Socially responsible investing (SRI) is one of the hottest trends in financial services, and the wealthtech companies don’t want to miss out.
The same day Morningstar announced a new sustainable investing initiative through a partnership with the Money Management Institute, Wealthfront on Tuesday introduced new SRI capabilities through its Direct Indexing feature, which lets investors with at least $100,000 own individual securities that comprise an index rather than using an index fund. Now, these users can click to remove securities related to fossil fuels, deforestation, weapons or tobacco. Wealthfront’s Direct Indexing also allows users to remove any individual security from their portfolio for any reason they wish.
Betterment followed on Wednesday with its own SRI feature, though the New York robo advisor is taking a different approach than its Silicon Valley competitor. Instead of allowing users to remove securities, Betterment is offering a new SRI portfolio, which replaces its traditional model’s U.S. large-cap exposures with iShares DSI, a broad U.S. stock market ETF built around environmental, social and governance (ESG) standards. Betterment is also including iShares KLD as a secondary ESG ETF for tax-loss harvesting.
Dan Egan, Betterment’s vice president of behavioral finance and investing, said the resulting portfolio scores 42 percent better on MSCI’s social responsibility and ESG scoring. He added that Betterment would add more products to its SRI portfolio as they become more affordable and meet Betterment’s requirements.
Betterment’s SRI portfolio will be available to all new and existing Betterment users across its retail product, Betterment for Advisors and Betterment for Business. While there isn’t a $100,000 minimum like Wealthfront's Direct Indexing SRI requirement, Betterment’s SRI portfolio will cost 20 basis points, as opposed to its standard 10-bps fee.
Egan believes the price point is still lower than other digital advice platforms on the market that focus on SRI, and that customers will be open to spending a bit more to feel better about their investments, comparing it to paying extra for organic produce. He also said the decision to use an ESG ETF rather than remove individual securities was to protect portfolio diversification and get ongoing monitoring of the securities.
“The problem is if you put together a random basket, you’re not really doing it holistically. A company may have female leadership, but it may be a tremendous polluter,” Egan said. “By working with a fund intermediary who has very clear criteria and ongoing monitoring for why they overweight or underweight, we provide feedback [to the companies].”
“By working with MSCI, we are ensured that companies are very aware of what they need to do,” he added.
Both companies said that the addition of SRI was in response to growing consumer demand. Though Wealthfront did not respond to a request for comment, CEO Andy Rachleff wrote in a blog post that the company has “seen numerous requests from our clients wanting to omit buying securities” tied to fossil fuels, deforestation, weapons and tobacco. He also cited a Bloomberg article that said a record $5.8 billion went to SRI funds last year, and an additional $2.9 billion has come in this year through May.
Egan said Betterment didn’t have any hard data about demand for SRI, but that it’s something clients have requested—and that the engineers have wanted to build—for a while. He added that it’s a demand from users across demographics.
“[SRI] is a nice sort of groundswell consumer movement,” Egan said. “As people learn more about the roles their money plays, they want to see more transparency.”
He added that as technology delivers this transparency and makes it easier for consumers to move into SRI funds, the cost of those funds will come down. In addition to Wealthfront and Betterment, startups like Motif Investing and Swell are providing SRI-focused digital advice.
“Technology means consumers can have their cake and eat it too,” Egan said. “It’s the next logical step. Consumers should not have to sacrifice valuable service to have a portfolio that aligns with their values.”
