Trends: Not Just for Tree Huggers Anymore

Judging by all the ink it's been drawing — ink and dollars — socially responsible investing is a hot topic among investors, perhaps even your clients.

By late last year, 12 percent of investment assets under professional management adhered to some form of socially responsible investment (SRI) strategy, according to the Social Investment Forum. That's up from 8 percent in 1999 — in a sliding market, mind you.

Why should you care? Because it's clear that SRI investing is no longer restricted to leftist kooks or the terminally religious. Reps who can't accommodate the demand for such investing risk losing out on SRI sales or even losing clients to reps who can help them retire and go to heaven, too.

And, even if SRI funds didn't capture the run-up in Philip Morris, say, they have done quite well. The Parnassus mid-cap fund, for example, returned 16.40 percent over the five years ended Dec. 31, compared with 10.70 percent for the S&P 500. For the year, Parnassus gained 7.84 percent, compared with a loss of 11.88 percent for the S&P 500. The Calvert Social Investment Equity ‘C’ fund returned 11.82 percent over five years, and lost 0.31 percent last year (see table).

Jim Larson, an RIA with Northeast Securities in Minneapolis, is a broker who has found a personal and professional payoff from SRI investing. Larson left social work for socially responsible investing about 10 years ago because it seemed like a good fit. His practice thrived because there were few specialists in the field. He even got referrals from other brokers who wanted to keep their customers, but didn't know enough about SRI to help them on that part of their portfolio.

Winnie Forrester, a financial advisor with First Union Securities in Nashville, is similarly singular in her marketing approach. Many of her new clients walked away from other brokers when told if they invest with their hearts, they'll lose money.

“Brokers, in general, need to educate themselves, rather than trying to dissuade socially responsible investing altogether,” advises Forrester.

Not only are the assumptions about poor returns from socially responsible investments unfounded, she says, so is the notion that clients who seek such vehicles are naïve. They come armed with research and are not necessarily appeased by a generic SRI fund.

“Our job as professionals — whether socially responsible or not — is to serve the clients' objectives first. The objective of socially responsible investing is to align the client's values with their investments,” explains Richard Barr, a registered rep affiliated with First Affirmative Financial Network in Santa Fe, N.M., and a member of the Social Investment Forum. With 230 SRI mutual funds out there, there are enough choices that one can meet all a client's financial and social objectives just through fund allocation, but this still involves actually looking into each fund and assessing the appropriateness of its social criteria.

Why? Because what is socially responsible for one client, isn't necessarily politically correct for another.

One way to get around the definitional thicket is to use custom portfolios in separately managed accounts. SRI investments in separate accounts actually dwarfs that in SRI mutual funds.

It's easier said than done, however. “Screening clients' interests then finding appropriate investments takes a fair amount of time and study, especially when ramping up,” says Larson, though he adds encouragingly, “it's not as bad as the Series 7.”

While requiring more time, it doesn't require developing a social agenda as well. After all this is about aligning the client's values — not the advisor's — with the investments. But it does require familiarity with the issues and understanding what equity issue goes with what social issue, which means going beyond the routine number-crunching. “Socially responsible investors want you to go beyond the financial statements,” says McFarland.

“It isn't about who is liberal or conservative. It's about finding how the way management manages impacted profitability,” she adds. This isn't something readily apparent or discussed in most research reports.

It's also important not to lose sight of the ultimate goal — generating returns. McFarland stresses that social screens don't help you get to superior investment performance. The next step is critical: Sorting among the companies with the right behavior to identify ones with the best financial prospects. “It's still about stock picking. Skill at stock picking is separate from the social criteria,” she says.

So, if it's an area that requires more due diligence, more involvement with clients — and no additional fees — why would this be an attractive expertise for reps to develop? “Think in terms of the client-rep relationship,” says Steve Schueth, president of First Affirmative Financial Network in Colorado Springs, and a former Forum president. “Ask the heart-level questions about what people care about — what kind of quality of life they want, what kind of world they want to leave behind — being able to advise with these answers in mind, is the key to a long-standing relationship.”

That's a view shared by Steven Bolt, founder of the Petaluma, Calif.-based Values Financial Network and www.MoneyandValues.com (for more SRI Web sites see page 87). “When a rep goes beyond just asking financial questions and into more personal issues — like what a client wants their money to do — it changes the whole dynamic of the relationship,” says Bolt.

“When you deal at this heart-level,” says Schueth, you develop a closer relationship. “It is much harder to lose a client and much easier to gain referrals and grow your business.”

Also, SRI expertise is becoming less of a specialty and more one of the tricks of the trade. When asked if they want their accounts and values aligned, 70 percent of clients will say ‘yes,’ but fewer than 15 percent of reps ever ask, says Bolt. “Brokers need to be thinking not about if, but when they will integrate this ability into their business. In ignoring it, they ignore a way of ensuring client relationships are bulletproof from competition and the Internet,” he adds.

Brokers like Bolt and Schueth are clearly SRI boosters and the degree to which socially responsible investing goes mainstream is open to question. But the numbers are hard to ignore. Somebody will make money from SRI clientele, and it might as well be you.

Being ‘Socially Responsible’ can Also Be profitable

A few examples follow: