Clients Want Socially Responsible Investing But Advisors Remain Skeptical

More and more Americans are familiar with socially responsible funds and want to leverage them in their financial lives, but a lack of professional guidance on SRI funds is keeping many investors on the SRI sidelines.

According to the latest Charles Schwab ETF Investor Study, three out of four exchange traded fund investors would invest more in SRI funds “if they had more education and professional guidance.”

While younger investors and women, especially, are flocking to socially responsible funds, 84 percent of all ETF investors believe they’re sacrificing investment returns by engaging with SRI funds – a belief that isn’t backed up by the facts.

A 2017 Morningstar report said sustainable/responsible funds and indexes perform on par with comparable conventional funds and indexes, despite theory suggesting otherwise. Companies with higher environmental, social, and governance scores and ratings can outperform comparable firms in both accounting terms and stock market terms.

Advisors 'In the Way' On SRI Funds?

Sam Adams, chief executive officer at California-based Vert Asset Management specializes in sustainable investments. He says the No.1 thing an advisor needs to do to get more clients into SRI funds, is to get out of the way. “Many clients want to invest this way, but it is the advisor that is the roadblock,” Adams said.

Too many advisors still tie SRI funds to performance problems, so many are reluctant to even offer, let alone recommend SRI investments. “There is no need to underperform with SRI, as over 2,000 studies have shown,” Adams said. “Newer, and lower cost, funds make it easier to perform well.”

Most advisors still think it’s too hard to put a well-diversified portfolio together with SRI funds. That, too, is a misconception. “There are hundreds more SRI funds available now than just a few years ago,” Adams said.

Adams offers some advice for advisors: Don’t let the perfect be the enemy of the good.

“You can’t get absolutely everything you want (and don’t want) in an SRI portfolio,” he said. “It’s like buying organic food.  You can’t get everything organic at the grocery store,” Adams said. So, you can rarely cook a meal that’s 100 percent organic, but that doesn’t stop people from buying organic and using it along with conventional foods.”

Where To Look On SRI Funds

Advisors looking to kick some tires on SRI funds have plenty of options.

Michal Strahilevitz, a behavioral economist at the University of Wollongong, in Wollongong, Australia said, “There are socially responsible index funds that are diversified and still have low expense ratios associated with them. These would be the best bet.”

Advisors need to council clients to be patient and comfortable with volatility linked to SRI funds. “That said, one advantage of socially responsible funds is that people may have less of an urge to sell on market dips,” Strahilevitz said. “Those urges to sell during market dips do more harm than good, so the loyalty to socially responsible funds may be a good thing.”

Advisors vetting SRI funds should also make sure to read the details how the fund defines social responsibility.  “Not every fund has the same filters and not every investor has the same sense of what aspects of social responsibility matter most,” Strahilevitz said.

Getting started is often the hardest part of the SRI fund selection process. Daniel Kern, chief investment officer at TFC Financial Management in Boston, offers the following recommendations for investors interested in socially responsible investing:

• Define what you want to accomplish. “Determine the investment objective and time horizon; then prioritizing which values-based considerations are “must-haves” and which are ‘nice to have,’” Kern said.
• Decide between absolute and directional alignment with personal values. For some investors, it will be impossible to find a mutual fund or ETF that completely aligns with personal values. “Investors who require absolute alignment to personal values may find that a separately managed account is the only way to achieve their investment and social objectives,” Kern said. “However, absolute alignment comes with a cost, potentially in higher fees, complexity or personal involvement in the design process.”
• Understand investment implications associated with different SRI approaches. There may be financial trade-offs associated with a SRI strategy. “For example, a fossil-fuel-free or low-carbon strategy may lag the broader equity market if oil prices rebound,” Kern said. “It’s important to be fully informed about the trade-offs between approaches.”
•  Complete research into the investment merits of the mutual fund or ETF. The factors typically considered in selecting non-SRI investments also apply when selecting an SRI investment. “The quality of the manager, historical performance, and expense ratios should be considerations that occupy equal importance alongside SRI considerations in the selection process,” Kern said.

Ask The Right Questions

Money managers should also ask clients specifically what SRI investments they prefer, then choose funds accordingly.

Franklin Gold, founder of FG Consulting & Advising, and former manager of Fidelity Investment’s Research website said, “Most investors have specific issues that concern them most - global warming, gender equality, tobacco and alcohol, and other environmental, social and governance fund categories.”

For an individual, it's hard to get investments that exactly align with their preferences, Gold said. “Find something that reasonably aligns with your outlook and go with it,” he said. “That assumes the investment meets the investor's investment objectives and is otherwise a quality investment.”

SRI On The Rise

No question, SRI investing is shifting into a high-gear – over $6.5 trillion is invested in SRI investments as of 2018, according to a report from Morgan Stanley.

Dan Aronson, chartered financial analyst and managing partner of EPIQ Partners in Minneapolis said, “The concept of socially responsible investing is not new. What is new is the way it’s being measured,” said Aronson. “Investors are taking a more active role in understanding what impact their investments are making in their communities and viewing those investments through a socially responsible investing lens.”

Advisors need to be on the same page, too. If not, clients passionate about a specific cause will make sure they hear about it.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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