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Robo Advisers’ Latest Foray: Socially Responsible Investing

Posted by hkarner - 18. Juni 2017

Date: 18-06-2017
Source: The Wall Street Journal

Digital investment services focus on niches to stand out from crowd

Charles Schwab has $16 billion in its Intelligent Portfolios service, making it one of the biggest players in the robo adviser field.

As the millennial investor comes of age, two youthful trends are converging: socially responsible investing and robo-advisory services.

Over the past year, a small but growing number of firms have introduced automated—or “robo”— investment services that include socially responsible investments. Driving the interest is a desire on the part of individuals to spend and invest in ways that are consistent with their values. Data also show that socially responsible investments can outperform over the long run; since 1990, the MSCI KLD 400 Social Index has returned an average of 8.4% a year, versus 7.6% for the S&P 500 index.

“There is a fair amount of evidence from investor surveys that millennials and women are especially interested in sustainable and impact investing,” says Jon Hale, director of sustainability-investing research at Morningstar Inc. Given that millennials are also the target market for many robo-advisory services, “it seems like a natural combination.”Investing giant TIAA was the latest to jump in with such an offering, launching earlier this month a robo platform with access to three types of investments: actively managed funds, index funds and socially responsible investments. This summer, robo pioneer Betterment LLC plans to introduce investments “that will better meet the needs of customers seeking a more socially responsible portfolio,” says spokesman Joe Ziemer. And Morgan Stanley said that its robo, planned for this fall, will include socially responsible investment options.

‘There is a fair amount of evidence from investor surveys that millennials and women are especially interested in sustainable and impact investing.’
—Jon Hale

The new services are part of a trend toward specialization among robo advisers, says Sean McDermott, a project manager at consulting firm Corporate Insight Inc. “Every major financial-services firm has either launched a robo or has announced plans to do so. The big firms have advantages, including trusted brand names and bigger marketing budgets,” he says. “The startups are trying to carve out a niche to differentiate themselves.”

Other startups are targeting specific segments of the population, including women, Hispanics and Muslims or offering actively managed investments in contrast to the index funds that have been standard fare for robos.

As with robos including Wealthfront Inc. and Betterment, the new socially responsible offerings start by asking prospective clients to fill out a risk-tolerance questionnaire. An investor’s answers determine which of several portfolios a service recommends. The services generally offer periodic rebalancing of investments to adhere to an investor’s desired asset allocation and tax-loss harvesting, a strategy of selling investments that have gone down in price to book losses that may offset taxable gains on other holdings.

Some also give investors the option to contact an adviser. TIAA, for example, includes financial advice in the 0.3%-of-assets fee for its new service, dubbed Personal Portfolio. If a client has complex planning needs, TIAA consultants can “create a plan at no additional charge and with no obligation,” says a spokeswoman. Other services, in contrast, are fully automated or simply provide help-desk assistance on the mechanics of opening the account.

Despite the head start of startups including Betterment and Wealthfront, the robo field is now dominated by traditional financial-services companies. The two biggest players are Vanguard Group, which had $65 billion in assets in its Personal Advisor Services as of March 31, and Charles Schwab Corp. , with $16 billion in its Intelligent Portfolios service. Vanguard currently offers one socially responsible fund within a robo—the Vanguard FTSE Social Index Fund—but has no imminent plans to introduce others; Schwab has no such fund in its robos.

Before signing on, it is important to consider the fees. Many of these services charge from 0.45% to 1% or more for advisory services and investment fees. That is generally higher than the 0.3% to 0.5% that is typical of many established robo services.

It is also important to understand the investing approach and services.

“In the old days, socially responsible investing was mostly used by religious organizations that wanted to exclude stocks of certain companies or industries that violated their principals,” including alcohol and tobacco firms, says Greg Wait, president of Prophecy Impact Investments LLC, a robo featuring socially responsible investing that made its debut in January.

Now, Mr. Wait says, managers of mutual funds and exchange-traded funds that take a socially responsible approach typically look for companies that “proactively adopt positive policies,” such as using renewable energy, promoting women or paying above-average wages.

Most of the new robos use socially responsible ETFs and mutual funds. Wealthsimple, a Canadian robo-adviser that introduced a service in the U.S. in January, uses six ETFs from companies including State Street Global Advisors, Invesco Ltd. subsidiary PowerShares Capital Management LLC and BlackRock Inc. that favor companies that promote women, use clean technologies and demonstrate community engagement, among other factors. Others use a mix of active and passive funds. Prophecy Impact Investments builds its portfolios with mutual funds from companies specializing in socially responsible investing including Domini Impact Investments LLC, Calvert Research & Management and Pax World Investments.

Others give clients the flexibility to buy or avoid specific stocks. OpenInvest, a San Francisco-based company that launched a robo adviser that takes a socially responsible approach in September, lets investors choose from among 10 investment “themes,” including climate change, supporting women in the workplace and divesting from weapons makers, among others.

It also allows investors to add or remove specific stocks. For example, some clients dumped United Airlines Inc. in the wake of its decision to forcibly remove a passenger after overbooking a flight, says OpenInvest co-founder Josh Levin. OpenInvest automatically rebalances the portfolio to ensure the client remains diversified and broadly tracking the market.

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