Impact Investing Gains Momentum

Impact Investing Gains Momentum

The polarizing political climate appears to be serving as an impetus for some firms to take socially responsible investing more seriously.  At today’s Impact Investing conference hosted by The Economist in NYC, Audrey Choi, Chief Executive of Morgan Stanley’s Institute for Sustainable Investing, said there is research that shows that 70% of investors want to align their investments with their values.

Not surprisingly millennials are interested in impact investing. Audrey Choi also referenced research that that millennials are two times as likely to buy or divest stocks based on their personal beliefs.

Most speakers throughout the day were aligned in that they wanted to see impact investing become more than just a sleeve of an investor’s portfolio; impact investing should be mainstream as suggested by the full name of the conference, “Impact Investing: Mainstreaming purpose driven finance.”  Jackie VanderBurg, Managing Director and Investment Strategist of US Trust and co-author of “Gender Lens Investing: Uncovering Opportunities for Growth, Returns and Impact,” explained that gender lens investing, like other responsible investing should not operate in a silo.

Another common theme throughout the conference was that impact investing is smart investing. Understanding sustainability and opening one’s eyes to the different geo-political risks that face our world, is wise and exposes a company to less risk. For example, Audrey Choi, shared a statistic from the Sustainability Accounting Standards Board (SASB), which found that 93% of companies stand to be impacted by climate change or the need to defend against it, but only 12% of companies are disclosing the risk.

A roadblock in the world of socially responsible investing is proving to investors that they do not have to compromise return when investing according to their beliefs.  As Jackie VanderBurg said in reference to gender lens investing, “Gender lens investing is not small, soft and pink. It is smart investing. Gender lens investing is the deliberate, intentional integration of gender-based data into financial analysis with the expectation of finding additional opportunities and mitigating risk”.  Money managers and personal investors must apply the same rigorous process to impact investments as they would with any type of investment. 

Joshua Levin, co-founder and Chief Strategy Officer of OpenInvest, a robo-advisory that permits clients to choose investments supported by their personal beliefs, brought up another challenge: intermediaries. He gave the example that when people first started out investing, people invested to have an impact; that impact may have been to start a factory or own part of a company to influence a company’s decisions. Now with so many intermediaries, investors no longer think of investments as having an impact. Now people invest for diversification.  With a platform like OpenInvest, people can have an impact by choosing not to invest in a company if the company is not aligned with their personal beliefs. 

Many speakers were also in agreement on other challenges facing impact investing: reliable metrics, more products across asset classes, and more education for consumers and advisors alike.  After attending this conference, I am hopeful that firms are working to address the roadblocks to impact investing. While perfect solutions may not be possible this should not impede the value that can be added from investing in a socially responsible way.

In the world of robo 2017, C.A.S.H. is king

In the world of robo 2017, C.A.S.H. is king
For those of you who seek yearly prognostication, here we go. I see four factors or trends driving the evolution of robo world in 2017, and attempt to capture them here with a simple, suitable acronym: C.A.S.H.
  • Cross border activity: We’re now seeing robo advisors extend their reach across national borders. This is not just the case in Europe (think German-UK robo Scalable and Italy’s Moneyfarm, which launched in the UK) but in North America as well. I comment on the planned entrance of Toronto based robo Wealthsimple into the US market in Financial Planning.
  • Asset managers will continue to seek distribution, launching robo advisory platforms that enable the advisor to market their products. They’ll also want a share of advisor profits.
  • Synergies with CRM, compliance and other tech providers will deepen, as robos become more tightly integrated into the wealth management ecosystem. It’s no coincidence that two of the portfolio optimization software providers featured in my last report offer robo advisory platforms.
  • Hedge fund-like robos will prosper in an more volatile economic environment. These robos will use passive instruments to take a position on the market, and in some cases, allow users to “steer” (or apply their own views to) investment decisions.
Taken together, these trends signal the “mainstreaming” of robo advisory capabilities. Robo advice platforms are now less a “nice to have” than a core part of the incumbent advice offer. As such, these platforms are becoming increasingly bound up in the larger industry infrastructure. Those robos that seek to keep themselves distant or apart from this ecosystem will find themselves exposed, and short of cash, once the current funding cycle dries up.

