of Management at Erasmus University in the Netherlands, and Sehoon Kim, an assistant professor at the University of Florida’s Warrington College of Business, authors of a recently published academic study, found that individual investor demand for socially responsible investing “is highly sensitive to income shocks” and economic stress. The professors went through mutual fund flow data and surveyed investors' views of and expectations for sustainable investing. The study focused on the periods immediately before and after the COVID pandemic went global in early 2020. The results show that when times get tough for individual investors, helping to save the planet takes a backseat to selling funds that they believe may lose more during a downturn. When an economic shock results in incomes shrinking, investors become more risk-averse. In the authors’ words, “We start to view the emotional or nonfinancial appeal of ESG investing as ‘costly’ and ‘unsustainable’ if it means forfeiting returns.” However, the study found that demand for ESG investments from institutions such as pension funds remained more robust. Their actions are typically constrained by investment mandates and are often slower to respond to market shocks. In addition, those investors don’t have to face the same kind of pressures that individual investors deal with during COVID lockdowns and job losses.

Finsum:A recently published academic study conducted before and after the COVID pandemic found that individual investors sell ESG investments during economic downturns, while the demand for ESG remains robust among institutional investors.

Category: Wealth Management

Keywords: investors, ESG, covid, mutual funds