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Why FAs Are Still Reluctant to Jump on ESG Bandwagon

By Murray Coleman August 16, 2017

A wave of mutual funds and ETFs with socially responsible investing themes keep coming to market. By investment researcher Morningstar’s latest count, 200-plus mutual funds and ETFs are now available featuring some sort of “sustainable” investment strategy.

Asset managers and major brokerages think there’s big money to be made shilling these funds to advisors, with the likes of BlackRock, Bank of America and UBS highlighting the growing acceptance and mainstream popularity of SRI and “impact investing” strategies.

But many advisors don’t seem to be biting. A survey of advisors from the Financial Times’ list of top RIAs last year showed just 4% of firms were focused on SRI opportunities.

Likewise, data compiled by Morningstar show funds following a sustainable investing theme had nearly $76 billion in net assets through last week. That represents just 0.45% of the total U.S.-based mutual funds and ETF market, according to the independent Chicago-based research firm.

Yet industry trade groups working with 401(k) sponsors, foundations and other nonprofit organizations argue that including such institutional money in the mix catapults socially responsible assets to much higher levels.

Nancy Skeans, chief executive of Schneider Downs Wealth Management Advisors in Pittsburgh, figures she stands somewhere in the middle between advisors who pooh-pooh deep involvement in socially responsible funds and those who are rabid fans.

Skeans thinks asset management’s “production machine” is getting “carried away” with climbing aboard the bandwagon of funds investing in environmental, social and governance issues.

But along with her colleagues at the RIA, which manages more than $1.2 billion, she sees value to her clients in monitoring developments in a retail ESG marketplace some analysts predict could double within several years.

Skeans says her client base skews to retirees and seniors – those who typically aren’t as inclined to put ESG at the top of their investment priorities. But as Schneider Downs refreshes its book and works with more up-and-coming young professionals, she expects to field a greater number of questions about socially responsible investing.

“We’re keeping on top of this emerging ESG market and are excited about its potential,” Skeans says. “Right now, though, we’re not seeing any surge of interest – the ESG marketplace still has a way to go to make a bigger dent in our clients’ long-term investment plans.”

Cameron Aydlett of Triad Financial Advisors in Greensboro, N.C., says she also isn’t finding much in the way of widespread demand for such products.

But she thinks it’s important to remain “objective” about SRI strategies. For those investors who raise such interests with advisors at the indie RIA, which manages more than $500 million, Aydlett says she tries to “manage expectations.”

While a myriad of investing vehicles are now available in the U.S. market, the FA likes to explain to ESG enthusiasts that many funds still hold relatively short track records. She also tells clients that active managers can charge higher fees and implement niche investment strategies that slice-and-dice global markets very finely.

Thomas Greco

“We find it’s important to let our clients know that there are always practical tradeoffs to consider when setting specific investment parameters for an otherwise diversified portfolio of stocks and bonds,” Aydlett says.

Thomas Greco, head of the investment committee at Concentus Wealth Advisors in King of Prussia, Pa., says he also isn’t seeing a “groundswell” of demand for ESG-styled funds.

Greco is concerned that many popular SRI funds offer “spotty exposure” to companies his clients really want to own. Different funds employ varying screening methods, he adds. “From a practical perspective,” Greco says, “complementing broader investment strategies with some of these more eclectic SRI portfolios can make managing client assets a lot more difficult.”

Greater complexity in portfolio management brings added risks to investors, he warns. On his list of concerns is a possibility of introducing more market volatility into client allocations. Greco also isn’t convinced that recent research arguing SRI investing can enhance long-term returns is grounded in “real-world” portfolio management practices.

“In a perfect world, all of our clients would be investing with a social conscience and the market would greatly reward those companies,” he says. “Over time that might happen. But at this point, we just don’t see the stock market creating enough clear SRI winners to recommend wholesale changes in investors' long-term asset allocation plans.”