by Erin Lowry
WHERE TO SPEAK TO A HUMAN
Want a human advisor but worried about being rejected based on your small stack of cash? Don’t worry, size doesn’t matter to all advisors. Here are some resources for you to consider if you want to hire a financial advisor:
XY Planning Network: XYPN is an organization of fee-only financial advisors specifically focused on Generation X and Generation Y clients. Advisors are required to be both CFPs and fiduciary advisors, which helps reduce the research you need to do. There are no asset minimum requirements, and some advisors offer a monthly retainer service. You can also reach your advisor virtually. You can learn more at XYPlanningNetwork.com.
Garrett Planning Network: Garrett offers clients access to a network of fee-only, fiduciary CFP professionals. Members of the network do not accept commissions or any other compensation directly from clients. There are no income or asset minimums to become a client, and many offer one-off meetings by the hour if you’re looking for help on a specific issue instead of a long-term relationship. You can learn more at garrettplanningnetwork.com.
National Association of Personal Financial Advisors: NAPFA is another way to find fee-only, fiduciary CFPs; however, some NAPFA advisors have asset minimums for clients, as the organization has no rule dictating that they can’t. You can learn more at napfa.org.
Ask a friend: Try your own network of friends and family to see if they have any recommendations for a financial advisor. There is one caveat here. You may not want to use the same financial advisor as your bestie or your parents or siblings. It could be akin to using the same therapist. Obviously, they shouldn’t be sharing your personal information, but it might just feel a tiny bit awkward.
ARE ROBO-ADVISORS AND HUMAN ADVISORS MUTUALLY EXCLUSIVE?
There’s nothing wrong with taking advantage of both worlds.
“People have a need for advice when they need it on their own terms,” says Nugent, a former wealth services provider himself. “Whether that’s through video chat, the phone, text message, email, or in person, everyone has a different kind of style. If you’re going through some sort of life event, it’s complicated. It’s not always black and white. Technology is really good at solving the black-and-white challenges that exist, but the ability to speak to someone human provides a different perspective that makes you think about other things that might be happening.”
Using a robo-advisor now might be the best way for you to enter the market, invest consistently, protect your portfolio from your own meddling hands, and still get some human advice along the way. Then, as your life and financial needs change, perhaps you end up pivoting to working with a human advisor. But even that doesn’t mean transferring all your assets away from your robo-advisor and over to a human. You can still do both if you prefer. Remember: it depends!
CHECKLIST FOR WHETHER A ROBO-ADVISOR IS RIGHT FOR YOU
☐ You’re ready to start investing in the first place!
Have you “earned the right to invest,” as Boneparth says? Go back to chapter 1 and make sure.
☐ Your financial situation isn’t too complicated.
As Benke mentioned, there are times when it makes sense to hire a dedicated professional to ensure you’re minimizing the taxes and maximizing the profits on your investments.
☐ You want help.
It’s okay if you want to be a completely hands-on DIY investor. But if you want help with asset allocation, rebalancing, tax-loss harvesting, and even determining your risk tolerance, then a robo-advisor could be a good fit.
☐ Do you need or want a long-term relationship with a person?
A robo-advisor may offer access to financial professionals, but not always in a one-on-one capacity to develop a long-term relationship. If that’s important to you, then ask your robo-advisor if it’s possible to develop such a relationship, or consider just hiring a human advisor instead.
Chapter 10
Impact Investing—Making Money Without Compromising Your Ethics or Religious Beliefs
OTHER THAN WHEN I saw the cult classic movie Wall Street, I didn’t give the idea of ethical investing too much thought in my early twenties. I also wasn’t actually investing, so it didn’t necessarily need to be a thought yet. Then a serendipitous conversation enlightened me on how an activist viewed the stock market.
I was sipping iced tea while sitting in a rocking chair on a screen porch in Georgia. It was exactly as quaint as it sounds. A rock-and-roll musician, his wife, and the major network news reporter I was shadowing were talking about conservation and other environmental issues. The reporter and I were there on assignment to interview the musician about his tree farm, so the progression to discussing general environmental issues made sense.
The BP Deepwater Horizon oil spill had occurred just a few months prior, so the news had been strewn with images of the damage done to the surrounding beaches and wetlands and of animals being killed or displaced.
Suddenly, the musician’s voice hardened. “Can you believe people are investing in BP now and making money off this horrific event?” he posed to the group.
This got my attention.
I’d spent a lot of that summer teaching myself about how to best handle my money after graduating college in a year, but I’d yet to consider the ethical side of the equation.
One sentence shifted the way I viewed investing. At what cost do you plan to earn and build your wealth? We collectively rail against outsourcing to countries with weak labor laws and get outraged over the systemic, horrifying behaviors of a CEO—and yet many of us still continue to invest in companies that financially benefit from the practices we claim to stand against. In return, we, the investors, benefit.
