Digital financial advice platforms are racing each other to introduce socially responsible investing options for their customers, and some experts believe traditional advisers should be doing the same.
Both Betterment and Wealthfront, the two largest startup robo-advisers, announced this week that they’ll give clients a way to align their investment dollars with their social and environmental beliefs. Both firms attributed the move to demands from customers.
“SRI has been one of the most consistent personalization requests we’ve had,” said Dan Egan, Betterment’s director of behavioral finance and investments. “It allows people who want to buy a better world to put their money where their mouth is.”
These firms join TIAA, which last month introduced a robo-advice offering that provides clients with access to socially responsible mutual funds and exchange-traded funds, and several smaller firms that in the last two years have introduced automated platforms that provide SRI investments.
The nation’s largest robo adviser, Vanguard Personal Advisor Services, which has $80 billion in assets, offers clients a proprietary fund on its digital platforms that tracks a benchmark that screens companies on social, human rights and environmental criteria. Schwab Intelligent Portfolios, which has $19.4 billion in AUM, does not offer an SRI option.
Technology analyst William Trout, Celent’s head of wealth management research, said SRI investing is approaching the point where its inclusion in portfolios is table stakes for digital advice providers, in part because of the investments’ appeal to younger investors. That factor that makes it important for human advisers, too.
“With the millennial population now the largest client segment in absolute numbers, and even old school advisors keen to engage with the next generation of clients, SRI will soon be a must-have for traditional advisers as well,” Mr. Trout said.
Traditional advisers report more clients are asking questions about SRI, and some advice firms have created practices to focus on offering sustainable investing options to their clients. But many advisers still do not because they don’t know much about the field, which is still developing.
“Clients are clearly interested in discussing ESG with their financial advisers, but the majority of advisers need more professional education and practical insights on incorporating sustainable investing into their practices to feel comfortable having those conversations,” said Jon Hale, Morningstar Inc.‘s head of sustainability research.
Morningstar, which launched sustainability ratings in March 2016, is working with the Money Management Institute to help advisers learn how to add SRI options to their businesses. They plan to host workshops and provide other content to teach advisers how to engage clients on appropriate sustainable investments, Morningstar and MMI announced Tuesday.
On Wednesday, Betterment, which is the largest startup digital advice platform, with $9.7 billion in assets, unveiled its initial SRI approach. The mostly digital platform is replacing the large-cap exchange-traded fund in its portfolio with an iShares ETF that’s built to include large U.S. companies that have been screened for positive environmental, social and governance characteristics.
Betterment’s SRI portfolio, which is available now, scores 42% better on ESG criteria than the U.S. large-cap equity holdings in its traditional portfolio, and it costs the same as its traditional portfolio, the firm said. Other asset classes in the Betterment SRI portfolio, such as smaller company and international equities and bonds, will remain the same for now because alternatives for those either don’t exist or would be too expensive to meet Betterment’s mandate of low-fee portfolio advice, Mr. Egan said.
Wealthfront CEO Andy Rachleff announced Monday that the firm would give clients a way to exclude companies that operate in domains that they don’t wish to support, beginning with four categories: fossil fuels, deforestation, weapons and tobacco.
He said clients have asked the firm how to opt out of investments in these sectors.
“We’re taking our cue from you and will build a one-click feature to omit one or all of these categories from your portfolio,” Mr. Rachleff wrote in a company blog.
Wealthfront, which has more than $7 billion in assets under management, will make this option available to investors later this year, spokeswoman Kate Wauck said.
Robo-advice platforms have captured more than $100 billion in client assets since they were introduced beginning around 2011. Robos and mostly digital advice firms are expected to reach about $385 billion in assets by the end of 2021, according to Cerulli Associates.
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