Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. We haven't done this
Speaker 1: for a while.
Speaker 2: We haven't seen each other in two weeks, I know.
Speaker 2: But after like ten days of going by your desk
Speaker 2: and everyone's like, no, we don't know where she is.
Speaker 1: Oh my god, Like I told them all, just if
Speaker 1: that comes by, I'm not here. No, I don't know
Speaker 1: where I've been. But now we're back in the booth.
Speaker 2: Back in the booth. Hello, and welcome to The Money
Speaker 2: Stuff Podcast. You're a weekly podcast where we talk about
Speaker 2: stuff related to money. I'm Matt Levian and I are
Speaker 2: at the Money Stuff comn for Bloomberg Opinion.
Speaker 1: And I'm Katie Greifeld, a reporter for Bloomberg News and
Speaker 1: an anchor for Bloomberg Television.
Speaker 2: It's good to be back, Katie, It's good.
Speaker 1: To be back.
Speaker 2: What's gone on today?
Speaker 1: Well, we're going to talk about incredited investors what that is?
Speaker 1: Should it exist? We'll talk about beamstocks growing up or Meme.
Speaker 2: Investors investment firms.
Speaker 1: True, that's true, and we're going to talk about naughty esg.
Speaker 2: It's less fun that it's accredited investors.
Speaker 1: Yeah, what are they? So? Currently two hundred thousand dollars
Speaker 1: income is what you need to be or a one
Speaker 1: million dollar net worth if I'm an individual.
Speaker 2: Yeah, so it's all sorts of like bars. Right, So,
Speaker 2: like the way it sort of like casually works is
Speaker 2: that you can invest in private stuff if you're an
Speaker 2: accredited investor, and you can and anyone can invest in
Speaker 2: public stuff. And the accredited investor bar used to be
Speaker 2: like I don't like one or two or five percent
Speaker 2: of households, and now it's like twenty percent of households
Speaker 2: because it's not index to inflation. So now you need
Speaker 2: to have an income of two hundred thousand dollars a
Speaker 2: year or three hundred thousand dollars for a couple, or
Speaker 2: have networth of a million dollars, or have a series
Speaker 2: seven or serious sixty five lescens. So if you have
Speaker 2: like the securities license, you can be an accredited investor,
Speaker 2: and if you're an accredited investor, you can invest in
Speaker 2: various sorts of private investments, mainly like startups. And people
Speaker 2: don't like these rules. Yeah, I should say, I read
Speaker 2: about this the other day, and he'll point out they're
Speaker 2: actually two like higher bars. So there's the bar for
Speaker 2: investing in hedgehunds and private equity firms, which is basically,
Speaker 2: if you're an investment manager and you want to charge
Speaker 2: performance fees like hedgehunds and private equity do, you need
Speaker 2: to have qualified clients, which basically means like a two
Speaker 2: point two million dollar networth, So it's a little bit
Speaker 2: of a higher bar than the accredited investor bar. And
Speaker 2: then the other thing is like there's certain kinds of
Speaker 2: private investments that are only open to quibs qualified institutional buyers,
Speaker 2: which basically means an institution with at least one hundred
Speaker 2: million dollars. So like those are the higher bars, but
Speaker 2: anyone can invest in startups in theory if they're an
Speaker 2: accredited investor, which means, you know, a two hundred thousand
Speaker 2: dollars income, which is like not that uncommon these days.
Speaker 2: Like one thing I pointed out is that like the
Speaker 2: number of people who meet that qualification is about equal
Speaker 2: to the number of people who own stocks directly. So
Speaker 2: it's like the investor class is pretty much overlapping with
Speaker 2: the accredited investor class. There's this perception that like these
Speaker 2: days the good investments are the private investments. Yeah, like
Speaker 2: we were talking about a lot, right, and so they're like,
Speaker 2: why is it that, like people who don't have a
Speaker 2: lot of money can't get the good investments? And then two,
Speaker 2: why is it that, like the term accredited just correlates
Speaker 2: with the wealth, Like it sort of seems like accredited
Speaker 2: means good or smart.
Speaker 1: Or perhaps qualified In some right.
Speaker 2: It seems unfair that qualified would just be in like
Speaker 2: having enough money, and so there's always this push to
Speaker 2: open it up for like a test. So it used
Speaker 2: to be only the money qualification, and now if you
Speaker 2: have certain securities licenses like this Ery seven, you can
Speaker 2: also be an accredited investor because you're, like, you know,
Speaker 2: if you like work at an investment bank, like, you're
Speaker 2: probably like you know, probably know as much as the
Speaker 2: average bear about like investments. And so the most recent
Speaker 2: news is that, like the Senate is pushing for a
Speaker 2: bill to make the sec write an exam that anyone
Speaker 2: can take, and if you pass the exam, then you're
Speaker 2: an a credited investor and you can buy private stuff.