In many ways, you can be in control of where your money goes as an investor.
ARE YOUR INVESTMENTS REALLY LIVING UP TO YOUR STANDARDS?
Unfortunately, investing in a fund, whether it’s a mutual fund, index fund, or ETF, can mean you’re financially supporting and benefiting from a company that partakes in practices you morally or philosophically oppose. It could be that you disagree with the company’s environmental policies or that it builds a product you don’t support or that it’s had a history of poor labor practices. When you invest in a broad index, you can’t opt out of investing in specific companies with which you disagree.
The S&P 500 index includes casinos, and alcohol, oil, and pharmaceutical companies. That may not bug you, and it’s perfectly okay that it doesn’t, but there are those who want to invest in a way that aligns with their values. Buying ETFs and mutual funds without doing thorough research could mean that your money is tied up with something you find unsavory at best and downright unethical or harmful at worst.
WHAT IS IMPACT INVESTING?
“Impact investing, by definition, says that a company has to be earning revenue that is aligned with one of the UN Sustainable Development Goals,” says Dave Fanger, CEO and founder of Swell, an impact investing platform. “That’s an important distinction [from] some of the [other kinds of investing] you hear about, like ESG [environmental, social, and governance] or SRI [socially responsible investing], which is really more of a broad umbrella term.”
What Are the UN Sustainable Development Goals?
“Goals that laid out the groundwork for businesses, non-businesses, and world leaders to follow and get behind that address things like climate change and energy efficiency,” says Fanger. “These are goals that reach out to 2030 and beyond, trying to address major social and environmental issues.”
The seventeen goals defined by the UN1 are:
No poverty
Zero hunger
Good health and well-being
Quality education
Gender equality
Clean water and sanitation
Affordable and clean energy
Decent work and economic growth
Industry, innovation and infrastructure
Reduced inequality
Sustainable cities and communities
Responsible consumption and production
Climate action
Life below water
Life on land
Peace, justice and strong institutions
Partnerships to achieve the goals
You can learn more about the specifics of these goals at undp.org.
WHAT IS SOCIALLY RESPONSIBLE INVESTING?
Socially responsible investing, or SRI, isn’t quite as strict as impact investing, which vets funds in portfolios with a more critical eye than an SRI portfolio would. It’s not unlike the difference between fiduciary and suitability. Impact investing is akin to fiduciary, and therefore looking for the best possible option; while SRI is more like suitability. It’s not harmful, but you can probably do better.
ESG (environmental, social, and governance) compliance is often at the center of SRI portfolios. The problem is it’s not terribly difficult to obtain ESG compliance, as the bar can be set rather low.
“If you think about it on a spectrum, on one side you’d find things like ethical investing or things that would be negative screening,” explains Fanger. “For example, let’s remove anything related to tobacco. Then you’ve got ESG in the middle, where you’re saying, ‘Let’s just find the companies that have good environmental, social, and governance policies.’ There are companies out there with ESG ratings that are quite high, but they could be in the oil sector. So, I think you go then to [the other end of the spectrum], and that’s where you’ll find impact investing. That’s saying, ‘Not only do we want to see a very high ESG rating, but let’s only look at the companies that align with the UN Sustainable Development Goals.’ That will then remove a number of questionable businesses that might be efficient with energy usage or water usage, but other companies are creating products that align with green tech or energy efficiency.”
HOW TO CHECK UNDER A COMPANY’S HOOD
As a company, Swell specifically looks at its evaluated holdings daily to ensure they remain compliant with the company’s standards by using Morgan Stanley Capital International’s (MSCI) ESG ratings, which rate companies on a scale from AAA to CCC. Fanger points to a company like Tesla as having a AAA rating, while a Wells Fargo or Volkswagen* would receive a CCC. You and I don’t have that kind of time or access to the same types of tools to evaluate these on our own. You can turn to companies like Swell or select SRI- and ESG-compliant mutual funds or ETFs from your brokerage of choice. However, that doesn’t always mean you’re getting the crème de la crème of companies.
“It’s kind of like organic food when it first came out,” says Fanger. “Everybody labeled it ‘organic,’ and then you started looking a little bit closer at those ingredients and thought, ‘Uhh, maybe this isn’t what I thought.’ Same thing here with ‘socially responsible’ or ‘impact investing.’ Some of these funds will state what the ESG rating is from MSCI, and you’re looking for something that’s double B and above*—that’s a good, strong indicator of the overall policies and procedures of a company. And then from there you would really look in the prospectus to see if it mentions anything about the revenue they make around the Sustainable Development Goals.”
