Millennial money changes the game for US advisers
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Advisers are facing higher workloads and more exacting client expectations when creating bespoke products, as appetite for environmental, social and governance (ESG) investments grows.
ESG is a long-established theme in institutional investment, but drivers such as the transfer of wealth from baby-boomers, the growing influence of millennial culture and the news agenda have prompted greater interest from retail clients in recent years.
ESG funds have seen stable but modest growth, reaping $6.4bn in net inflows in 2017, up from $5.8bn in 2016, according to Ignites research. The data also tracked 40 ESG product launches among mutual funds and ETFs in 2017, up from 36 in 2016, and 26 in 2015.
“We see more clients becoming more conscious of where their money is being invested; they want their investments to do well but also to do right,” says Kristine Porcaro, co-founder and president of Lexington Wealth Management.
Hannah Ahmed, wealth adviser at Seattle-based Merriman, echoes this change, pointing to the millennials and women who are likely to benefit significantly from baby-boomer wealth.
“These demographics tend to be a lot more thoughtful about how they invest their money and making sure it lines up with their values.”
Rob Carpenter, president and chief executive of Baltimore-Washington Financial Advisors, explains that this greater awareness is supported by the improved performance of ESG products in recent years.
The MSCI ACWI ESG Universal Index has returned 9.02 per cent in the past five years, topping the 8.88 per cent returns generated by the MSCI ACWI, its parent index, over the same period.
Mr Carpenter says: “ESG investments may have typically underperformed in previous decades but, in the last three years for example, we have started to see strong performance and ESG investments outpacing things like oil.”
However, this presents challenges for registered investment advisers (RIAs) designing portfolios for clients who want ESG investments that perform well, but have their own ideas about what that label should include.
To accommodate this, advisers are having to tailor portfolios to suit individual client desires based either on social responsibility or corporate governance.
Jared Kizer, chief investment officer at Buckingham Strategic Wealth, explains this often means placing clients in a separately managed account.
Mr Kizer says: “There is more logistical complexity there and more upfront work for the RIA, but what is involved after that is pretty much the same.” Another option, he adds, is to invest a client in ETFs with a general ethical focus.
Some other RIAs talk of going a step further and creating new products intended to match investments with desired performance for a large section of clients. But Ms Ahmed says this takes a lot of time and research, and many new offerings may be subject to change.
While equities, ETFs and mutual funds seem to be the main route to ESG, some advisers say they are starting to see more inquiries about fixed income and alternatives, which present further challenges still.
Ms Ahmed says there are fixed income products such as municipal bonds where it is easier to access ESG, but in this scenario it becomes even more important to define what ESG means to an individual client.
In alternatives, meanwhile, a perceived lack of transparency in the asset class makes ESG investing difficult, but Ms Porcaro thinks it is a matter of time until this changes.
“We are seeing more strategies pop up. It is challenging to stay on top of it in places like venture capital but I don’t think that will be for long,” she explains, citing a parallel trend of alternative asset managers exploring ESG offerings.
While many believe ethical factors will continue to be a growing trend, Mr Kizer says the outlook hinges on long-term performance.
He argues there is evidence that “sin stocks” have generated higher returns over long periods. He adds that ESG-focused equities generally will tend to move a portfolio towards large-cap growth stocks, which may detract from returns in the longer term as growth will not always outperform value.
“What hasn’t yet been properly looked at is what the impact will be of more people being more into ESG investments than they were in previous generations,” he adds.
Mr Kizer cites hedge funds as an area of the institutional space where returns have been hit in recent years by too much money chasing too few trading opportunities.
But looking at the changing attitudes of RIAs, it appears there is still plenty of time and opportunity before ESG investments reach capacity.
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