Incorporating Client Values Into Investing by Darren L. Zagarola, CFP®, CPA, PFS As published in Financial Advisor, April 25, 2013 One of the best aspects of an advisor's job is the opportunity to impact our client's lives by helping them realize their personal and financial goals; to show them how their dreams and finances relate. To do so, we must take the time to identify and ensure that we understand what is most important to our clients – in other words, their values. Values impact every aspect of a person's life. They are the basis for day-to-day decisions. Most clients do not know how or even that they can incorporate their personal values and societal concerns into their investment decisions. As advisors, it is our responsibility to enlighten clients about the opportunities available to them to invest in this way, primarily through the use of SRI products. SRI has long stood for “socially responsible investing,” and goes by many names: values-based investing, ethical investing, ESG (environmental, social, governance) investing, and green investing. More recently, it has evolved to mean “Sustainable and Responsible Impact” investing. Sustainable can be defined as meeting the needs of the present without compromising the resources of future generations. Responsible means the use of an investment process that considers the environmental and social consequences of investments, both positive and negative, within the context of rigorous financial analysis. “Sustainable and Responsible Impact” investing therefore identifies businesses that are sustainable, responsible and financially-sound investments. Having the SRI conversation with clients is not significantly different from the conventional portfolio discussion. During the data gathering process, the client's short- and long-term goals, cash needs and risk tolerance are identified. Then the appropriate asset allocation is determined. Since the goal of SRI investments is the same as other investments – appreciation, capital gains, and preservation of capital – we can then discuss with clients how SRI can be used to meet their goals. These are investments, and financial analysis still plays a key role in their selection. When introducing the SRI concept to clients, advisors should know what preconceived notions about it they might have. Here are the facts: SRI has been around since the 1700s. It is not new, nor is it a fad. SRI returns perform as well as the broader universe of funds. There is no premium required to invest in SRI products. You can create a fully diversified portfolio solely with SRI products. SRI is appropriate and attainable for everybody, regardless of wealth. You don't need 100% of your portfolio in SRI products to meet your personal goals. Let's explore these points so that you may elaborate on them when speaking with clients. We always begin our SRI conversations with a brief history of the concept, which dates back to religious doctrine of hundreds of years ago and rules on how one should invest and spend. It gained traction in the 1970s and 1980s because of events like the Dow Chemical protests, anti-apartheid movement, and Exxon Valdez oil spill. The first SRI mutual fund was started in the 192's and the first index was created in 1990. The U.S. Forum for Sustainable and Responsible Investment's 2012 Report of Sustainable and Responsible Investing Trends in the U.S. shows that $1 of every $9 invested is now put into SRI products, and this percentage continues to grow. This supports our belief that SRI is not a fad and will remain a sustainable investment philosophy for the long-term. Clients often believe that SRI products have a lower annual return and higher costs than conve ntional investments. This is not necessarily the case. There have been numerous studies performed over the years showing that on average, SRI portfolios produce annual returns that are comparable to conventional portfolios. The monetary return combined with societal impact and being able to invest in line with one's personal values could be considered immeasurable. The average expense ratios for SRI products, which range from 0.5 percent to 2.0 percent, are only slightly higher than broader universe large-cap mutual funds and similar to small-cap and international investments that require more research and analysis, and thus result in higher costs. Further, the number of SRI products available in the marketplace has grown to more than 720, including in excess of 300 mutual funds and exchange traded funds (ETFs). This increase should continue to lower costs for SRI in the future and help the everyday investor realize that investing with one's values is not only for high-net-worth individuals. There is no single approach to SRI investing. Each investor may have different values and different ideas about how to invest based on these values. Investors may be looking to exclude certain business types from their portfolio; such as companies that operate in Sudan, have a history of dumping toxic waste, or are involved in the alcohol, tobacco and/ or firearms businesses. Some may be looking to include certain business types; e.g., companies involved in producing clean energy, community-oriented banks, and/or corporations with a strong record of corporate governance, shareholder advocacy, or managing executive compensation. There are even companies that used to be excluded from SRI fund portfolios that changed their ways and now are included. It may take an initial small investment for clients to gain comfort investing according to their values. Remember, this might be new to them and they have to learn and understand the process. The client does not need to be 100 percent invested in SRI products to achieve their goals. If the client believes strongly about an issue, the advisor can incorporate that into a well-diversified investment portfolio. I recently met with the children of long-time clients. They are young and just starting out with their investment portfolio. They were very excited to learn they could incorporate the values that their parents taught them into their investment portfolio. We concentrated on a positive or inclusionary approach, meaning we identified issues that were important to them and incorporated companies that held similar beliefs into their portfolio. We then allocated a portion of their portfolio into funds that supported their interests. Finally, we reviewed the non-SRI portion of the portfolio to ensure there were no companies whose values conflicted with theirs. People are driven by their personal values. Institutions are driven by mission statements. Companies are driven by client and customer demands. Pensions are driven by constituents' requirements. No matter the client or their values, the possibility exists to create an SRI portfolio to meet their needs. It all begins with truly understanding the values held by your client, knowing how important it is to them that their investments match those values, and then educating them on the many options that exist.