Speaker 1: This scratched a memory up to the surface. This is
Speaker 1: slightly different, but it's related. In April twenty twenty two,
Speaker 1: FINRA called for comments on whether they should introduce knowledge
Speaker 1: checks before you know, retail could buy what they defined
Speaker 1: as complex products, which basically meant like leverage and all
Speaker 1: these like funky ETFs that we talk about on this
Speaker 1: podcast sometimes. And that was met with outrage. People hated
Speaker 1: that idea.
Speaker 2: Right, because that's like those products are public product. Anyone
Speaker 2: can buy those, right. You don't have to be a
Speaker 2: credited investor to buy a triple LEBRITYTF or zeroed A
Speaker 2: options on socks. There's all sorts of stuff that is
Speaker 2: available to the public, which basically sort of means like
Speaker 2: it's meant disclosure requirements, right, there's not formally supposed to
Speaker 2: be like really substantively of like whether it's a good investment.
Speaker 2: You know, there's like a certain amount of pressure on
Speaker 2: stuff to not be crazy stuff. But like in general,
Speaker 2: there's a lot of public stuff that is risky, and
Speaker 2: there's this weird situation where a lot of public investments
Speaker 2: are very risky and dangerous and sort of hard to
Speaker 2: understand and anyone can buy them. Yeah, And then there's
Speaker 2: a lot of private market stuff that's like like space
Speaker 2: stuck that like you're not allowed to buy because it's
Speaker 2: limited to people with at least two hundred thousand dollars
Speaker 2: of income. It's weird that anyone can buy the products
Speaker 2: that Finnerun's toy strict and then like they're trying to
Speaker 2: expand the qualification for the act.
Speaker 1: Time again they opened it up for comments. They received
Speaker 1: more than twelve thousand comments, which was pretty wild. That
Speaker 1: shattered the record. I don't know if it's since been shattered,
Speaker 1: if they've opened up comments to anything else crazier, but
Speaker 1: usually they get like a couple dozen comments, so this
Speaker 1: was wild. It is interesting, you know, the disclosure base
Speaker 1: sort of whatever is how we do it now. I
Speaker 1: don't know how it want to talk about that, but basically,
Speaker 1: you can market all of this crazy risky stuff as
Speaker 1: long as you put in like big bright letters that
Speaker 1: you might and probably will lose money on that. That's fine.
Speaker 2: Yeah, although like a weird aspect of that is you're
Speaker 2: often buying it through your app, right, Yeah, Like there's
Speaker 2: no requirement that you've read any of the disclosure The
Speaker 2: firms can't market it without all the warnings disclosures, but
Speaker 2: you can buy it, you know, you pushed button.
Speaker 1: That's what one of the points that Finn made at
Speaker 1: the time that since these rules were put in place.
Speaker 1: There's a lot more self directed investors in the market
Speaker 1: now that aren't necessarily going through a financial advisor. There's
Speaker 1: a lot of people just clicking around on robin Hood
Speaker 1: for example. That's a deep tease to what we'll be
Speaker 1: talking about next. And that's why they floated the idea
Speaker 1: of a knowledge check that was unpalatable. It's interesting that
Speaker 1: the Senate is pushing for some sort of test now.
Speaker 2: Yeah, and like private investments are the opposite, Right, you
Speaker 2: can't buy them on it app. You do have to
Speaker 2: you know, essentially buy them through a broker or a
Speaker 2: financial advisor, right, And there is some history of skepticism
Speaker 2: about how aligned the interests of some of these brokers
Speaker 2: are with their clients. Right. I mean, there's a lot
Speaker 2: of private market stuff that is very high fee has,
Speaker 2: like lots of layers of fees for products that like,
Speaker 2: you know, you could probably do better by buying a
Speaker 2: you know, index CTF, but like the advisor gets paid
Speaker 2: more for selling you the complex product. And making people
Speaker 2: pass a test might make them more resistant to getting
Speaker 2: pitched bad products, but it might just make them feel
Speaker 2: more sophisticated and then make the advisors salivate of even
Speaker 2: more over selling them bad products. Right, I don't know
Speaker 2: about these tests.
Speaker 1: You know, there's not a lot of teach one.
Speaker 2: I would I wrote, I would love to write one, right,
Speaker 2: I would also love to I love taking standard I
Speaker 2: s house but that tracks. Yeah, but like it would
Speaker 2: be so fun to write this list. But like just
Speaker 2: you sort of know what it would be like. It
Speaker 2: would be like, you know, like compound interest and like that.
