September 30, 2010Investing
Ethically?
By Ron Robins, Founder & Analyst - Investing for the
Soul
In most Western countries between 40 to 80 per cent of
investors want to invest ‘ethically.’ They desire to
make money and create a better society. However, the
funds screening investments for ethical conduct usually
make up less than 3 per cent of total mutual fund, unit
trust, or ETF assets in those countries. These
‘ethically screened’ funds frequently focus on
investments related to the environment and
sustainability, social responsibility, or are
faith-based, and so on.
Investing ethically, for some investors, is important as
they believe it also impacts their personal or spiritual
development. They believe they ultimately share in the
responsibility for the activities of the company,
companies or funds that they invest in.
In many Muslim countries ethical investors invest in
Islamic financial products such as sukuk—Islamic bonds.
These assets sometimes represent a significant
proportion of total financial system assets in these
countries.
The discrepancy in Western nations between investors
desiring to invest ethically and how they actually
invest is because: investors fail to discuss with their
advisor what ethical values are important to them; the
investment advisor is not interested or does not ask
clients about their values; or the advisor is not
familiar with, or is averse to, ethically screened
investments.
Advisors are often averse to ethically screened
investments as they believe they lower returns due to
restricting the universe of investments. However, dozens
of academic and investment industry studies generally
conclude that the long term results of ethical and
conventional funds are similar. In fact, funds that
focus on environmental, social and governance (ESG)
screens sometimes outperformed. (See my web page
Ethical Investing Studies/Research.)
Fortunately though, the majority of US advisors are at
least starting to recommend green and sustainable
investments, says a survey released in April 2010 by
TerraVerde Capital Management. It seems that a similar
trend could be occurring in other developed countries as
well, especially in the UK, Germany, Canada and
Australia.
If, as an investor you are looking to invest in ethical
investments, it is wise to find an advisor who is
favourable to them. Of course, the advisor should be
properly registered or licensed and have the requisite
education too. However, in many countries advisors are
frequently salespeople and not necessarily required to
act in the investor’s best interest.
For instance, in the US, brokers are legally third-party
salespeople whereas registered investment advisors must
always put the client’s interest first. So, get to know
the rules of the game where you live before placing your
funds with an advisor. The next thing is to see if the
advisor you are considering is, or has been, involved in
any legal problems. Also, ask what trade and
professional organizations they belong to.
The advisor should preferably have been in business for
five or more years. Ask him or her for at least three
references from other clients who have been with him/her
for at least two years. Friends, family or business
associates might be helpful in finding a suitable
advisor as well.
Be sure to find out how advisors are compensated. Many
are now moving to a fee-based approach. New regulations
in the UK, Australia, and even in the US, point in this
direction. Often the fee is a percentage of the assets
you bring to them and is usually anywhere from 0.25 to
3.00 per cent per year. However, the case for paying
higher than 1.00 or 2.00 per cent annual fees is
generally hard to justify. Also, some advisors may even
charge a fixed per visit fee.
In many countries, advisors are paid various commissions
from the mutual fund/unit trust companies on the funds
they sell to their clients. It is best to understand
very clearly what fees you are paying. Consider not only
the upfront and possible redemption fees, but most
especially the total annual fees.
Over the long term high annual fees can eat up most of
your gains—or even most of the original sum invested! If
you pay 2 per cent in annual fees, after 25 years you
are left with around 60 per cent of your possible
portfolio. At 5 per cent you are left with close to 20
per cent!
Also, ask who will actually be servicing your account
and dealing with you. If it is to be a junior person,
request the same information that you have for the
advisor. Beware of ‘bait and switch’ when it comes to
these services. Furthermore, ask the advisor to show you
investment plans he/she has completed for other
ethically oriented clients.
For most of humanity, many of our ethical values are
alike, no matter where we may live or what religion we
follow. Therefore, if most investors apply their ethical
values to their investments, then over the long-term
only companies embodying these values could truly
prosper. So if this sounds good to you, find an advisor
who can help transform your values into suitable
investments for you.
Investors applying their ethical values to their
investments may not only enjoy good profits, but also
help create a more sustainable and ethical world.
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