The ActivePassive portfolios have traditionally been appealing because they bring two distinct investment approaches – as well as their potential benefits – together in one portfolio. Since the portfolios’ inception over a decade ago, Envestnet|PMC has studied and researched the results of the ActivePassive investing approach, making adjustments as new information and data trends are gathered.
Part of that research includes considerations around ensuring that clients receive cost-effective solutions. This conversion both addresses those concerns and is in support of PMC’s long-term research.
The conversion will provide the following benefits:
- Cost Efficiency for Clients: ETFs generally have lower expense ratios than mutual funds.
- Liquidity and Flexibility: Unlike mutual funds, ETFs are purchased or sold during the trading day when the markets are open. ETF shares are priced continuously during normal exchange hours and share prices will vary throughout the day.
- ETFs are generally more Tax Efficient than mutual funds.
Impact of Conversion
- This conversion will have an impact on the client, the advisor, and the Firm. We expect the change will be felt by owners of legacy accounts opened prior to 2/15/21. There will be no pricing changes to accounts subject to the asset-based pricing model, i.e., accounts established after 2/15/21 with the prefix MAN.
- The average ActivePassive platform fee is increasing from 16 bps to 19 bps. This increase is because the current program utilizes No-Transaction-Fee Funds (“NTF”), and the program was originally priced to reflect that there were no trading costs. The switch to using ETFs going forward will result in transaction fees for all portfolio and client activity.
The increase to 19 bps for the average platform fee will partially cover the projected costs of transactions going forward. ESI will absorb the remaining portion of transactional costs in order to keep the program pricing competitive and to mitigate the impact to advisors. - Capital gains/losses will be incurred and will likely generate tax consequences in taxable accounts. To help offset the impact, ESI is working with Envestnet | PMC to spread the conversion over a two-year period for clients who have concerns about experiencing significant tax consequences in one calendar year. ESI will provide further communication and details to advisors with impacted clients in the coming weeks.
- Under the new pricing structure, the Envestnet | PMC ActivePassive program qualifies as a wrap fee program, as clients will not pay separately for trading costs. Accordingly, clients in this program will receive a copy of the Firm’s Form ADV Part 2A-Appendix 1 (ESI Illuminations) brochure in conjunction with the client announcement. The brochure will provide clients with a description of the services, fees, and disclosures associated with the Active/Passive program in its new state. The conversion does not require a new advisory agreement.
Timing of Conversion
ESI is partnering with NFS and Envestnet | PMC regarding the timing of the conversion, which is expected to take place at the end of the 3rd quarter/beginning of the 4th quarter 2023.
The conversion will be affected when Envestnet | PMC sells the mutual fund positions in clients’ portfolios and purchases ETFs appropriate to each client’s chosen model. As noted above, clients with significant capital gain/loss implications will be given the opportunity to spread this conversion over two tax years.
Resources
- ActivePassive PMC Portfolios FAQ
- ActivePassive PMC ETF Portfolios brochure
- ActivePassive PMC ETF Portfolios Flyer – “Blending the best of both styles into one solution”
Questions?
Please contact:
Mike Chiarella MChiarella@nationallife.com 802-229-3936
Tom Longfellow TLongfellow@nationallife.com 802-229-7424
Dan Randall drandall@nationallife.com 802-229-7166
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