Advisors, Take Note: Retail Investors Are Still Waiting To Be Informed About RI
February 28th, 2023 | RIA Staff
There is a sentiment in the investment industry that Responsible Investing (RI) has taken a back seat after the frenzy of 2020-2022, when new product launches were dominating the headlines and there was keen interest in ESG funds. The pandemic perhaps triggered an existentialist crisis forcing a re-examining of one’s values, spending and investing. Despite the origins of RI being deeply seated in a long-term view of investments and focusing on key areas such as strong corporate governance and minimizing environmental and social harm, the current discussion is steering toward a political conversation which may be creating a paradox for financial advisors.
To help advisors navigate these conversations we can look at a recent study conducted on the advisor segment that shows there continues to be a clear need for advisors to better understand their clients’ values and objectives with a view on their risk appetite and risk adjusted returns. We argue that adding RI due diligence adds to the strength and trust of the advisor-client relationship and an element of fiduciary responsibility in working toward the best of interests of the client.
A 2024 RIA Advisor Insights Study found that advisors’ adoption of RI is lagging investors and investment manufacturers with only 14% of advisors offering RI information and funds to their clients, but 90% expecting growth in the coming years. The study also cites three main factors that commonly drive advisors to start offering RI services: client demand (37%), their own interest, research and values (25%), and wholesaler support (19%). On the other hand, the reasons advisors do not offer RI in their practice include concerns around greenwashing (35%), and either lack of expertise or that ‘they have not gotten around to it yet’ (43%). The study outlines that the understanding of RI varies broadly amongst advisors and that wholesalers/manufacturers likely need to step up in maturation of RI practices and adoption. While 32% stated that their dealer list had a wide range of ESG solutions available, 38% cited limited availability and 30% cited no availability, no dealer list and/or do not know about ESG solutions.
Combined with the 2023 RIA investor study, one could find some opportunity cost where 67% of investors say they would like to be informed about RI vs. only 14% of advisors are equipped to address it. Investment Executive published an article in 2024 citing similar insights on advisors and their ability to offer up ESG discussions to their clients.
Client and Advisor Fulfilment Gaps
Source: 2024 Advisor RI Insights Study
From an investment perspective, on a spectrum of values-based investing to financially material ESG topics, advisors are likely to find where their clients are situated through their due diligence toolkit. Values based investing has existed for multiple decades and the issues or values have changed over time with the socio-economic, political, and cultural changes. The ongoing conflicts in eastern Europe and the middle east coupled with the severe weather impacts being felt in different geographies, are triggering or re-defining investor interests in either avoiding specific types of investments, doubling down on solutions, or purely managing these from a risk management perspective.
On financially material ESG factors, as data and methodologies solidify and taxonomies come into play, asset managers are using ESG metrics and information in the same way they would use any information with the objective of providing risk adjusted returns. Given the impact of community relations, carbon profile, governance profile and overall purpose of a firm, it is increasingly difficult for asset managers to ignore the market impact of ESG factors. On this end of the spectrum, there are nuances on fund profiles and the approach taken by asset managers, that do not come through without a deep understanding of RI. An understanding of how such fund profiles and approaches may be interacting with the investment objectives and preferences of clients, as well as the associated obligations for advisors to understand those objectives and preferences. In this context, it is important for advisors to know their clients’ preferences and be equipped to address them.
Some key questions advisors can ask their clients include:
1. Are there any specific economic activities, themes or issues they feel strongly about?
2. What are the drivers of these preferences – values (religious or family/personal) based, being responsible citizens (do not harm), or the economic argument for looking at ESG related investment risks or opportunities?
3. Do they care about investing in a specific fund which is aligned with their values or are they seeking asset managers whose underlying approach to RI stacks up well against their preferences?
4. Some questions advisors can ask of themselves, and their available solutions include:
5. Which funds are available to match the risk profile of their clients and the specific preferences they may have?
6. Are they familiar with the sustainable/RI approach and progress of the asset managers whose funds they utilize?
7. What tools can they access to understand the ESG characteristics of funds on offer alongside their traditional risk and return characteristics?
8. How can they keep themselves up to speed on the evolving nature of RI? What courses, workshops and educational tools are their dealers or industry associations making available?
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Author
Priti Shokeen
Managing Director, Head of Sustainable Investment
TD Asset Management