Speaker 2: It would be like sort of like financing trivia. He
Speaker 2: would potentially give you the illusion of being sophisticated and
Speaker 2: being able to sort of see through. Yeah, but that's
Speaker 2: that's all your financial advisor needs, sow you sort of
Speaker 2: ruinous product. If you were starting from scratch, you would
Speaker 2: not like divide the investment universe this way, right, Like
Speaker 2: you would not let people buy all of the risky,
Speaker 2: weird products that Fenner is nervous about. When the Senate
Speaker 2: talks about this, they talk about like, you know, investing
Speaker 2: in like local small businesses, right, Like you can't like
Speaker 2: those they are exemptions to the rules. But in general,
Speaker 2: it's kind of like difficult and risky for small businesses
Speaker 2: to raise money from like people in their community. Because
Speaker 2: like there are you have to bet SEC exemptions, like
Speaker 2: there's a credit investor tests, and it might be nicer
Speaker 2: if more people could make those sorts of private investments.
Speaker 2: And those investments in some ways seem like more appealing
Speaker 2: or more like wholesome than like triple levertyts or whatever. Right,
Speaker 2: the complex products that that Fenner is right, this is
Speaker 2: more of a niche comment, but I liked it. So
Speaker 2: I used to be a convertible bond underwriter, right, And
Speaker 2: like a lot of bonds are done under an SEC
Speaker 2: rule called rule one forty four A, which basically means
Speaker 2: that you have to be one hundred million dollar institution
Speaker 2: to buy them, right, And it just like it makes
Speaker 2: their disclosure a little bit easier. But one reader was like,
Speaker 2: why am I allowed to buy the stock of a
Speaker 2: public company but not their one forty four A bonds?
Speaker 2: The one forty fairy bonds are sort of by definition safer, right,
Speaker 2: they're like senior in the capitol structure, but like he's
Speaker 2: not allowed to buy them because he doesn't have a
Speaker 2: hundred million dollar fund, right, But like anyone can buy
Speaker 2: the stock. So there's a lot of stuff like that
Speaker 2: where it's like what gets treated as like a risky,
Speaker 2: dangerous thing for retail investors, and what gets treated as
Speaker 2: like no problem, anyone can buy that by clicking a
Speaker 2: button just doesn't track any like economic or disclosure reality.
Speaker 2: So I don't know, I don't have a good solution.
Speaker 2: I've written my bad solution, which is that the SEC
Speaker 2: should give out a certificate of dumb investment where you say,
Speaker 2: I know I'm buying something dumb, and they slap you
Speaker 2: and you say, no, I really want to buy something dumb,
Speaker 2: and then like they give you the certificate. But like
Speaker 2: the important thing in my original proposal was that then
Speaker 2: if the thing goes to zero, you're not allowed to complain,
Speaker 2: like to the press or to anyone, right because like
Speaker 2: a lot of this stuff, it's like retail investors buy
Speaker 2: this terrible thing and I realized that is a terrible thing,
Speaker 2: Like no, no, it's gonna be great, and then they
Speaker 2: buy it and goes to zero and they're like, oh
Speaker 2: I was defrauded. It's like, oh, you knew it was
Speaker 2: a terrible thing. So the idea of like making people
Speaker 2: sign a form saying they know they're being dumb is
Speaker 2: appealing to me because when it would sort of like
Speaker 2: obviate some complaints. And then two, like all this stuff
Speaker 2: about accredited investors, like it comes from a place of
Speaker 2: like thinking, those are the smart investors who get access
Speaker 2: to the good stuff, and I suspect that the real
Speaker 2: experience is kind of the opposite, where like those are
Speaker 2: the investors who get pitched the expensive, weird stuff. And
Speaker 2: when you make it a test of financial sophistication, then
Speaker 2: like people want to take that test. They want to
Speaker 2: pass that test, and then they passed. This was like, oh,
Speaker 2: I'm so sophisticated, and then they buy the worst stuff
Speaker 2: because like they have this illusion of sophistication, Whereas if
Speaker 2: you make them sign of things saying this is dumb,
Speaker 2: like it's less aspirational and like maybe maybe like deters
Speaker 2: them from buying the worst things.
Speaker 1: That's true. I mean it would be labor intensive to
Speaker 1: have to line up like a staffer to slap every
Speaker 1: single person that it's.
Speaker 2: Really a hypothetical, but like I like it, you know.
Speaker 1: I don't know, I think we should kick it around.
Speaker 1: Write the test, Matt. We didn't insult any dentists when
Speaker 1: mean stocks grow up? You know, Robin Hood, do you
Speaker 1: know Robin I remember a time when their bare case
Speaker 1: on robin Hood is that, you know, you would have
Speaker 1: all these people who use robin hood as a gateway
Speaker 1: drug and then graduate up into proper investments such as
Speaker 1: index funds, and that they migrate over to like Schwab
Speaker 1: or Fidelity for example. That hasn't really been the case,
Speaker 1: hasn't that.
