IWF Advisor aligns clients' investments and beliefs.
Whatever you may think about it, socially conscious investing-dubbed socially responsible investing (SRI) by its advocates-is impacting the financial decisions of many clients and prospective clients. According to the 2003 Report on Socially Responsible Investment Trends in the United States, published by the Social Investment Forum (an organization of more than 500 social investment institutions and practitioners), $2.16 trillion was identified in professionally managed portfolios as using one or more socially responsible investment strategies.
"More than one out of every nine dollars under professional management today in the United States today is involved in socially responsible investing," the study claims. Furthermore, from 1995 to 2003, assets involved in socially responsible investing grew 40% faster than total professionally managed assets in the United States. Data obtained from Morningstar Inc. confirms a growing interest in SRI investing: More than $19.7 billion is invested in SRI mutual funds today, up from just $4.5 billion in 1995.
The point is, socially responsible investing is getting too big to ignore. Whether you actively cultivate clients who have an interest in it or not, you had better be prepared to service clients with an interest in socially responsible investing-or be ready to refer them to someone who can.
A new online service, IWF Advisor from IdealsWork Financial (www.idealsworkfinancial.com), may offer advisors a solution to the tricky problem of finding a cost-effective way to align a client's social agenda and financial needs.
Assuming that you do want to service clients who feel that their social beliefs should be reflected in their investment portfolio, several options are open to you. The most obvious one is to invest the client's assets in an SRI mutual fund. SRI funds generally fall into two broad categories: religious funds and, for lack of a better term, "liberal, politically correct" funds. The former exclude certain types of investments based on religious doctrine. For example, Islamic funds tend to exclude most stocks in the financial sector because their lending practices do not conform to Islamic religious doctrines. The better known "liberal" funds tend to avoid industries that pollute the environment, manufacture firearms or produce tobacco products.
Many issues are far from black and white, and different companies may display disparate scores on different SRI criteria. McDonald's ranks near the top on minority employment, but doesn't do well on producing healthy products.
There are a number of perceived problems with SRI funds. One is that, by their very nature, they exclude certain industries, which limits their ability to diversify. Says Bill Rocco, an analyst who covers SRI funds for Morningstar, "Historically, there has been a natural sector bias built into the liberal funds. Their selection criteria result in portfolios that fall into the large-cap blend and the large-cap growth style boxes." According to Rocco, some funds seek to broaden their reach by offering a "best of class exemption." Rather than totally excluding an offensive industry, they will seek to provide additional diversification by investing in the company within an industry that is the least offensive.
A potentially larger problem for some may be that client's beliefs with regard to social responsibility do not necessarily jive with those of the fund management. Many clients, for example, tend to have a much more narrow focus than the typical SRI mutual fund does. They may feel very strongly about animal testing, but they may not care at all about tobacco use, or they may be radically opposed to tobacco use (say, they lost a parent to lung cancer), but have no problem with producers of alcoholic beverages.
One way to obtain a greater degree of control over the process might be to invest in a separately managed account. This is a reasonable alternative for larger accounts, but it may be difficult to obtain a high level of customization at a reasonable cost when dealing with smaller accounts.
A third option is to construct a customized portfolio of individual stocks that conform to your client's social tastes. In the past, this has been a somewhat onerous task, but now IWF Advisor greatly simplifies the work of socially screening individual securities and industry sectors to identify securities that meet your client's criteria.
"We are not tackling this from just the progressive liberal position," says Sam Pierce, president of IdealsWork Financial. "People have different core values, and they all should be considered when investing."
The IWF Advisor system consists of two databases: one that tracks corporate social and environmental data, and a second that tracks financial data. The program also uses the social and financial performance preferences selected by the client in consultation with an advisor. Once the client preferences are entered, the program searches for companies that meet the criteria the client has specified.
It is not necessary to be an expert in SRI investing to use this program. The interface is generally well laid out and fairly self explanatory. Advisors can screen individual companies, industries or indexes. The program comes loaded with a number of pre-programmed screens to get you started. For example, a "value" investor who wanted to screen the Dow Jones Industrials for companies that support animal rights would select "Dow Jones" from the drop down list of indexes, select "animal rights" from the social criteria menu, and select "value investor" from the financial criteria menu.
