Ethics are very personal. Each and every client will have their own perception of what ethical investing means to them, so it's important for advisers to understand their client's values and individual views on any objectionable stocks and asset classes.
Clients who invest ethically tend to be emotionally involved with their investments and have strong opinions around where they wish their money to be invested. The onus is on their financial adviser to ask the right questions to ascertain the specific areas the client would like to avoid (negative screen) and which areas they would like to include (positive screen).
For ethically minded clients non-negotiables could be;
» Human rights abuses
» Intensive farming
» Poor environmental management
In most cases ethical funds will avoid these areas. That being said, some funds may invest in companies who derive less than 10% of their total business from one of the above activities. While less than 10% might seem like a reasonable figure, for those who wish to totally avoid armament or tobacco production this figure is totally unacceptable.
Therefore, not only does the client need to be asked the right questions about their preferences at the outset, but robust analysis needs to be applied to each and every fund to make sure it doesn’t hold any of the 'no go' areas uncovered in the fact find process. This same in-depth analysis will need to be constantly applied to make sure the investments remain compliant in relation to the client’s beliefs.
Review the client's entire holdings
While new portfolios will be aligned to the client’s beliefs, consideration needs to be given to any other holdings the client might have and how accurately these reflect their ethical views.
A financial adviser not well versed in ethical investments may feel comfortable reviewing a portfolio to determine its appropriateness for the client’s investment needs, although without the proper scrutiny that very portfolio may fail to address their ethical concerns.
To illustrate this point we asked King & Shaxson Ethical Investments to undertake an analysis of the top ten funds (based on gross inflows) according to a leading platform’s recent data. We felt it was worth reviewing the holdings of these funds to see what ethical nasties might appear.
Top ten funds (by gross inflows):
- Fundsmith Equity
- Axa Framlington Managed Income
- Valu-Trac Investment Management Sorbus Vector
- Vanguard Investments UK Life strategy 60% Equity
- Valu-Trac Investment Management Sorbus Vector 1B
- Vanguard Investments UK Life strategy 80 Equity
- CF Woodford Equity income
- Axa Fund managers Standard Credit Short dated Bond
- Premier Portfolio Managers Multi-Asset Monthly Income
- Vanguard Investments FTSE Developed World Ex UK Equity index
Taking each of the funds listed above King & Shaxson Ethical Investments, and indeed a financial adviser, could clearly review the underlying holdings within each fund. The multi-asset or index linked assets can also be analysed however this takes more time and effort.
Hidden ethical nasties are revealed
All of these assets have a common theme: tobacco. Most ethical investors tend to want to avoid this type of holding. So as you can see, without taking time to review the underlying holdings of a fund it is possible for the ethical investor’s principles to be ignored. This could be the cause for embarrassment for the financial adviser, or more importantly, result in anger from the client.
It’s like the embarrassment suffered by the Church of England in July 2014 when they admitted that funds held by their venture capital portfolio included an investment in Accel Partners - one of Wonga’s key financial backers - in spite of the Archbishop of Canterbury’s criticism of payday lending.
Avoid this mistake in your own business
In today's technology driven world clients have the ability to carry out their own research. Therefore it is more important than ever for those providing advice and guidance to take time to understand the non-financial aspects of their client’s investments, considering these alongside the financial elements, to avoid any potential embarrassment.
At DISCUS we know that many professional advisers see the benefits of incorporating a discretionary proposition within their centralised investment proposition for conventional portfolios. The same process can be applied for ethical mandates too. By selecting a specialist discretionary manager to look after your ethical client’s investments you will significantly reduce the amount of time you spend researching and analysing portfolios to make sure they still adhere to the client’s wishes.