When it comes to investing in accordance with one’s personal values, advisors and clients aren’t seeing eye-to-eye.
Values-based investing could become an albatross around the necks of financial advisors, according to recent research by the Money Management Institute (MMI) and Aon, which found a significant disconnect between advisors and potential clients of at least mass affluent status..
When a survey of more than 1,000 advisors asked what proportion of clients were interested in some form of values-based investing, whether it be environmental, social and governance (ESG) investing, socially responsible invesing (SRI) or some other variant, the respondents guessed that 44% of their clients would be interested. However, when the same question was posed in a survey of 1,500 "high-net-worth" investors (with more than $250,000 in investible assets), 76% said they wanted to incorporate at least one of their values into their portfolio.
The authors of the research said the disconnect could be explained by the immaturity of most values-based investing: concepts like ESG and SRI are still ambiguously defined and lack reliable data and thus can be frustratingly inconsistent. Also, nearly half of all advisors believe their clients either associate values-based investing with lower returns (49%), or generally lack interest in investing in accordance with their values (45%).
Clients, however, did not see values-based investing in those ways. Almost all of the investors surveyed (95%) did not believe that investing in accordance with their values would require sacrificing financial returns, and more than half of the investors surveyed (54%) said that they would be willing to accept lower returns to achieve that end.
Through their investor survey, Aon and MMI were able to quantify some of the impact of values-based investing on the advisory relationship. Clients engaged in values-based investing tended to have higher levels of satisfaction with their financial plan than those who were unengaged (73% to 56%), as well as more satisfaction with their annual reviews (80% to 65%) and greater overall satisfaction with their advisors (77% to 66%). Those engaged in values-based investing were also more likely to feel like they were getting a fair or exceptional value from the advisory and investing fees they paid.
When asked which values they deemed most important to be included in their portfolios, the "high-net-worth" respondents most commonly named their family and their country of origin. A less commonly named and less emphasized tier of values named by the client respondents include human rights, social justice, environmental protection, sustainability, religion, climate and diversity. A third tier of values, with the least amount of emphasis placed upon them, includes corporate governance, arts and culture.
The research makes advisors across age groups appear out of touch. For example, older advisors over age 55 tend to underestimate the importance investors place on values and interests like arts and culture, corporate governance, climate solutions, sustainable corporate practices and even family and country, while overestimating the importance of religion. Younger advisors under age 45 tend to overestimate the importance to investors of environmental, sustainability, diversity, religion and corporate governance, while underestimating the importance of social justice, human rights, family and country.
The Aon-MMI survey confirmed findings in previous research that younger investors have a higher interest in values-based investing, but also indicated there’s little spread between age groups. While clients under age 45 were the most likely to desire some form of values-based investing, with 78% indicating interest, clients between ages 45 and 55 and those over 55 also indicated strong interest, with 71% of each group desiring to incorporate at least one of their values into their portfolio.
For the research, Aon and MMI sponsored a survey of 1,500 "high-net-worth" individuals, defined as having more than $250,000 in investible assets, and 1,077 financial advisors across the U.S. The high-net-worth individuals were surveyed online between October and November 2019, while the advisors were surveyed online between December 2019 and January 2020.