Speaker 2: I mean, you and I were reading this Baron's article
Speaker 2: about how robinhood is growing up, and like the stat
Speaker 2: that I found shocking is something like ten percent of
Speaker 2: Americans have robinhood account Yeah, like American adults whatever and
Speaker 2: rest adults, and robinhood has zero point three percent of
Speaker 2: like retail financial.
Speaker 1: Assets, which is sixty five trillion.
Speaker 2: Sure, but like they are thirty three times bigger by
Speaker 2: number of people than by assets, right, Like they have
Speaker 2: a lot of people, but like a tiny fraction of
Speaker 2: those people's assets, or else they have only the people
Speaker 2: with very few assets, right or some companies. Yeah, and
Speaker 2: that does sort of suggest that that bear case had
Speaker 2: some truth to it, which is that people do the
Speaker 2: fund trading on Robinhood, but when they grow up to
Speaker 2: like their index funds, they do it somewhere else.
Speaker 1: Well, two points to that number One, the stock is
Speaker 1: up like one hundred and ten percent this year, so
Speaker 1: like in terms of it being a bare case, it's
Speaker 1: certainly not playing out in the stock market. And two
Speaker 1: that may be the case. Robinhood is working really really
Speaker 1: hard to grow up, which I find interesting. They had
Speaker 1: their Hood summit in Miami. I think it was last
Speaker 1: week or the week before, But in any case, they
Speaker 1: have all these new features that are coming out. They
Speaker 1: have this desktop trading platform. That's one thing. They're offering
Speaker 1: index options for the first time. That's kind of exciting.
Speaker 1: But I thought that this was interesting. There's one to
Speaker 1: three percent matching bonuses for investors who transfer assets to
Speaker 1: robin Hood's platform, so they'll pay you to bring your
Speaker 1: money over to Robinhood. And as of June twenty twenty four,
Speaker 1: Robinhood has provided customers more than two hundred million dollars
Speaker 1: in matches on asset transfers and retirement account contributions. That's
Speaker 1: according to the company. So they are trying to grow up.
Speaker 2: Right, It makes little sense, right, I mean, if you're
Speaker 2: a person who has like one thousand dollars robin Hood
Speaker 2: account for fun and like your retirement savings at Fidelity,
Speaker 2: and it is like, bring all your retirement savings over
Speaker 2: to us, and we'll give you one percent of the
Speaker 2: or three percent of them, Like yeah, why would you done? Right?
Speaker 2: And if you're like relatively self directed in your retirement
Speaker 2: savings or an ETFs anyway, like yeah, that's free money.
Speaker 2: There's some lock up on it where you bring the
Speaker 2: money over you you have to keep it at robin
Speaker 2: Hood for a while. So right, it's it's part of
Speaker 2: the strategy for them to go from being people's like
Speaker 2: fun money play you know, shows confetti when you do
Speaker 2: a trade account to being like their main you know,
Speaker 2: savings and investment account. The other thing that I thought
Speaker 2: was interesting about what they're doing is they're talking about
Speaker 2: getting into building out a wealth management farmware. Instead of
Speaker 2: just being self directed, they have some sort of advisory business.
Speaker 2: And that's probably not like opening branches with people, but
Speaker 2: it's like, yeah, you know, some sort of robo advising,
Speaker 2: some sort of automated you know, AI driven advising where
Speaker 2: if you are not a person who wants to watch
Speaker 2: the markets all day and be on Reddit and like
Speaker 2: sort of you know, do your own investing, but you
Speaker 2: want someone to help you do your retirement planning. If
Speaker 2: robin Hood can offer that, Like, that's just a ton
Speaker 2: of assets that you know, have to be tied to
Speaker 2: some sort of advice.
Speaker 1: Yeah. They basically want to be like the one stop shop,
Speaker 1: don't they.
Speaker 2: Which is like but you know, with like Fidelity and
Speaker 2: all these people like to have some roots and being
Speaker 2: self directed discount brokrages, but they're all like, you know,
Speaker 2: trying to help people, you know, give people advice on
Speaker 2: their retirement accounts.
Speaker 1: I should have looked into it. But don't they have
Speaker 1: a credit card as well?
Speaker 2: Or do you have a credit card?
Speaker 1: Yeah, that's like good, yeah card Goldman have some painful
Speaker 1: news about that this week. It seems hard to just
Speaker 1: create a credit card.
