How do clients understand the impact of their investments? Challenges and opportunities for advisors
Financial advisors must be sure that all client communications are compliance-approved. However, tools that facilitate conversations between clients and advisors about the environmental and social factors associated with an investment portfolio are often denied compliance approval. Regulatory requirements state that the calculations behind any tool offered by broker/dealers must be recreated, so many firms cannot justify the staff time needed to verify impact reporting tools.
ESG is a growing area of interest among the advisor community. One reason that ESG is not considered a priority for many broker/dealers is because there is a presumption of little interest among advisors and their clients. However, it is unfair to conclude that ESG is limited to a niche group of advisors without knowing the facts. What percentage of advisors have an interest in ESG? How much AUM do they represent? At what pace is ESG interest growing among the advisor community? Does this correlate with the growing rate of interest in the investment community overall? (For investors? For portfolio managers? For AUM?) Plus, significantly more interest would be piqued among advisors if they were supplied with the appropriate tools. Offering ESG is no longer a niche, and can sometimes be seen as a fiduciary responsibility in managing client portfolios.
There is precedent for offering client-facing impact reporting tools in the wealth management industry. First Affirmative makes YourStake available to advisors. Morgan Stanley has a proprietary Impact Quotient available to their advisors and clients. Conway Wealth Group and Summit Financial offer the Seeds Investor impact reporting tool. TONIIC Tracer is available to their members, such as RIA Abacus Wealth Partners. TONIIC is an industry group for institutional investors, many of which have left their traditional wealth managers because they couldn’t provide the right kind of impact support.
Impact reporting fits within larger ESG strategies at wealth management firms. Many wealth management firms are investing in ESG strategies in response to advisor demand, shifting client expectations, and industry trends. There is record growth in inflows to ESG assets, especially given the extra attention to risk mitigation forcing companies to address issues such as COVID, Black Lives Matter, gender equality, and climate change. ESG data/reporting is crucial to enhance the value and convey the benefits of ESG strategies. Imagine a financial advisor telling you they have a strategy to reduce risk, but don’t provide any metrics to prove it? These kinds of reports are needed to help provide impactful information sought by clients, such as shareholder engagement highlights or descriptions of a company’s involvement in the prison industry. Equipped with these tools, advisors can leverage data transparency and accompanying explanations to help their clients overcome the challenges to understanding why companies score poorly or well on ESG.
Wealth managers are at risk of clients moving their assets to managers with more ESG capabilities. Similarly, advisors could be left frustrated and switch broker/dealers if their firm doesn’t recognize its lack of ESG resources. Impact reporting tools can be an excellent resource for aligning branding claims of impact to the actual work of investment advisors. ESG data firms can facilitate compliance approval processes by disclosing raw data, calculations, and sources — so broker/dealers should invest the time needed to clear such tools for advisor and client use.
