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Robos Grow a Social Conscience

By Murray Coleman November 2, 2016

Industry surveys indicate many traditional wealth managers are late to join America’s socially-responsible investing party.

But not robo advisors. A host of startups are offering computer-driven portfolios sensitive to environmental, social and governance issues. And each aims to deliver services online at lower costs than most brick-and-mortar investment advisors.

The question, say experts, is whether they can compete if bigger robos and asset managers opt to start pursuing ESG investors in earnest.

The average socially responsible mutual fund charges an expense ratio of 1.1% in the U.S., according to Morningstar. A much smaller group of SRI-themed ETFs typically come with fees of 0.54%.

“The robo space is extremely crowded at this point, so it’s a natural evolution to see some startups try to move into new territory,” says Sean McDermott, an analyst with Corporate Insight in New York.

An early mover is EarthFolio, which launched in 2014. Art Tabuenca, a former Bank of America investments executive and founder of the San Francisco-based ESG-focused robo, declined to provide assets under management to FA-IQ. But its form ADV, filed last year, lists assets under management of about $30 million.

EarthFolio only invests in mutual funds since “just a handful of well-diversified ETFs” concentrating on ESG issues are on the market today, Tabuenca says. Its management fee is 0.50% per year with a $25,000 minimum investment. EarthFolio is offered through a platform for advisors by investment outsourcer Envestnet.

When it comes to attracting assets, Tabuenca characterizes his service as still in a very “nascent” stage. “The vast majority of ESG assets is sold through institutional networks,” he says. “But as far as retail ESG investing, we’ve never had a huge retail distribution channel to tap into — that’s what we’re trying to start now through this direct-to-client robo model.”

Tabuenca says recent industry surveys show 60% to 70% of traditional advisors aren’t involved with sustainable investing. He adds that the latest research also indicates that most high-net worth investors and affluent young professionals are very interested in learning more about values-based strategies.

Conor Murray

“We’re seeing a changing of the guard in traditional investment advising — a lot of evolving types of clients, including Millennials and women, are vastly underserved in this area,” Tabuenca says.

But not everyone is convinced a sea change in wealth management is coming for robos modeled after SRI principles.

While some of the new ESG competitors might be able to build a loyal following, robo analyst McDermott questions whether “it’ll be enough to achieve enough scale to generate long-term profitability.”

Lurking are bigger and more diversified robos such as Wealthfront and Betterment. Also, independent analysts note that large asset managers like BlackRock, Schwab, Fidelity and Vanguard — already players in automated investing — could decide to expand their current robo services to include their own SRI funds.

“As SRI investing grows and becomes more mainstream, some of these early robo pioneers might be well-positioned to be bought out or folded into larger players,” McDermott says.

In the meantime, he warns, “they’re also taking on significant risks of being put out of business” by bigger competitors moving into ESG-related niches.

Still, most general investing robos are struggling to break into profitability, says Conor Murray, CEO of OpenInvest in San Francisco.

Launched on September 13, the socially-responsible robo says it’s in the process of opening nearly 600 new accounts. Despite eschewing direct-marketing efforts, Murray is expecting an early harvest of more than $10 million.

OpenInvest charges a management fee of 0.50% and builds portfolios through individual stocks. Trading costs and other fees associated with monthly rebalancing and tax-loss-harvesting transactions won’t be passed along to clients, according to the firm.

On the whole, Murray finds SRI investors to be an eager and loyal group.

“We’re seeing so much pent-up demand by retail investors eager to gain access to a market that’s traditionally only been open to large institutions,” he says, “that our online sustainable-investing model doesn’t require a lot of upfront customer-acquisition costs.”

Even hybrid robos with ESG bents are coming to market. Late last month, Grow Capital Management launched its Grow application for Apple mobile devices. An Android version is set to become available December 1.

The parent RIA, which is based in San Francisco and opened in August, manages about $27 million. “It’s the human face of our robo service,” says CEO Doug Heske. Clients using the mobile-enhanced app can also choose to work with portfolio managers directly through real-time texts, teleconferencing, emails and in-person meetings.

The all-mobile investment option charges 0.25%, which includes underlying ETF management fees. Depending on the complexity and asset level, fees for the human side of the service can range anywhere from another 0.25% to 0.75% a year.

“Even for clients who don’t want human support,” Heske says, “we still are going to be offering advice through original articles, videos and links to interesting third-party content through our mobile app.”