Wells Fargo rides herd on DoL

Wells Fargo rides herd on DoL

It’s no coincidence that Merrill Lynch launched its new robo platform the same week it decided to exclude commission based product from IRAs. Likewise, the decision by Wells Fargo to announce a robo partnership with SigFig suggests that despite the pronouncements of pundits and industry lobbyists, DOL is hardly DOA.

It takes a brave man to guess how the Trump administration will balance populist tendencies with free market rhetoric. In this case, as I note in a previous post, the inauguration of the new president precedes DoL implementation by less than three months. The regulatory ship has left port, and in any event, it's not clear that President Trump will want to spend valuable political capital undoing DoL.

I’ll discuss Wells Fargo’s motivations in a later post. For now, I’ll note the degree to which a robo offer aligns well with the principles of transparency, low cost and accessibility at the heart of DoL. At the same time, I caution the reader to consider the challenges that any bank faces in rolling out a robo platform, a few of which I underscore in this column by Financial Planning’s Suleman Din.

Guidance, not advice

Guidance, not advice

Last week Merrill Lynch announced the launch of its long awaited Guided Investing robo advisory platform. Investors get access to a fully automated managed account for only $5,000, compared to the $20,000 required for call center driven Merrill Edge.

A new type of hybrid model

It’s interesting that Merrill Lynch would launch another managed account platform at this point, given the narrow gap between the two program minimums. But industry wide fee compression underscores the importance of cost savings, and with Merrill Edge’s best growth behind it, even a call center is expensive compared to a digital first approach.

I say “digital first” because Guided Investing clients can still get access to a human advisor. In this case, however, the advisor delivers (in the words of a Merrill spokesman) “guidance” and “education”, and not investment advice. Advisors are able to explain product choice as well as why and how a portfolio is rebalanced, for example. Such capabilities reinforce the Merrill message that its portfolio models are not just algo driven, but managed by the CIO.

Compliance friendly

The compliance friendly terms “guidance” and “education” give another clue to Merrill’s intentions. Like BlackRock and other asset managers discussed in my previous post, Merrill wants to get ahead of the DoL rule and fill the advice gap that will be left by the rollout of a uniform fiduciary standard across both the qualified (retirement) and taxable investment spaces. It’s worth pointing out that Merrill announced its decision to stop selling commission based IRA accounts the same week it launched Guided Investing.

Compliance and economics are powerful (and mutually reinforcing) motivations. Especially when the economics are not just about cost savings, but about the chance to develop a whole new client segment. Guided Investing represents not just another robo platform, in short, but an effort to lower delivery costs and fill out the range of options Merrill offers clients, particularly younger and self-directed ones.

Merrill believes (correctly, in my view) that this type of managed investment solution will be as ubiquitous as mutual funds within five years, and so it has no choice but to move forward. Vanguard finds itself at the same crossroads, which is why the firm’s plan to launch a fully automated robo platform (as a complement to its $40 billion AUM Personal Advisory Services hybrid program) is probably the industry’s worst kept secret.

 

Shining light on the thinking at BlackRock

Shining light on the thinking at BlackRock

It’s clear that there’s more than a little chutzpah behind BlackRock’s demand for tougher regulatory oversight of robo advisors. This post probes the thinking behind it.

Does BlackRock, with FutureAdvisor in hand, want to shut the door on new robo entrants? A desire to forestall such competition would suggest a level of fear that I do not think exists. (Among other things, the robo narrative has moved past the independent or 1.0 stage). BlackRock’s main concern seems to be that the sloppy hands of existing competitors might result in regulatory sanction on everyone, and so put the hegemony enjoyed by BlackRock and its asset manager competitors at risk.

Neither faster, nor better, nor cheaper

While BlackRock may have paid $150 million for FutureAdvisor, I don’t think the firm believes it owns a better mousetrap. FutureAdvisor may have an innovative glide path feature (which may explain why FutureAdvisor has an older clientele than its robo competitors), but tax loss harvesting, 401(k) advice, “try before you buy” functionality and other core capabilities have become table stakes in robo world. If anything, BlackRock may believe that its proprietary ETFs (characterized by low tracking error and a broad product base, e.g., Japanese fixed income) outshine the plain vanilla offerings of Schwab and Vanguard, although this argument is undercut somewhat by the firm’s recent decision to drop fees.

