Don't Miss Out
SRI is growing. There are firms that can help you build your client base, but many broker-dealers ignore the opportunity.
By CAREN CHESLER
There was once a fund manager who made a lot of money shorting Enron before anyone knew the company was about to implode. As the story goes, the manager had an advisory board, and one of the people on the board was an academic, who at the mention of a possible investment in Enron began making telephone calls to the energy company’s competitors and asked them one simple question: Are you comfortable working with Enron? He found no one was. Based on that information, the fund manager shorted the company, and the rest is history.
It’s this kind of thinking that is behind the growing market for socially responsible investments, where decisions are made not only on financial factors but on external ones, such as a company’s labor, environmental or governance (ESG) record or its fit with people’s religious beliefs. In fact, using such nonfinancial criteria enabled some SRI managers to fare better than traditional money managers last year. Some faith-based funds, for instance, sold off holdings in AIG International and Lehman Brothers Holdings months before these companies hit the skids because they had run afoul of the funds’ pro-life criteria.
“There were many managers that got out of Lehman and AIG and Bear very early and didn’t go down with the ship, and it was not because they knew those companies were weak and leaking but because of extra-financial factors discovered in the social research process. And that happens all the time,” says Steven J. Schueth, president of Colorado Springs-based First Affirmative Financial Network LLC.
It’s no surprise SRI is one of the fastest-growing sectors of the market. More than 70% of wealthy Americans have socially responsible and green investments in their portfolios, and 57% say they have as much as one-quarter of their portfolios in such investments, according to a recent survey by PNC Wealth Management.
So how can advisors get their clients exposure to this sector? The simplest method is to offer investors SRI mutual funds. First Affirmative, for example, offers asset management and consulting services to advisors and currently has about 130 of them registered through its network. Advisors who work with the firm have access to 80 SRI mutual funds and 52 separate account managers. The advisors’ clients are then charged a fee of about 1.4% of their assets. The more assets they have with the firm, the lower the fee goes.
Joan Fuetsch is one independent registered investment advisor, located in Menlo Park, Calif., who says she joined First Affirmative’s network to offer her clients more socially responsible investments. She says aside from getting her access to its products and admission to one of the biggest SRI conferences in the country, her $1,300 annual membership enables her to list her name on a Web site called socialfunds.com, which has allowed her to win new clients.
While she’ll put clients into mutual funds, she prefers dealing with Boston-based Trillium Asset Management Corp., one of the oldest and largest independent investment management firms in the United States that is exclusively devoted to socially responsible investing. The company offers both equity and fixed-income portfolios and balanced portfolios and it engages heavily in shareholder activism, which some in the SRI sector believe is the only way to truly effect change.
“Nobody cares if you don’t buy Philip Morris,” Fuetsch says, “But if Chevron has someone at every shareholder meeting shouting about what they did in Ecuador and they start getting more votes on resolutions, the company is going to start paying attention.”
Trillium’s minimum investment requirement is $2 million, but that level is often lower when clients go through an advisor. Fuetsch adds that Trillium has referred some clients with smaller portfolios to her.
Clients who want to invest in socially responsible ways and who have less than $100,000 to work with are typically put into a mutual fund or two by their advisors. Those with about $250,000 might be put into a separately managed account that has a variety of mutual funds. For those with more than $500,000, the advisor might create a tailor-made portfolio. The client would be asked to fill out a questionnaire to assess his particular interests. The advisor would then work with a money manager (such as Trillium) to come up with an asset allocation strategy that fits those criteria.
“Some people like the broad set of guidelines that a fund or SMA might have, but many have a very specific driver that is driving them. For them, they’re better served with a custom solution,” says Sam Pierce, president and CEO of Portland, Maine-based IW Financial, which provides objective research and technology solutions to help financial professionals evaluate the environmental, social and governance records of companies.
Pierce’s firm will work with an asset manager to come up with a profile for a client. It then combines that profile with its own investment research and produces a “buy” or “do not buy” list, depending on certain screening elements. That profile would then be available to the advisor for his clients.
“Mutual funds are for small investors who want to dabble or for advisors who don’t want to get personally involved in the evaluation of their client’s personal goals,” Pierce says. “But with a mutual fund, you’re basically using the fund’s perspective on what issues define social responsibility.”
For now, clients looking for socially responsible investments may have a much larger menu of options if they go with an independent RIA rather than an advisor from one of the large Wall Street wirehouses. That’s because the large broker-dealers don’t believe they’d see a lot of commission money from sales of socially responsible investments, so they haven’t signed many sales agreements with money management firms offering SRI funds. Without those agreements, advisors working for the large broker-dealers are limited in what they can offer. (Brokerages that offer wrap accounts have a somewhat larger menu of SRI mutual funds on offer, but the selection is still relatively small.)
“In my experience, there are few firms that provide enough funds or managers or resources to allow a licensed broker at a broker-dealer to properly diversify a portfolio for a socially conscious client,” Schueth says. “The large broker-dealers just don’t see it as a compelling business opportunity.”
Moreover, most senior managers view SRI as something investors do when they’ve already made some money elsewhere and are feeling generous, Schueth says. Independent RIAs, then, are the ones best placed to capitalize on the rising interest in SRI, as they can simply sign up with an existing network or platform that offers a variety of such investments, from mutual funds to separately managed accounts.
“It’s much easier for an independent RIA to focus or refocus their business on the socially conscious investor than for a broker to do that,” says Schueth. “They can set themselves up with a potentially much broader menu of investment options than most broker-dealers have available.”
Rob Thomas, who spent nine out of his 11 years at a large Wall Street wirehouse trying to convince the firm to increase its SRI options, says part of the problem is the way the brokerage industry is paid. Rather than being paid by an advisory fee by the client, most brokerages take a cut of the commission on products its advisors sell. Since many brokerages don’t put much credence in socially responsible investments and don’t think they will sell very well, they won’t put much time and resources into them, Thomas says.
“There was a group of us trying to bring SRI options to the firm, and three years later, there’s still no selling agreements and no additional SRI opportunities, and that’s despite the fact that they bought a firm that already had SRI agreements,” Thomas says. “I left because I was not happy with the fact that socially responsible investing basically got no dignity.”
Tired of fighting, he left to run his own firm, Social(k), a Springfield, Mass.-based company that offers a socially responsible retirement platform for 401(k) and 403(b) plans. The firm offers more than 150 screened socially responsible funds, including the Calvert, Pax, Parnassus, Portfolio 21 and Winslow Green Growth funds, as well as more than 2,000 conventional portfolios. To date, nearly 400 financial advisors have registered with Social(k) to offer their clients an alternative to existing retirement plans.
For now, it looks like Thomas made the right move. The firm has had double-digit growth since its inception in 2005, and even last year, the company continued to grow, with more companies and organizations adopting its socially responsible retirement platform for their 401(k) or 403(b) plans. And he is currently in talks with a company that has 20,000 employees and $1.7 billion in its 15 retirement plans.
“Nine times out of ten, if you talk SRI to an old-school broker, he’s going to think you’re nuts,” Thomas says. “They just don’t think there are enough hippies out there to buy this stuff.”
Thomas may be poised to prove them wrong.