Clients expect their financial advisor to help them prepare for their future while anticipating trends that could develop into good investment opportunities. For a practice to attract and retain high-net-worth individuals, this kind of insight is all the more essential.
During the next few years, existing sustainable technologies should be scaled to price points competitive with traditional technologies, especially in energy efficiency and water conservation. Advisors who build a niche in these types of investments now could take advantage of that trend. Obviously, whether or not sustainable investment strategies work in your practice depends on each client and his or her unique situation.
The high-net-worth clients I work with are attracted to sustainable investing because they have gotten returns but they also want to invest in companies that reflect their values. But despite the quality of these companies and no matter how well-researched they are, a return is not guaranteed.
To help you start integrating sustainable investment strategies into your practice, here are some key concepts and marketing approaches.
What Is Sustainable Investing?
Besides conducting in-depth research, firms that specialize in sustainable investing also engage in shareholder advocacy. They can have dialogues with a company on a variety of issues in order to encourage improvement with particular ESG issues. This appeals to my clients because they want to know that the businesses they are investing in care about the same issues.
The Business Case For Sustainable Investing
Bloomberg now has more than 300,000 terminals around the world that provide corporate sustainability information to keep pace with the growing investor demand for ESG data. MSCI recently purchased two of the largest ESG analytics companies and started offering its own ESG indices and consulting services.
Alternative investors have also started to take an interest. The number of alternative vehicles (hedge funds, private equity, venture capital, and property and real estate investments) that use some kind of ESG criteria in their selection process grew by 285% between 2007 and 2010, says US SIF 2010 Trends Report.
In January 2010, US SIF reviewed the performance of 160 member funds on its mutual funds performance chart, which is tracked by Bloomberg. The foundation found that 65% of these funds outperformed their benchmarks in 2009, most by significant margins. Large-cap funds that use ESG criteria did especially well-72.6% of them outperformed the S&P 500. A majority of these large-cap funds also beat the S&P 500 over three- and ten-year periods, according to US SIF. This data often changes advisors' and clients' perceptions that sustainable investing means sacrificing performance (though past performance is no guarantee of future results).
Fifteen years of academic research indicate that, over time, strategies employing ESG criteria perform well against those that do not. The 2011 winner of the UC Berkeley Moskowitz Prize, which recognizes research in SRI, was a paper called Does Corporate Social Responsibility Affect The Cost Of Capital? In it, the authors found that firms with better corporate responsibility scores enjoy cheaper equity financing. Investing in responsible employee relations, environmental policies and product strategies, the authors suggest, can help companies substantially reduce their cost of equity.
In another recent study, two Harvard Business School professors analyzed 180 companies and found that "high sustainability companies dramatically outperformed their counterparts over the long term, both in terms of stock market and accounting performance." The authors of the study, The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance, suggest that strong environmental and social performance policies create a strong culture and promote a company's values and mission.
Because sustainable investment portfolios are focusing on companies with increasingly diverse ESG criteria, they have also started investing in companies from sectors of the economy that were in the past excluded. By expanding their universe, portfolio managers now own more companies that pay dividends and can support a total return approach to portfolio allocation.
What's The Marketing Strategy?
Sometimes just talking about yourself is the best marketing. But this encounter also shows how sustainable investing might present a marketing opportunity with your clients. It could be that many of them are interested in some kind of ESG issue. It could be energy consumption, pollution reduction, gender diversity in the workplace or child labor abuses in overseas factories.
My personal experience bears this out: When I first decided to focus on sustainable investing in my practice, I was surprised to find that 80% of my clients were interested in learning more about it. Now, more than 90% of my clients have between 15% and 50% of their portfolios allocated to sustainable investment funds. This happened because I chose to take my practice in this direction. As an advisor, you need to determine whether this investment strategy is right for you and the clients you serve. Some clients will want it to be a larger part of their portfolio and others may not want to participate at all. Those who are interested will find that the sustainable investment universe covers many mutual fund categories, private equity, ETFs and community investing options (though they are also subject to the same risks these categories are).
Every day, stories appear that you can use to talk to clients about sustainable investing. For example, after Tropical Storm Irene hit late last summer, cities nearby had floodwater deposits backing up into their drinking water because of aging infrastructure, creating a terrible odor. People were understandably upset and eager to hear about funds that invest in water infrastructure and technology for filtration and wastewater management.
Several major corporations that have operations in my community now work closely with sustainable investment portfolio managers and other shareholder groups to reduce their environmental footprint and institute efficiency policies beneficial for shareholders and consumers. When clients hear about what's happening with companies that have operations in their own backyards, sustainable investing becomes more personal.
The proposed Northeast Electric Vehicle Network is another story my clients are excited about. Transportation, energy and environment officials from ten northeast U.S. states and the District of Columbia are joining forces to reduce pollution and reliance on oil. The network is planning for enough electric vehicle charging stations to service 200,000 electric vehicles, according to SustainableBusiness.com. Public policy initiatives like these offer valuable marketing opportunities. Often when I speak to my clients about becoming shareholders in the companies that will benefit from these public policy initiatives, they want to know more about the sustainability process.
It is possible for you, similarly, to become the expert on investment strategies that few other advisors will be talking about. After developing this specialty within a traditional financial planning practice myself, I've been asked to participate on panels and been interviewed in local and national publications.
If you choose to integrate sustainable investing into your practice, I recommend building strong business partnerships with sustainable portfolio company representatives. They can help you climb the learning curve faster with product knowledge, marketing support and aid in integrating investment strategies into a portfolio allocation model. Some of my most successful marketing events have included presentations by my business partners from both sustainable and traditional investment companies.
In my opinion, there's never been a better time to look at incorporating sustainable investing into your client portfolio allocation process. Multiple reports, forecasts and studies indicate that it is moving into the mainstream, and I believe it's my professional duty to make clients aware of this trend. And when clients get excited about it, they share their excitement with others. This is how I doubled my production. With a stubborn recession and high market volatility to worry about, clients appreciate the opportunity to believe that their money matters.
With a focus on sustainable investing, I've built the kind of long-term relationships with my clients that helped me survive the recent recession with 99% client satisfaction and 98% retention. I'm confident the best is yet to come for advisors and investors who participate in the growing opportunities available through these strategies.
© 2012 Ameriprise Financial Inc. All rights reserved. Paul Ellis, CFP, JD, is the founder of Ellis and Associates, a financial advisory practice of Ameriprise Financial Services Inc. He is also a franchise consultant, and is based in upstate New York. He is licensed/registered to do business with U.S. residents only in the states of New York, New Hampshire, Maryland, North Carolina, Florida, South Carolina, Minnesota, Kentucky, Connecticut, New Jersey, California, Louisiana and Pennsylvania.