Money Stuff: The Podcast
Episode: Some Cigarettes: Accreditation, Memes, Naughty ESG
Release Date: October 25, 2024
Hosts: Matt Levine and Katie Greifeld
Introduction
In this episode of Money Stuff: The Podcast, hosts Matt Levine and Katie Greifeld delve into three primary topics: the intricacies of accredited investors, the evolution of meme stocks and platforms like Robinhood, and the challenges surrounding Environmental, Social, and Governance (ESG) funds. Their discussion intertwines technical insights with wit, providing listeners with a comprehensive understanding of contemporary financial landscapes.
1. Accredited Investors: Definition, Criticisms, and Future Directions
Understanding Accredited Investors
Katie Greifeld initiates the conversation by defining accredited investors as individuals or entities that meet specific financial criteria, allowing them access to private investment opportunities typically unavailable to the general public. Currently, the criteria include:
- Income Thresholds: An individual earning $200,000 annually or a couple earning $300,000.
- Net Worth: Possessing a net worth of at least $1 million.
- Professional Credentials: Holding securities licenses like Series 7 or Series 65.
Katie Greifeld (03:13):
"Currently, $200,000 income is what you need to be, or a $1 million net worth if I'm an individual."
Evolving Standards and Legislative Pushes
Matt Levine highlights the increasing prevalence of accredited investors, now encompassing approximately 20% of households due to income thresholds not being indexed to inflation. He discusses the Senate's proposal to introduce an exam-based accreditation system, aiming to assess financial sophistication rather than solely relying on wealth.
Matt Levine (05:18):
"The investor class is pretty much overlapping with the Accredited investor class... It seems unfair that qualified would just mean like having enough money."
Katie adds historical context by referencing FINRA's 2022 proposal for knowledge checks on complex financial products—a move met with significant public opposition.
Katie Greifeld (06:39):
"They received more than 12,000 comments, which was pretty wild. That shattered the record."
Implications and Speculations
The hosts ponder the potential outcomes of shifting accreditation criteria, questioning whether such changes would lead to more informed investing or inadvertently complicate the landscape, possibly deterring individuals from engaging with private investments.
Matt Levine (09:53):
"It would be like compound interest. And what's that? It would be sort of like financing trivia."
2. Meme Stocks and the Evolution of Robinhood
Robinhood's Growth Trajectory
The discussion transitions to Robinhood, the trading platform predominantly associated with meme stocks. Matt cites a surprising statistic from a Barron's article: approximately 10% of American adults hold a Robinhood account, albeit with a mere 0.3% share of retail financial assets.
Matt Levine (16:43):
"I found shocking is something like 10% of Americans have Robinhood account... they are 33 times bigger by number of people than by assets."
Strategic Shifts and Challenges
Katie outlines Robinhood's recent initiatives to transition from a platform for "fun money" to a comprehensive investment service. This includes launching a desktop trading platform, offering index options, and providing matching bonuses to attract more substantial investments.
Katie Greifeld (16:19):
"They have 1 to 3% matching bonuses for investors who transfer assets to Robinhood's platform... They are trying to grow up."
Matt analyzes the financial sustainability of Robinhood’s model, noting the potential decline in revenue from payment for order flow as users transition to less frequent, long-term investments like index funds.
Matt Levine (18:25):
"Robinhood is getting less money from your buy and hold investing than they are from your frantic day trading."
Future Prospects
The hosts speculate on Robinhood's ambitions to incorporate robo-advising services, aiming to become a one-stop-shop for investors. However, they acknowledge the formidable competition from established giants like Fidelity and Schwab, who dominate the wealth management sector with trillions in assets.
Matt Levine (24:50):
"It's an intriguing strategy of being the salient fun brokerage and then trying to pivot from there to being the next Schwab."
3. Naughty ESG: ESG Funds, Greenwashing, and Regulatory Oversight
ESG Funds Under Scrutiny
Matt and Katie shift focus to ESG funds, spotlighting WisdomTree’s recent $4 million fine for mismarketing its ESG ETFs. The issue centered around discrepancies between the fund’s stated exclusions (e.g., companies involved in tobacco or fossil fuels) and the actual holdings, attributed to errors in third-party data sourcing.
Matt Levine (29:03):
"WisdomTree got in trouble for... they didn't do what they said they were going to do."
Challenges of Defining ESG
The hosts discuss the inherent challenges in defining ESG criteria, noting the absence of a standardized framework. This vagueness often leads to accusations of greenwashing, where funds claim ESG credentials without substantive actions.
Matt Levine (29:17):
"There's no single accepted standard for what is ESG or like what an ESG fund should do... the SEC is not going to say to a big ESG fund what you are doing is not ESG because like the SEC doesn't have a substantive definition of what ESG is."
Regulatory Responses and Industry Implications
Katie mentions the SEC’s role in enforcing accurate ESG disclosures, albeit within the constraints of loosely defined standards. The conversation touches on the broader impact of regulatory actions on fund management practices and investor trust.
Katie Greifeld (35:15):
"There are hundreds of ESG funds shutter now both in the US and in Europe... similar to how automakers pivot to EVs and face losses when projections aren't met."
Comparative Insights
Matt draws parallels between the fluctuating demand for ESG funds and the automotive industry's challenges with electric vehicles (EVs), emphasizing the speculative nature of ESG investing and its reliance on optimistic future projections.
Matt Levine (36:00):
"ESG investing is so interesting because part of the thesis for ESG investing is we're going to avoid fossil fuels because... it will be impossible for fossil fuel companies to be profitable."
Conclusion
Throughout this episode, Matt Levine and Katie Greifeld provide an insightful examination of significant financial topics shaping today's investment environment. From the evolving definitions and criticisms of accredited investors to the transformative journey of platforms like Robinhood, and the regulatory complexities surrounding ESG funds, the discussion underscores the dynamic and often contentious nature of modern finance. Their analysis not only elucidates current trends but also prompts listeners to consider the broader implications of these developments on the investment landscape.
Note: Advertisements, sponsor messages, and non-content segments have been excluded to focus solely on the substantive discussions of the episode.