Wealth Management Trend: Socially Conscious Investing

In the midst of this quarter's write-downs, layoffs and earnings disappointments, wealth management clearly remains a bright, profitable star on Wall Street -- in Merrill Lynch, for instance, wealth management was most strongly profitable unit this quarter and financial advisors have been promised they will be spared from the upcoming layoffs. In an interesting trend, more wealth management dollars are moving into socially aware investing. According to the Social Investment Forum, socially responsible investing assets in the U.S surged 18% from 2005 to 2007, outpacing broader managed assets. Although this research focused on institutional investors, retail investors are following the same pattern, at least according to Bill Crager, president of Envestnet. He should know; his firm's platform for financial advisors, which is used by 400 broker/dealers, beta tested a socially aware investment vehicle with a handful of small investment firms and attracted $300 million in six months."Whatever starts in the institutional world always comes down to the retail world," Crager says. "Where we're seeing it today is in the upper-high-net-worth category. The wealthy want to make sure their assets are being managed in a conscious way and that can represent anything - it can be environmental, it can be a stance against companies based in China or companies that have invested in Darfur or are supporting arms in Darfur or it could be religious. It could be no sin stocks -- no alcohol, no tobacco."

Envestnet has partnered with KLD Research & Analytics, which rates companies by how well they do on various fronts such the environment. The Envestnet platform puts investor portfolios through KLD's screening tool and informs investors of the activities the companies are engaged in. The financial advisor can then modify the portfolio to better suit the investor's interests. "The retirement segment especially has an interest in this and when presented with the options, they not only want returns and protection, but as long it's not going to adversely affect portfolio performance, they want to make sure their dollars are invested in a way that doesn't conflict with their views."

There is a danger of promising an investor that his money will be invested in a socially responsible way and then finding out that KLD didn't do its job carefully enough, Crager concedes. "You never know all that goes on in a company," he notes. "Take a company like GE: it's a large provider to the military of products like fighter jet engines, on the other hand it's building clean energy technologies. So how do you classify GE?" Envestnet's solution is to offer different grades of filters, such as a minimal SRI filter that might include GE stock and a more stringent SRI+ filter that would most likely reject it. To create its analysis, KLD looks at annual reports, interviews with companies, news articles and other types of research.

Crager believes Generation Y will be even more interested in socially-aware investing. "That next generation of children in their mid-20s is incredibly socially conscious," he says. "You can't present them with a traditional investment portfolio. They're concerned about the effect on the community or the environment, and that's an indication of where the market will ultimately head."