Advisers slow to embrace socially responsible investments sought by clients

When financial adviser Marlena Sonn met Bryan Wilson three years ago, she began showing him how his investments could be aligned with his personal beliefs. “As [our] conversations progressed, it became a priority for me to have the investments reflect my personal ethics and worldview,” said Mr. Wilson, a 30-year-old artist and fine-art fabricator. Adviser surveys indicate that more clients are asking if they can have a positive effect on society with their portfolios, and well-known asset management companies are offering more so-called impact investment options. Wirehouses, custodians and many independent broker--dealers have platforms that provide advisers with a menu of choices. At the same time, it can be difficult for clients to find advisers who have the knowledge and expertise required to serve the expanding number of clients who want to incorporate impact investing into their portfolios. “There has been a tremendous amount of client demand for impact investments, and that is forcing advisers to catch up with the market,” said Ms. Sonn, founder of Treebeard Financial Planning. “Clients want their money invested in people they trust and who they don't fear will do things in the basement that they won't know about.” In a survey of financial advisers who do not specialize in socially responsible investing, 49% said they offer or have offered such an option, according to a First Affirmative Financial Network survey of 1,913 advisers released last October. About 70% of those advisers said they provide an SRI choice because clients have asked for it. There's little professional infrastructure to help advisers get up to speed in this area. They lack a central resource for information about impact investing, and the strategy itself often is not described clearly.

GROWING FRACTION

At about $36 billion in assets, impact investing in the U.S. represents a small but growing fraction of the broader, $6.6 trillion universe of sustainable or socially responsible investments. Unlike SRI, which is passive — in that it applies sets of negative or positive screens to lists of public companies — impact investing is active. It seeks out companies or projects making positive social, economic or environmental changes. Next-generation investors — namely millennials, or those born between 1980 and 2000 — rank social impact as a crucial criterion when they are making investment decisions. According to a May 2013 Spectrem Group study, a survey of wealthy millennials found that 45% want to help others and consider social responsibility when they are investing. About 29% of millennials in a Bank of America Merrill Lynch survey said they look to their advisers to provide values-based investing, the third most-requested service. In fact, the prospect of a surge of interest from these emerging investors could help break the logjam and push impact investing activity to a level of greater professionalism. Some companies are getting the message. BlackRock Inc., the world's largest money manager by assets, in February announced the launch of BlackRock Impact, a business unit that will house its $225 billion in values-based strategies and concentrate on developing more products. Laurence Fink, chief executive of BlackRock, said clients are demanding investments that have multiple payoffs, and that such requests are becoming more frequent and increasingly complex. “Clients are looking to measure the returns on their investments both by the societal and financial outcomes they can help to create,” Mr. Fink said. The addition of products will translate into more opportunities for advisers to come up with solutions for their clients. But advisers will have to do their homework. Those looking to engage interested clients will need to perform more in-depth due diligence than is required by most traditional holdings. They can either become experts in the field or team up with other advisers or firms that already have that know-how.

GETTING STARTED

Those looking to acquire expertise have a few places to start. For the past year and a half, the Forum for Sustainable and Responsible Investing (US SIF) has offered an online course aimed at financial advisers. About 500 people have taken it, and two-thirds of them were financial advisers, according to Lisa Woll, CEO of US SIF. Also offered live at US SIF's conferences, the course has been popular enough that the group plans to vote in May on whether it should be turned into an adviser certification, Ms. Woll said. “Many advisers have said they would rather be getting a designation they could put on a business card,” she added. Advisers also can receive training at a handful of other conferences hosted over the course of the year by the First Affirmative Financial Network and the Global Impact Investing Network. A Calvert Foundation nonprofit, ImpactAssets, publishes an annual list of 50 investment managers who specialize in the activity. The list can be a sound starting point for investigating products that might match up with client priorities. Wealth management firms Abacus Wealth Partners and Aspiriant are creating an investment platform to help smaller advisers integrate impact investing with traditional advising, according to Jennifer Kenning, managing director for the joint venture, Align. “Not every advisory firm can build this in-house,” Ms. Kenning said. “We can educate advisers or their clients. Either way, advisers retain the lead relationship.” In addition, Ms. Woll said, advisers most likely will need to enhance their process for bringing on new clients that have an interest in impact investing. Intake forms should include questions about which issues clients are most concerned with and want to address with their investments, she added.

MORE GUIDANCE ON THE WAY

Additional guidance may be on the way. The Money Management Institute will issue a report at the end of March aimed at making advisers aware of impact investing and convincing them that they need to become familiar with it, according to William Burckart, a consultant partnering with MMI. “It will help advisers meet client demands for impact investing” and assist them in addressing the hurdles involved, Mr. Burckart said. Enhanced client retention could help make the case that advisers should put in the effort. Advisers report that clients in impact strategies tend to be “stickier” than others. “Investors are unlikely to leave someone they feel is genuinely in line with what they're looking for and is doing the work to update them about what's happening in the space,” Ms. Sonn said.