IWF Advisor allows advisors to create both social and financial custom screens, which can be named and saved for future use. On the social screen, a company can be excluded for any involvement in one of six activities (animal testing, weapons, nuclear power, tobacco, alcohol, gambling). As an alternative, you can set up the screens so that a particular activity or sub-activity does not totally exclude a firm from consideration; instead, it lowers the firm's "social" score.
Screens can also be adjusted so that only some activities in a category impact the social score. The process can be further refined by assigning weightings to various activities.
The financial screens fall into four broad categories: historical performance, Morningstar grades (Morningstar Inc. equity rankings for financial health, growth and profitability), growth trends and valuation measures.
IWF Advisor can be used to screen existing client portfolios of stock and mutual funds. In the case of individual stocks, an advisor would simply enter the ticker symbols, provide the social criteria, and the program will generate a report. If any portfolio holdings are in conflict with the client's interests, an advisor can bring those issues to the client's attention, analyze the implications of a sale and arrive at a course of action with the client.
If a client's social concerns are narrowly focused, it should be possible to construct a portfolio of mainstream mutual funds that are in alignment with a client's goals. An advisor could, for example, enter the portfolio holdings of various mutual funds and screen to make sure that the companies in the portfolio do not do business in countries that are known to support terrorist groups. Clients with narrowly defined social agendas such as terrorism, gambling, contraceptive manufacturing, etc., should have no trouble finding a wide range of mutual funds in addition to the SRI funds that meet their needs without compromising their beliefs.
While IdealsWork Financial tool is an admirable product that brings useful social screening techniques to the individual advisor at a fairly reasonable price ($750 per year per user), the service could be a lot better than it currently is. One of the greatest problems I see with the program is the amount of data entry it requires. Ideally, one would hope that IWF Advisor could be integrated with, or at least import from, portfolio management, portfolio analytic and/or financial planning software so that existing portfolios could be screened without the data entry chores. By the same token, if I were going to use IWF Advisor to screen mainstream mutual funds for narrowly defined client preferences, an enormous amount of time would be saved if the program linked to Morningstar Workstation or a similar product that contained current portfolio holdings of the various mutual funds.
I would want IWF Advisor to upload the portfolios I build to my trading software. I also would want the program to link with the FOLIOfn Inc. Advisor site (http://www.folioadvisor.com/) so that I could effortlessly implement the portfolios I built for clients of more modest means, or ones I built from a custom index by taking an existing index and excluding companies based on some narrowly defined criteria. According to a company spokesperson, IdealsWork will be adding some portfolio management capabilities in future releases.
Currently, IWF Advisor's data and screening criteria are somewhat limited. At press time, IWF Advisor contained data on roughly 2,000 publicly traded companies. That's a good start, but it is not nearly enough, particularly if you have a fondness for smaller companies. As an unscientific test, I entered five stock holdings (as reported by Morningstar) at random from the Royce Micro Cap Fund to see if the program contained any information on them. Two of the five were in the database. Quite frankly, that's two more than I expected, but not good enough.
The program offers a good selection of industries that you can screen, but the broad and narrow market indexes are virtually non-existent (the only one currently available is the Dow Jones Industrials, which is rarely used by advisors). In order for this to be a useful tool for advisors, the ability to screen a meaningful assortment of major indexes is almost a must.
The financial screens are a good first effort, but my guess is that experienced advisors will demand much more robust financial fundamental screening tools, and possibly some technical ones as well.
Despite some shortcomings, IWF Advisor represents an important development in the field of SRI investing. For advisors who personally embrace the SRI philosophy, the program will most likely sell itself. It offers advisors a relatively painless tool capable of performing customized social screens on individual securities and/or portfolios based on client driven criteria. The more skeptical among us who question the advisability of SRI investing as it is generally practiced at the retail level today may still have an interest in this product. It can help advisors conform to some clients narrowly defined social beliefs without negatively impacting our investment processes. It can also help advisors differentiate themselves in an increasingly competitive marketplace, and possibly attract new prospects.
As things stand today, this service is best suited for those advisors who cater to socially conscious clients or who would like to attract this client base in the future; however, if some of the features I've suggested are added, IWF Advisor will appeal to a much broader audience.Joel P. Bruckenstein, CFP, is co-author of the book Virtual Office Tools for the High-Margin Practice: How Client-Centered Financial Advisers Can Cut Paperwork, Overhead, and Wasted Hours. (See www.virtualofficetools.net for ordering information.)