Educate clients on new socially conscious offerings

Tools designed to help investors avoid investments in countries that sponsor terrorism or genocide, or that violate the human rights of their citizens, are the latest offerings from financial services firms. These tools include exchange traded funds that avoid the shares of companies that do business in such countries, and screens that identify such companies. No doubt, anti-terrorism mutual funds will follow. The existence of the divestment strategy and the tools to implement it provide investment advisers with another opportunity to be of service to their clients. While some clients may find the concept of avoiding the shares of companies that do business with pariah states appealing, such a strategy may carry higher risks or lower returns. Many state and local government pension funds have adopted anti-terrorism investment policies that require their investment managers to divest the shares of companies doing business in countries such as Iran, Sudan and Syria. But as The Wall Street Journal reported, some states are rethinking their divestiture policies, and others that were thinking of adopting them are reconsidering the issue. The problem, as the Journal pointed out last week, is that such policies aren't cost-free. The portfolios incur transaction costs while selling the stocks of the offending companies, and in addition, banning the stocks reduces the investible universe, hurting diversification. While the costs may be acceptable in a bull market, they may not be in a bear market. No American investor wants to provide financial or material assistance to terrorists who threaten this country. Similarly, no investor wants to help regimes that violate the human rights of their citizens. The urge to sell the stocks of companies doing business in, or with, such countries is understandable. But many of these investors may not be fully aware of the potential costs to their long-term returns from such decisions. Advisers must make sure such investors understand the immediate costs and the potential long-term effect on returns of shrinking the available investment universe. It isn't the advisers' responsibility to persuade the investors one way or the other, but it is their responsibility to make sure the investors make fully informed, not emotional, decisions. If after they understand the implications of the decision to divest companies that operate in, or do business with, pariah states, or even mutual fund companies and ETFs that invest in such companies, the clients still want to divest, then the advisers must support that decision. They must help clients implement their decisions as efficiently as possible, making full use of the new tools and investment vehicles available to minimize the short- and long-term potential costs. The money, after all, belongs to the clients. If they can accept the possibility of lower long-term returns to make a moral statement, so be it.