Companies can also pass ESG compliance without passing your own personal gut check. Casinos can be considered ESG compliant through the use of solar panels, but maybe you don’t want to invest in one because you disagree with gambling.
You can look up the “holdings” (i.e., the companies included) in a particular fund. For example, Morningstar typically gives free access to the top ten to twenty-five holdings in a particular fund. You should also be able to look up all the holdings through a monthly fund report from your brokerage of choice. If you’re having trouble finding it online (because it’s not always easy) try actually giving your brokerage a call.
The level to which you want to practice ethical investing, SRI, or impact investing will greatly dictate your approach. Wanting to only invest in SRI-compliant funds that also adhere to the UN Sustainable Development Goals and that have at least a AA ESG rating will result in you needing to do a lot of the heavy lifting with research as well as potentially limiting your diversification and therefore exposing you to more risk. Swell offers investments in 270 companies* meeting the impact investing definition, according to Fanger, but that’s only 270 companies. Just the S&P 500 exposes you to 500 large-cap companies in 10 different sectors.
Just because a brokerage firm says a fund is ESG or SRI compliant does not mean it lives up to your standards. If you have a strict code of conduct regarding the type of companies with which you’ll do business, you’ll need to do more digging.
INVESTING WITH RELIGIOUS BELIEFS IN MIND
Another consideration is a portfolio that only includes companies that align with your religious beliefs. Notably, halal investing is a faith-based approach to picking investments that align with Islamic beliefs. For instance, investing in companies that profit from gambling or produce alcohol, tobacco, or pork products wouldn’t comply. That instantly eliminates a lot of common index funds. The S&P 500, for instance, has Molson Coors Brewing Company (alcohol) and MGM Resorts International (gambling).
Having to vet each company in an index is incredibly tedious, so some robo-advisors, like Wealthsimple, have created halal-compliant portfolios.
CAN I STILL MAKE A DECENT RETURN ON MY INVESTMENTS?
One of the biggest concerns by far when it comes to impact investing or placing restrictions on your portfolio due to ethical or religious beliefs is whether you can still receive a healthy return.
“The main thing we deal with is this idea that I’m going to sacrifice returns,” says Fanger. “The data is showing otherwise.”
One such data point Fanger recommends is the comparison of MSCI’s KLD 400 Social Index compared to the S&P 500. The MSCI KLD 400 Social Index started in 1990 and has outperformed the S&P 500, according to Fanger. This isn’t leaps and bounds better, more like a few hundred points. However, just because the index overall performed well doesn’t mean the returns from those funds always win. You have to look at specifics when you’re investing, especially expense ratios.
The expense ratios for SRI funds coming from companies like Vanguard, a company that’s generally considered to have low expense ratios, are higher than funds that are not necessarily SRI compliant. For example, in the winter of 2018, Vanguard charged a 0.20 percent expense ratio with a minimum investment of $3,000 for its Vanguard FTSE Social Index Fund Investor Shares (VFTSX). The Vanguard S&P 500 Index Fund Admiral Shares (VFIAX), also with a $3,000 minimum, only charged a 0.04 percent expense ratio. The SRI-compliant fund (VFTSX) didn’t have an Admiral shares option, only an Institutional Investor option with a minimum of $5 million and a 0.12 percent expense ratio.
So, yes, you can make a decent return—but the fees might do more harm than those attached to non-SRI-compliant funds. So impact investing exclusively could be financially problematic.
“Keep in mind that as your investing program gets more specialized, you’re investing in segments of the market, and that might expose you to a little bit more volatility, for instance, relative to the entire market or the entire global market that holds a lot more securities,” says Maria Bruno, CFP®, a senior investment analyst for Vanguard Investment Strategy Group. The more specialized you become, the more it could reduce your diversification, which exposes you to more risk as you narrow the sectors in which you’re willing to invest.
This isn’t meant to discourage you from building an impact investing or SRI-compliant portfolio, but you must consider more than just the returns of the index. It
’s also about the cost of the funds, which impacts your net returns. Adding impact-investing-compliant funds can be a way to diversify your existing portfolio, but investing exclusively in such funds may minimize your diversification and increase your risk.
CHECKLIST FOR IMPACT/SRI INVESTING
☐ Do some research if you want to really ensure your investments aren’t tangled up with anything you deem nefarious. Don’t take at face value a fund labeled “ESG compliant.”
☐ Understand that your standards and the brokerage’s standards may be different.
☐ Avoid relying exclusively on impact investing. While you won’t necessarily be sacrificing returns, it could leave you without broad diversification and therefore subject to a higher amount of risk.
☐ Adding an SRI- or ESG-compliant fund to your existing portfolio is a smart way to diversify.
Chapter 11