Speaker 2: I don't know if you have money market funds, Like
Speaker 2: it's like a synergy there. I have to assume that
Speaker 2: when robin had started, but you started from nothing, Like
Speaker 2: there's so much opportunity in like showing people confetti when
Speaker 2: they do trades, right, Like the pool of money that
Speaker 2: you can extract by like helping people do fun trades
Speaker 2: on their phone is enormous, right, And it is enormous,
Speaker 2: but it's like, you know, it's a tiny fraction of
Speaker 2: the pool of money from people like saving for retirement, right,
Speaker 2: and so like, when you get big enough, you're like
Speaker 2: the way to go to the next level of is
Speaker 2: to get people's retirement money and not just their fund
Speaker 2: trading money. Now, I will say the other thing about
Speaker 2: the barecase of people graduating from meme stocks to retirement
Speaker 2: funds is that Robinhood so far makes a lot of
Speaker 2: its money on trading pad for order flow, right, And
Speaker 2: two Sili's facts about that are one, if you are
Speaker 2: just buying ets for retirement, you're not trading that often, right,
Speaker 2: So Robinhood is getting less money from your buy and
Speaker 2: hold investing than they are from your frantic day trading.
Speaker 2: And then two where they get most of their money
Speaker 2: from payment to order flow is options in crypto, Like
Speaker 2: frantically trading stocks less good for them financially than frantically
Speaker 2: trading options and crypto and buying and holding stocks even
Speaker 2: worse than frantically trading stocks. So there is like a
Speaker 2: margin compression as they go to the to the higher
Speaker 2: dollar you know, retirement funds, but hopefully you make it
Speaker 2: up on volume.
Speaker 1: Yeah, another bare case that you could put in there,
Speaker 1: and this falls more into the psychology category is we
Speaker 1: might have moved passed this for Robinhood. But I was wondering,
Speaker 1: you know, when we were watching the fantastic fall of
Speaker 1: all these meme stocks and just so much money was
Speaker 1: being destroyed of retail dollars, whether instead of graduating into
Speaker 1: index funds, et cetera, whether or not people would just
Speaker 1: get totally disenchanted and leave the market all together. But
Speaker 1: it seems like that hasn't been too bad for robin Hood.
Speaker 2: Yeah, I don't know. I mean, I think a lot
Speaker 2: of people interpret memestocks as themselves a phenomenon of disenchantment, right,
Speaker 2: where like people feel like they can't get ahead, and
Speaker 2: so they put their money into gambles rather than like
Speaker 2: investing it sensibly in index funds or whatever. Yeah, And
Speaker 2: I don't know what comes after disenchantment with that, right,
Speaker 2: Like I I think some people are like, I'm going
Speaker 2: to stop gambling and start saving responsibly. Some people are like,
Speaker 2: we're disenchanted before, and now they're extra disenchanted, right, I
Speaker 2: don't know.
Speaker 1: I feel like it has sort of played out with crypto,
Speaker 1: Like I think that so many people lost money on crypto.
Speaker 1: I'm talking about just like day traders lost money on
Speaker 1: crypto because this time around with bitcoin got pretty close
Speaker 1: to seventy thousand sometime in the past few weeks. It
Speaker 1: just feels like Bitcoin at seventy thousand this time around
Speaker 1: is a lot different than before, like the FTX collapse,
Speaker 1: when I think that did disenchant a lot of the
Speaker 1: retail community.
Speaker 2: I agree, although then I want you to tell me
Speaker 2: why bitkind is back in tewenty thousand.
Speaker 1: I the podcast just ends.
Speaker 2: No, I agree, But like this is my cryptos skepticism
Speaker 2: coming out. Like go ahead, if you've got into crypto
Speaker 2: for gambling and you got disenchanted and you stopped being
Speaker 2: in crypto, like that's all like totally consistent, right, because
Speaker 2: it's like should beat this out. But it's essentially a
Speaker 2: gambling product, right, Like not all you know, like stayble
Speaker 2: goo whatever, right, but like you know, like the stuff
Speaker 2: that you see on like coin market cap is essentially
Speaker 2: a gambling product, whereas like if you got into the
Speaker 2: stock market for gambling, like that's a tiny, tiny fraction
Speaker 2: of like why people are in the stock market of
Speaker 2: what you can do this. It's mostly you're just like
Speaker 2: you're investing in like the growing productive capacity of the world. Right,
Speaker 2: Like that's what the stock market is, right, it is
Speaker 2: like companies and like you have economic growth, so the
Speaker 2: companies make more money and like that accrues to their shareholders. Right. So, like,
Speaker 2: if you get into the stock market for gambling purposes
Speaker 2: and there's a thing you can stay for that isn't
Speaker 2: gambling purposes with cryptos, I'm not so sure that's true.
Speaker 2: There are people in crypto are building good products blah
Speaker 2: blah blah blah. Right, but if you're like buying the tokens,
Speaker 2: you know, like there's a lot. Yeah, it's like hard
Speaker 2: to invest in those.
Speaker 1: Things anyway, that's that's in it for the tech.
Speaker 2: But no, I mean, like, right, I agree, if you
Speaker 2: get into memes stacks and you lose all your money
Speaker 2: and you get disenchanted and you like decide that investing
Speaker 2: in capitalism is bad, then like that is probably bad
Speaker 2: for your net worth. The popular perception of memes tax
Speaker 2: is like they got into memestacks because they thought investing
Speaker 2: in capitalism was bad. So like you know, yeah, the
Speaker 2: disenchantment will maybe point them in the in a better direction.
