Earlier this week, FT Adviser reported that IFAs ‘turn down’ ethical investments. Simon Leadbetter investigates whether the issue is investor demand, adviser expertise, funds available or a lack of understanding for both parties.
On Wednesday, one of the financial adviser trade magazines, FT Adviser, reported the assessment of Anna Sofat, managing director of London-based Addidi Wealth. She said, “A lot of people do not want their money invested in unethical industries such as armaments, tobacco, blood diamonds and so on.
“If socially responsible investment is never discussed, people will not realise that there are solutions to their ethical concerns. Some financial advisers say that ethical investments have underperformed over the last few years, but so have the majority of actively managed funds.”
Blue & Green Tomorrow’s own internal research of IFA Fact Find documents (a short information-gathering survey mandated by law when advising clients to ensure that the advice is the best available from all information given) showed that many IFAs leave the ethical investment question to the end, when much of the guided discovery of financial advice has already been given.
It is surprising that when the Financial Services Authority itself states that, “When assessing a customer’s needs you should make sure you consider their hopes and aspirations plus any beliefs” , advisers give such a low priority to what will be some of the most profoundly held beliefs of the advised, whether on moral or religious grounds.
One of the issues is the word ‘ethical’, which has religious or moral overtones in the highly secular, some would say amoral, environment of investment. Socially responsible or sustainable do not carry alienating overtones.
Many people’s values are less about religion than a belief in what is right and wrong. Whether you are, in order of global adherents, Christian, Muslim, non-religious, Hindu, Buddhist, Shinto, Sikh, Jewish, et al., most people believe that pollution and killing or exploiting people (especially children) is wrong, and they would not collude in such activities directly.
We’re fairly confident that there is no religious text that says, “You shall not sin… unless it compromises your rate of return” – and the non-religious have equally strong convictions, too.
Unless ‘expert’ financial advisers spell out the direct connection between the investments their clients make and real world activities (e.g., armaments, tobacco, blood diamonds), or even attempt to get some sense of the client’s values or beliefs in regard to these activities, then they are self-evidently failing in their duty to provide the most appropriate advice.
Again, our own research suggests that while only 8% of the market would switch to ethical or environmental investment options, two-thirds of those who would not switch would not do so as they do not understand the sector or are concerned about the return on investment.
Unless advisers make the effort to understand the balance between a client’s values as well as their appetite towards risk and return, rather than just push their own ill-informed prejudices, then they are failing their clients.
Again, this is about best advice, which means allowing clients to make informed choices based on all the information available. They may be willing to give up a small part of their return or entertain more risk by screening out those companies that profoundly offend their own values – not that there is any evidence that an investor needs to entertain lower returns or more risk if they are well advised.
It cannot be best advice to advise an investor who supports organisations that work to protect people or the planet to invest in organisations that are involved in the harming of people or planet.
Lee Smythe of Smythe & Walter Chartered Financial Planners eloquently describes the current dilemma for advisers. “Given the option, more clients would want to consider being ethical, environmentally friendly or whatever other label may apply with their investments”, he says.
“This is where the investment managers need to play their part in providing sufficient options to build suitable portfolios.
“Unfortunately this then becomes a little bit ‘chicken and egg’ in that they won’t provide better solutions for a demand which doesn’t exist and demand is unlikely to increase hugely until better solutions are available.”
If you want to know more about ethical, socially responsible or sustainable investment read our free guide here.