More investors follow their hearts

Mar 31, 2013 @ 12:01 am

By Liz Skinner

Financial adviser Tom Nowak realized about three years ago that he was all wrong about socially conscious investing.

Although he had been steering clients away from it for years, research showed him that investments in firms or funds that screen for certain social or environmental factors can compete on performance and provide portfolio diversification. He also learned that there are reliable methods of evaluating a company's impact on society.

“I realized that the assumptions that had kept me away from socially responsible investing weren't true,” said Mr. Nowak, founder of Quantum Financial Planning LLC. “I now offer up the option of socially responsible investing to every client who signs up for advice.” About one in every three new clients of his expresses an interest in dedicating at least a portion of their assets to investments that align with their belief systems. Many investors, in fact, seek out his services because they know he has identified low-cost socially conscious investment options.

Events such as the school shooting at Newtown, Conn., last December or the BP PLC Gulf of Mexico oil spill in 2010 tend to spark new waves of interest among investors in knowing exactly what types of companies and causes their portfolios are supporting, advisers said.

Financial adviser Jennifer Hatch of Christopher Street Financial Inc. said several clients called her after the Sandy Hook school shootings wanting to know whether their portfolios supported the gun industry.

“We found it was hard to accomplish a portfolio that omitted guns, because most of investments were in widely diversified funds, and you couldn't just take out the guns,” said Ms. Hatch, who has helped about a dozen clients invest with certain social and political screens.

The clients who questioned her after Sandy Hook did not change any of their investments after her analysis but decided to “take personal actions against certain companies.” For instance, one client returned all the Christmas gifts she had purchased at Cabela's Inc., which sells the type of rifle that was used at the elementary school shooting.

With national gun control legislation slated to be debated after the congressional recess ends Friday, client conversations like these may resume.


About 11% of the $33 trillion in total managed assets in the U.S., or $3.73 trillion, was in socially conscious investments at the end of 2012, according to figures from the U.S. SIF Foundation, formerly the Social Investment Forum Foundation. That's up from $3.07 trillion in 2010, which at that time accounted for about 12% of the $25 trillion in managed assets.

“Many more wealth managers are getting client requests and interest from clients about socially responsible investing,” said Steve Schueth, an adviser and president of First Affirmative Financial Network LLC, which manages socially conscious portfolios for the clients of about 107 advisers.

Clients typically have many of the same concerns that Mr. Nowak had before he researched the investments. Mr. Schueth recommends that advisers direct clients to tread lightly in the space at first. For instance, The Community Foundation in Boulder, Colo., invested about $1 million of its $20 million with First Affirmative about a year ago after its leaders decided the group should be trying to “do good with its investments,” the way it does with its community projects, foundation president Josie Heath said.

Returns for the foundation's socially conscious investments and its other investments were both about 11.5% last year, with the socially conscious funds slightly outperforming the others, she said.

“Initially, we put our toe in the water, and now we've had good success,” Ms. Heath said. “We will be raising with the board whether to put a greater percent in moving forward.”

One reason investors need help is that the number of choices has skyrocketed in the past 25 years — from half a dozen socially conscious mutual funds to more than 200 — along with a growing number of exchange-traded funds and money managers who integrate socially conscious strategies. In addition to equity funds, some companies also have bond funds that incorporate socially conscious themes, including Calvert Investments Inc. and Pax World Investments.

Of course, specializing in socially conscious investments doesn't ensure growth — and learning about this space can be challenging.

“Some financial advisers who are part of the First Affirmative Network have grown their business over the past few years, and others not so much,” Mr. Schueth said.

There are no professional designations that highlight an adviser's expertise in socially conscious investing.

Eric Smith, founder of Goodfunds Wealth Management, said socially conscious investing is not something that advisers should plan to do with just a few clients.

“It really is a true focus area and specialty that you need to commit yourself to in order to do well,” he said. “It's not a sector, like health care — it's a fundamental investment approach.”

Clients who are interested in socially conscious investing typically want their lives to be in line with their beliefs, so many of Mr. Smith's clients also have solar panels on their roofs and shop at food co-ops.

“So they are going to want socially responsible investments for their individual retirement accounts,” he said.


Advisers said many clients are willing to sacrifice some returns, though it's unclear whether they must. U.S. SIF cites about 20 studies which collectively suggest that socially conscious investing doesn't have an impact on performance one way or the other.

A client of Heidi Davis, an adviser with Columbia Financial Planning LLC, came to her after the 2010 Gulf of Mexico oil spill and wanted to examine what types of companies each of her investments supported. In the end, about 20% to 30% of her portfolio had to be changed because it included investments in big oil companies that the client didn't feel matched her interest in protecting the Earth.

“I explained to her that sometimes with socially responsible funds, the performance is not necessarily as strong,” Ms. Davis said. “She was OK with that because the approach supports what her beliefs are.”

Other investors seek to align their investments with their religious or moral beliefs.

Seventeen years ago, John Vleko, president of Planning Resources Inc. decided he wanted to blend his own Catholic beliefs with investing.

Today he has about $14 million in client assets invested with the Ave Maria Funds, a family of mutual funds that screen out companies that don't support the ideals of the Catholic Church. In addition, he's helped clients invest another $25 million in the funds through their 401(k) plans.

“I don't thump people with Bibles,” Mr. Vleko said. “But if some of these things are near and dear to a person's heart, I say put your money where your heart is.” Twitter: @skinnerliz


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