Speaker 2: Cut all of this.
Speaker 1: No, this is good, I will say, I mean we're
Speaker 1: talking about Robin Hood's ambitions to become this one stop
Speaker 1: shop and you know, grow up a little bit. It
Speaker 1: is for context good to point out that Charles Schwab
Speaker 1: Fidelity they have ten trillion and fourteen trillion in total
Speaker 1: assets respectively. Robin Hood is clocking it at one hundred
Speaker 1: and forty three point six billion dollars in assets as
Speaker 1: of the end of the second quarter. So it's a
Speaker 1: long hill to climb.
Speaker 2: It's an intriguing strategy of like being the like salient
Speaker 2: fun brokerage and then trying to pivot from there to
Speaker 2: being like the next Schwab. Like, I don't know, it
Speaker 2: strikes me is like a reasonable thing to do and
Speaker 2: like kind of cool.
Speaker 1: Yeah, I don't know, but yeah, you're right if I
Speaker 1: was a CEO, Like by.
Speaker 2: The way, you're like, yeah, they have a long way
Speaker 2: to go, Like yeah, they have like one hundred times
Speaker 2: upsided assets. Like that sounds like a pretty good position
Speaker 2: to you.
Speaker 1: I wonder if it's an easier pivot to make to
Speaker 1: like be the fun investment firm and then try to
Speaker 1: become the mature one versus like, you know.
Speaker 2: Much easier. Can you imagine Fidelity be likeah, we've got confetti.
Speaker 1: Right, hey, fellow kids. Right, Yeah, it's.
Speaker 2: So much easier. It's so much here because also like
Speaker 2: age moves in a direction, right, Like if you if
Speaker 2: you're like a twenty three year old, then you start
Speaker 2: on robin and then you become like a thirty three
Speaker 2: year old and you're still on robin hood. Yeah, I'm
Speaker 2: gonna save for retirement, right, whereas like Fidelity is like
Speaker 2: average you know, account holder is older.
Speaker 1: Like they're not gonna.
Speaker 2: They're not gonna be like maybe they have like a
Speaker 2: midlife crisis and get into memes like gambling, but like
Speaker 2: you know, it's a better move to start to hook
Speaker 2: them young and then sort of grow up a lot.
Speaker 1: So true. Yeah, it's like me with tail Or, Swift ESG,
Speaker 1: Naughty ESG, wisdom Tree. I'm not wrapping, uh, but wisdom
Speaker 1: Tree was fined four million dollars for miss marketing. They're ESG.
Speaker 1: Do you have a selection of them in the world.
Speaker 2: A lot of people are worried about greenwashing, right, Like
Speaker 2: there's this idea that people market ESG products funds or
Speaker 2: market their companies of the s year or whatever, and
Speaker 2: like they don't really mean it and they're doing bad stuff.
Speaker 2: They're like you know, secretly doing coal or whatever.
Speaker 1: They might have a point, so what they have a point, sure.
Speaker 2: But like two, I think most people get mad about that,
Speaker 2: would like someone to police that according to their own
Speaker 2: beliefs about ESG. Right, So, like you know, people get
Speaker 2: mad at like black Rock for having ESG funds that
Speaker 2: like sometimes vote for the directors of call companies or whatever, right,
Speaker 2: and like people like, oh, they shouldn't do that, And
Speaker 2: you know, it's like it turns out there's no like
Speaker 2: single accepted standard for what is ESG or like what
Speaker 2: an ESG fund should do, and so different issues of
Speaker 2: ESG funds have different opinions and they do different things,
Speaker 2: And if you have like a strict view, then you'll
Speaker 2: be mad at like ESG issuers who have less strict views.