Asset managers in the catbird seat  

Like the ETF business, robo advisory services have become increasingly commoditized, even as the DoL conflict of interest rule presents a massive tailwind for both. It’s a tricky time for asset managers seeking to shift their offer from manufactured product to advice based solutions.  BlackRock appears to feel it is in the catbird seat, and is perfectly happy to secure its hand and that of its asset manager competitors, all of whom have done well by automating their investments platforms. I’m not saying there’s collusion here, just a noteworthy confluence of interests.  

I’ll talk about the motivations behind the launch of another asset manager-backed robo in my next post.

In robo world, B2B = buyer beware

In robo world, B2B = buyer beware

The success of robo advisors in commoditizing the historically manual portfolio management process is proving their Achilles heel, as I noted in my last post. Incumbents have taken over the narrative. Yet the efforts of these incumbents to build, buy and partner with the robos comes with its own risks.

Foremost among these is how to implement robo advice within a multichannel ecosystem. As discussed in the report, Getting the House in Order: Consolidating Investment Platforms in the Wake of the Department of Labor Conflict of Interest Rule, the ability to deliver consistent advice across channels has become paramount in the new regulatory environment.

This consistency requires a clear view of assets held in house, which in turn implies eliminating product stacks and their underlying technology silos. Of the big four US wirehouses, Bank of America Merrill Lynch has led the way by consolidating five platforms into one. Their competitors are still trying to solve the problem.

Regional banks, with their legacy tech and limited budgets, are going to have a hard time getting this right. Asset managers are eager to help them launch robo platforms, despite the “me too” nature of the banks’ efforts. 

It’s hard to blame these asset managers for wanting to distribute their wares. B2B sales are in their DNA. But I’d point out that their headlong rush to abet bank robo contrasts with their cautious efforts to roll out on their own platforms.

Schwab spent months and millions to launch Intelligent Portfolios. UBS has moved much more slowly, and appears to be using SigFig as a placeholder until it can achieve the technological and service clarity demanded by clients and regulators alike. Fidelity danced with Betterment before rolling out Go through its retail branches. It's tepid if not touch and go.   

I don’t begrudge asset managers for taking their time. They have their own considerations, foremost distribution. That’s why they are enabling bank robo capabilities, even if it's not clear exactly how the banks will manage this. Why not give the teenager the keys to the Audi? But with their own clients, they have to get things right. They have shareholders to answer to, and the stakes are much higher.

The Big Bad Robo Halt

The Big Bad Robo Halt

Let’s pause. Take a break. No, the big bad robo halt isn’t the Betterment Brexit brouhaha I discussed in the WSJ last week. It relates to the degree to which the hype around robo has dwindled.

As detailed in last week’s webinar, robos’ ability to automate previously high touch advisory functions is proving their comeuppance, at least in startup world. The commoditization of the portfolio management process, from asset allocation to rebalancing to tax loss harvesting, works in favor of the large incumbents, with their advantages of brand and scale.

Meanwhile, product innovation efforts by independents as described in my Robo 3.0 report have gained little traction. While the robo value proposition (centering on transparency, cost, and user experience) broached by first movers Wealthfront and Betterment and others remains very much in play, incumbents have co-opted the vision.

We're not yet at the point of a fire sale, but the price tag for independent robos is shrinking fast. This is a question of deployment as well as value; among other things, it's become apparent that putting into action a store bought robo is not as simple as plug and play. I'll discuss the robo world challenges facing asset managers, banks and other incumbents in my next post.

Capital One Rolls Out a Bank Built Robo

Capital One Rolls Out a Bank Built Robo

In a blog post yesterday I took automated advisors to task for the black and white way (advisor-assisted “hybrid” model versus “digital only”) they have framed the robo debate. Imagine my surprise when I saw that Capital One’s brokerage arm had launched a platform addressing this very complaint.

The Capital One robo combines a digital interface with telephone access to advisors. It’s an advanced take on the hybrid models offered by Personal Capital and Vanguard, both of which use digital technology (iPads, smartphones and other interfaces) to enhance and scale the contribution of the individual advisor.

What these models do not do is digitize advice delivery. Yes, they deploy algorithms to develop risk based portfolios, but firms have been doing this for ages. The defining characteristic of robo (as opposed to automated) advice is the removal of the real life advisor.

Robot with Benefits

The Capital One robo or robot is a step in that direction in that it automates the entire portfolio manufacturing process, while giving investors the options of getting a wise uncle (or aunt) on the phone to discuss it. This process spans risk profiling and portfolio construction on the front end to compliance and funding at the back.

