Morningstar - Q2 2023 - 19

bonds for a portfolio and the people charged
with overseeing the effort.
There are some early signs that investors are
paying attention and moving their money
toward the best of breed. New ETFs backed by
firms with solid actively managed mutual
funds have represented those with the largest
inflows in 2022. For the full year, almost
$86.3 billion found its way into actively managed
U.S. ETFs. Of that sum, roughly half went
into ETFs from Dimensional, Avantis, and
Capital Group.
The flows into Avantis' rules-based funds
capture the shift toward ETFs. The firm offers ETF
and mutual fund versions of its many strategies,
but its ETFs have proved the more popular
choice by a long shot. Of the nearly $18.4 billion
that Avantis has brought in over the past
three-plus years, more than $17 billion went into
its ETFs. Likewise, Capital Group rolled out
nine ETFs in 2022. Many of them use similar
processes and management teams as the firm's
American Funds mutual fund lineup. Those
nine ETFs attracted almost $5.7 billion in 2022
despite being less than a year old.
But Dimensional's move into ETFs looms large
over those two. It launched 23 new ETFs and
converted seven tax-managed mutual funds
to ETFs over the past three years. Dimensional's
ETFs pulled in more than $26 billion of new
money in 2022 alone, largely offsetting the money
that left its mutual funds.
The ETFs from Avantis, Capital Group, and
Dimensional have emerged as some of the early
success stories in active managers' move
toward ETFs. That's great for investors as they now
have access to a wider range of investments
through a cheaper and more tax-efficient
vehicle. Great processes and management teams
should distinguish the best of breed as fees
continue to fall.
Daniel Sotiroff is a senior manager research analyst for
Morningstar Research Services LLC.
Open Banking
Helps Advisors Serve
Investors
There's a little-known rule in the works that
could be very helpful for investors and
their advisors. The Consumer Financial Protection
Bureau is writing regulations to implement
Section 1033 of the Dodd-Frank Wall Street Reform
and Consumer Protection Act. Section 1033,
commonly referred to as open banking, is fairly
straightforward, but the rules pertaining to
it could prove to be quite complex. Section 1033
simply requires certain financial institutions to
make consumers' financial data available to
them-and their authorized agents-in standard
electronic formats. Morningstar ByAllAccounts
recently submitted a comment letter to
the CFPB advocating for financial advisors to be
explicitly considered authorized agents. (For more
on open banking, see Ten Questions on Page 80.)
Brian Costello, head of data aggregation strategy
at Morningstar, says that consumer access
to their own financial data " should be a basic right,
as should the ability for them to share the
data with the parties the consumer has selected
as best suited to help them manage their financial
activities and performance. "
Open banking will make investors' data readily
available-and usable. To be sure that even small
financial institutions will comply, a direct electronic
interface is not required; data " scraping " will be
allowed. The regulations will prescribe data
formats, required data security measures, and
processes by which the CFPB can monitor
transmission and use of the data by financial
institutions and aggregators such as Morningstar
ByAllAccounts and Yodlee.
For now, the rules only apply to Regulation E
deposit accounts and Regulation Z credit
card accounts and to those institutions that
provide them (that is, banks and credit
card companies). In the very near term, authorized
agents will be able to have uniform directed
access to their clients' banking and credit
card activities. Although it's not a complete
financial picture, it can certainly help when
advising clients dealing with budgetary issues.
Additionally, aggregators would more easily
provide accurate, up-to-date information.
Finally, consumer protections would be
implemented to ensure secure access and prevent
inappropriate use of investor data. These
regulations are necessary to the implementation
of Section 1033.
We hope these rules will eventually also
apply to investment accounts as well as retirement
accounts regulated by Erisa. This would
provide advisors with the opportunity to fully
monitor and cohesively manage their clients'
full financial situation.
" In the current macroeconomic environment, "
Costello says, " it is vital that industry and
government are aligned in enabling and protecting
consumers in their savings and investment
activities. Investing should be accessible to all
consumers, and one way to generate
positive investment outcomes is via personalized
advice from competent and authorized
financial advisors. "
Sheryl Rowling, CPA, is an editorial director at Morningstar.
Shopping Consumer
Cyclicals
GREATER EUROPE
European Union
Investor concerns about inflation, reduced
discretionary income, and lower capital
availability led to a drop in consumer discretionary
stocks in 2022. Salary increases have not
offset the higher costs for energy, food, mortgages,
and other goods and services. However,
consumer income remains propped up by
government support programs, low unemployment
morningstar.com/products/magazine
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https://www.morningstar.com/authors/2024/sheryl-rowling https://www.morningstar.com/authors/2118/daniel-sotiroff http://www.morningstar.com/products/magazine
Morningstar - Q2 2023

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