Speaker 2: And there's like nothing you can do about it. I mean,
Speaker 2: you can like put your money at a different fund,
Speaker 2: but like the SEC is not going to say to
Speaker 2: a big ESG fund what you were doing is not
Speaker 2: ESG because like the SEC doesn't like have a substance
Speaker 2: of definition of what ESG is. Yeah, and you can
Speaker 2: imagine that changing, but like not really in like the
Speaker 2: current state of American politics and SEC rulemaking, it's just
Speaker 2: going to be ESG is like this sort of like
Speaker 2: somewhat like voluntarily defined concept. But what the SEC can
Speaker 2: do is look at every ESU firm's definition of ESG
Speaker 2: and see if they're following it. And it turns out
Speaker 2: a lot of them aren't. And the reason they're not,
Speaker 2: by the way, is like SG ETFs where like they
Speaker 2: you know, it's like fairly low expense ratio and like
Speaker 2: they don't have a huge staff of people, you know,
Speaker 2: investigating everything. They buy data from data vendors, and like
Speaker 2: sometimes they mess it up and then they don't do
Speaker 2: ESG things, but they don't do what they said. So
Speaker 2: Wisdom tre you got in trouble. I had this ESG
Speaker 2: ETFs and it described them in fairly strict terms, you know,
Speaker 2: instead of some of them like they don't invest in
Speaker 2: companies that have any involvement in fossil fuels or tobacco,
Speaker 2: like regardless of how much revenue they get from if
Speaker 2: they have any involvement, they are screened out. And the
Speaker 2: way they did that is like they went to some
Speaker 2: data vendors and they bought lists of companies that do
Speaker 2: things right, and like the lists were not quite right
Speaker 2: for the thing they described. So they bought lists of
Speaker 2: companies that were involved in tobacco. Lots of like big
Speaker 2: stores carry cigarettes, right, and like the cigarettes make up
Speaker 2: you know, one percent of revenue or whatever, like they
Speaker 2: are on the shelves, And the data vendor would only
Speaker 2: flag a company of retailer if more than ten percent
Speaker 2: of its revenue came from cigarettes, and so like most retailers,
Speaker 2: that's not the case. And so they weren't flagged. And
Speaker 2: so the SEC looked and Wisdom true was investing in
Speaker 2: some of these in some retailers that like you know,
Speaker 2: sold some cigarettes, and they said in their materials they
Speaker 2: didn't invest in companies that sold cigarettes, and I was like,
Speaker 2: you did not do the thing you said you were
Speaker 2: going to do because of like a data error. Right,
Speaker 2: they said, we wouldn't invest in fossil fuels, and so
Speaker 2: they bought the list of the data vendor that's like
Speaker 2: listed companies in the energy sector. And then like it
Speaker 2: turns out they're investing in like railroads that transported coal.
Speaker 2: So they got in trouble for that. So that's like
Speaker 2: the level of policing of greenwashing that the SEC could
Speaker 2: do is like if you say something and you don't
Speaker 2: do that due to like laziness or like buying the
Speaker 2: wrong data set, then you'll get in trouble.
Speaker 1: Yeah. I do like that. The defense is probably like, well,
Speaker 1: it's just a little bit of cigarettes. You know, if
Speaker 1: I have one cigarette a month, it's not that bad.
Speaker 2: Right, I mean like, I mean like they've been missed
Speaker 2: in tobacco companies like Drugstars. That's old cigarettes.
Speaker 1: Yeah. I also think it's interesting, And this was a
Speaker 1: point raised by my colleague wil Donna Hirich that you know,
Speaker 1: wisdom Tree was fined here four million dollars not necessarily
Speaker 1: the third party data provider.
Speaker 2: Well, I'm my impression is that the data provider actually,
Speaker 2: for the most part, accurately described data.
Speaker 1: Like the ETF description and prospectives didn't match up with
Speaker 1: the data that they would buy.
Speaker 2: They were they weren't like buying an index. They were like,
Speaker 2: we're excluding companies that do this. And then the way
Speaker 2: they excluded companies that did that is like going to
Speaker 2: a data provider and saying what companies do this, So
Speaker 2: it was like it was like the data provider's name
Speaker 2: was on the ETF.
Speaker 1: Yeah, that's interesting.
Speaker 2: The tobacco stuff. I'm actually I'm not sure if they
Speaker 2: got it right. But like for in general, the data
Speaker 2: providers accurately described what was going on. Yeah, and Wisdom
Speaker 2: Tree just bought their own data.
Speaker 1: I've never smoked a cigarette. Just so everyone is clear,
Speaker 1: it is interesting. This kind of tracks with what we
Speaker 1: were talking about.
Speaker 2: I swear this podcast is basically for Katie's parents.
Speaker 1: I've never spoked his cigarette. I swear to God, I believe. Anyway,
Speaker 1: moving swiftly along, this is similar to what we were
Speaker 1: talking about a couple of weeks ago. You were saying
Speaker 1: that the SEC won't define ESG. It really is the
Speaker 1: same for all principles based.
Speaker 2: We talked about the Biblical we were talking about JWWJD, what.
Speaker 1: John do and how they were Bible washing. I think
Speaker 1: about that all the time. Yes, it's a great phrase,
Speaker 1: but yeah, principles based investing it's hard to define, but
Speaker 1: it seems easy to run a foulve of doing what
Speaker 1: you said right.
Speaker 2: No, I mean like in the general case, like you
Speaker 2: can't define principles best investing because you could have any
Speaker 2: set up principles you want. It's just the SEC is
Speaker 2: going to check up on your principles. One gets the
Speaker 2: sense that the SEC as an institution sort of likes
Speaker 2: some sort of ESG principles and would like investors to
Speaker 2: invest in things that are environmentally and socially and governance minded. Right.
