For many investors, incorporating personal values into a portfolio is a must, and socially responsible investing (SRI) is a way to do that. If you don’t know what SRI is, or only have a vague idea, it turns out you’re in good company. Most registered investment advisors (RIAs) don’t know either, and because of it they’re missing a big opportunity with their clients.
Socially responsible investing is when you apply your moral compass to how you invest your money. Not only are you looking for a high return on your investment, but also one that meets certain criteria that lets you sleep well at night. For example, peaceniks might want to avoid putting their retirement savings in military defense contractors. Environmentally conscious folks might breathe easier knowing none of their hard-earned cash is invested in companies that pollute the air or deplete the ozone layer. Still, others may want to boycott drug companies that test their breakthrough treatments on animals. In other words, SRI is putting your money where your mouth is.
According to research conducted by Registered Rep. of its RIA readership in January on behalf of Portsmouth, N.H.-based investment manager Citizens Funds, 64 percent of respondents said their knowledge of SRI was slim or none. It’s not surprising, then, that nearly 50 percent said they had zero client assets invested in SRI funds, and 36 percent said they don’t offer SRI. According to the survey, the average number of assets invested in SRI funds was 2.5 percent, which is not likely to change much since 73 percent of respondents said they expected their SRI allocation to remain the same over the next two years.
But ignoring SRI and not educating clients on what’s available is a big mistake. Another survey conducted in January 2006 by polling firm Yankelovich on behalf of Calvert Funds showed that 54 percent of retail investors are interested in SRI. In fact, assets in socially responsible mutual funds have grown 400 percent, from approximately $7.4 billion to over $40 billion in just eight years, according to Morningstar. Meanwhile, the number of SRI funds has increased to 200 today from only 65 in 1998.
Andrea Pollinger, senior vice president of marketing for Citizens Funds, says that advisors who learn more about SRI tend to use it more. According to the survey, 58 percent of respondents who currently have more than 5 percent of their AUM in SRI funds plan to increase that percentage. Only 18 percent of advisors with less than 5 percent of AUM in SRI funds planned to add more. “The survey points out that those advisors who research socially responsible mutual funds tend to have a more positive view about these products,” she says.
According to respondents, benefits of SRI investing are that it: helps meet the needs of current clients (64 percent); enables me to a reach a broader client base (30 percent); and associates the practice with an additional area of expertise (26 percent). Drawbacks to SRI funds include: there aren’t many choices (75 percent); performance has been spotty (52 percent); and researching the funds takes a lot of time (39 percent). Advisors that have more than 5 percent of their assets in SRI have a more optimistic view of these seemingly esoteric vehicles: Only 46 percent say performance is a drawback, and 14 percent see it as a benefit.
For many advisors recommending a fund comes down to the traditional evaluations like quality and tenure of management and track record. Seventy-three percent of respondents would recommend an SRI fund with an impressive performance record even if clients weren’t specifically interested in SRI. “There are a few good SRI funds that pass our screens,” says John Rafal of Essex Financial Services in Essex, Conn. “But if a fund doesn’t pass our screens, we don’t use it at all,” he says.
Dan Moisand, a principal with Spraker Fitzgerald Tamayo & Moisand in Melbourne, Fla., has a different problem. “A lot of our clients are retired military or were involved with the military in some way,” says Moisand, who says defining “SRI” becomes tricky in such cases. But he, too, says his fund screens are the ultimate determinant of which funds he researches further.
Greg Ghodsi, an advisor with Robert W. Baird in Tampa, Fla., admits very few of his clients have brought up SRI funds in conversation, but says the topic does come up occasionally in initial client evaluations. “In every one of those conversations, you have to find out if there are any issues that concern them, any companies they don’t want to own,” says Ghodsi. For RIAs, it’s time to have “the talk” with their clients about SRI.