Needless to say, clients pay for the privilege, to the tune of 90 basis points. This is not much less than the average US advisor charges for his services, and it is a given that other firms will replicate this model, and at half the price. In the meantime, give Capital One kudos for being the first US based bank (Bank of Montreal, whom I discuss in a recent report, was the first in North America) to roll out a homegrown, pure play robo advisory platform.

Keeping up with the Canadians

Keeping up with the Canadians

In my last blog post I described the challenge posed by robo-advisors to the bank dominated wealth management industry in Canada. Here I share observations from my recent report, Thawing Market, The Growth of Robo Advice in Canada, while exploring the implications for other markets as well.

The robo advisory business in Canada lags several years behind its US counterpart, but in terms of learnings and understanding, it is catching up fast. This trajectory reflects the natural development of the robo learning curve as well as economic, regulatory and demographic factors common to Canada and other developed markets. These include a low interest rate environment; a graying population and regulator umbrage towards practices that long have defined the wealth management business.

The Regulators Are Talking to Each Other

Let’s start with the regulators, who are clearly are speaking to each other across borders. In the English speaking world alone, the UK and Australia have banned commissions, while Canada and the US have essentially gelded them.

Directives aimed at conflicts of interest and revenue sharing represent a worldwide tailwind for passive instruments (such as ETFs) and the robo advisors that offer them. In Canada, the high fees charged by active mutual funds have battered those older and affluent investors least able to afford them.

The interest rate starved Canadian banking sector, which accounts for a large part of mutual fund sales, can no longer count on the willingness of consumers to pay 200 plus basis points for a fund. Like the citizens of the defunct East Germany, they’ve looked over the proverbial Wall and seen a better way.   

Small but Mighty

In dollar terms, the robo advisory business in Canada is miniscule. But the modest scale of the business belies a complexity of outlooks and approach.

Canadian regulation presumes portfolio oversight by a real life human being. In practice, this means communication from a dedicated advisor to confirm the suitability of the client portfolio, and to ensure the client understands the risks. While communication can be as basic as an email, it appears that advisors will soon be required to pick up the phone and call their clients, or at least those populations (such as the 65+) in need of more tactile support.

All It Takes Is a Phone Call

This requirement represents an alternative to the binary lens through which US automated advisors have played the market. Their worldview has been black and white (i.e., the advisor-assisted “hybrid” model versus “digital only”) and their messaging shrill if not patronizing (“investors need the guidance of an advisor”). Pure play robos have also become more dogmatic. Remember when Wealthfront used to talk about its brainy investment committee led by Burton Malkiel? This message has since been subordinated to talk of APIs and algos.                                                

Instead of using the concept of human engagement (or lack thereof) as a litmus test, or as a cudgel to bash other models, maybe US automated advisor could acknowledge the robo shades in between black and white? The Canadians, in their temperate and accommodating way, appear to be doing just that.

Robo Advice Comes to Canada

Robo Advice Comes to Canada

Newly elected Canadian Prime Minister Justin Trudeau took heat back home earlier this year for imploring his Davos audience to recognize Canada not for its resources, but for its resourcefulness. Yet the intent of his statement was less to diminish the contribution of the energy sector to the Canadian economy than to underscore its distorting effects.

Remember, oil rich Canada passed the global financial crisis with flying colors. It took the end of the energy boom, coupled with the onset of digital revolution, to open the bank dominated financial services sector to fresh air and force a stolid wealth management industry to reckon with digital entrants.

Fees for investment management services in Canada are among the world’s highest, as are barriers to industry entry. For startups, the difficulty of taking on the Big Five banks is matched by challenges in getting funded. The small Canadian VC community is oriented more toward payments solutions and cybersecurity than investments, and no wonder: it’s tough to grow scale up fast in a country of 35 million.

Yet, as I point out in my recent report, Thawing Market, The Growth of Robo Advice in Canada, there is a lot happening north of the US border. Despite the odds, investments oriented fintech is gaining steam. It’s not a coincidence that the erstwhile Bank of Montreal, or BMO, this year became the first North American bank to launch its own robo-advisor. Particularly interesting is degree to which the lessons learned from the recent disruption extend beyond Canada’s borders to the US and other markets. I’ll talk about these lessons in my next post.