Speaker 2: That's why the SEC has proposed rules back climate change disclosure,
Speaker 2: not just because it thinks the disclosure is interesting, but
Speaker 2: because it thinks in might like to invest in greener
Speaker 2: companies and avoid maybe browner companies. I get the ounce
Speaker 2: I could be wrong that the SEC is less interested
Speaker 2: in biblically based investing, and the SEC doesn't think that
Speaker 2: investors should try to avoid companies that contribute to like
Speaker 2: gar Right's charities.
Speaker 1: Right, speculation, Yeah, one might think that speculation.
Speaker 2: But the SEC, like doesn't get to choose, right. The
Speaker 2: SEC just looks at your list of principles and says,
Speaker 2: did you buy the right data? Is that to adhere
Speaker 2: to your list of principles? And sometimes with both ESG
Speaker 2: and with biblically based investing in the answers now and
Speaker 2: then the SEC finds you. It's like a non substance.
Speaker 2: It's just like going around checking the boxes. It's not
Speaker 2: like interested in the substance of the things.
Speaker 1: I will say, it's been kind of fun to watch.
Speaker 1: There is this like big demand for ESG, or at
Speaker 1: least you know, a lot of these fund companies would
Speaker 1: tell you that there was all this fantastic demand, but
Speaker 1: I think that they just wanted to launch products because
Speaker 1: now you have a lot of ESG funds that have
Speaker 1: been closing. That's the case in the US.
Speaker 2: It was a lot of demand, and I don't know,
Speaker 2: I think it was all backlash.
Speaker 1: Backlash, back, a huge backla, backlash, backlash. Maybe there was demands.
Speaker 2: Backlash, demands with rhymes of black rocks them.
Speaker 1: I don't know. I think that a lot of fun
Speaker 1: companies launched a lot of VSG products because it was
Speaker 1: in vogue, and then the demands maybe wasn't there to
Speaker 1: the way that maybe some of those fun companies thought
Speaker 1: there would be.
Speaker 2: Yeah, it was in vogue among fun companies, and I
Speaker 2: think there was a sense that like you're getting ahead
Speaker 2: of the giant wave of demand that was coming, and
Speaker 2: that wave was not quite coming out.
Speaker 1: I have a parallel to make sure well, first of all,
Speaker 1: you're seeing hundreds and hundreds of VSG funds shutter now
Speaker 1: both in the US and in Europe. It's sort of
Speaker 1: similar to how all of these automakers were like, we
Speaker 1: are going to phase out internal combustion engines and pivot
Speaker 1: to EV's, and a lot of these legacy automakers have
Speaker 1: had to take a lot of losses because the EV
Speaker 1: demand isn't really there, And of course when it comes
Speaker 1: to that, it's probably a combination of range anxiety, the
Speaker 1: charging infrastructure in the United States isn't quite there. Evs
Speaker 1: are more expensive for now the normal cars, But you
Speaker 1: could draw a lot of parallels to the ESG fund space.
Speaker 2: I think that like ESG investing is so interesting because
Speaker 2: part of the thesis for ESG investing is we're gonna
Speaker 2: avoid fossil fuels because in the future there will be
Speaker 2: such public backlash against fossil fuels that it will be
Speaker 2: impossible for fossil fuel companies to be profitable. There will
Speaker 2: be regulation stopping them, will be you know, carbon taxes,
Speaker 2: there'll be something that makes it uneconomical to run a
Speaker 2: fossil fuel company. And to have that investing thesis, you
Speaker 2: have to have this like view of the future of
Speaker 2: public opinion that's like really quite stark, right, Yeah, you
Speaker 2: see the same thing here. If you're an automaker and
Speaker 2: you're talking to like your shareholders, who are investment firms
Speaker 2: that are launching a lot of es CHIEF funds. There's
Speaker 2: this like widespread view of like the consumer demand for
Speaker 2: clean energy and you know avoiding fossil fuels is going
Speaker 2: to be so strong in the future that like you'll
Speaker 2: need to have a robust ev business or like you'll
Speaker 2: need to have a lot of ESG funds and like
Speaker 2: you know eviens for that was kind of it was
Speaker 2: like a little bit wishful thinking about ESG investors, and
Speaker 2: it turns out that the rejections about like future consumer
Speaker 2: demand or not. Right.
Speaker 1: There's so much more to say, Matt, But I actually
Speaker 1: literally have to go get the oil on my car
Speaker 1: change right now. It's not electric. That was a choice
Speaker 1: I made because I don't know where I would charge it.
Speaker 2: There you go, and that was the Money Stuff Podcast.
Speaker 1: I'm Matt Levian and I'm Katie Greifeld.
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Speaker 2: The Money Stuff Podcast is produced by Anna Maserakus and
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