Megan Lewis argues that advisers with an expertise in responsible investment (RI) could be killing two birds with one stone: satisfying growing client demand, and meeting their new fiduciary responsibility
From July 2012, advisers will have a statutory “fiduciary duty” – an obligation to place clients’ interests before their own.
These reforms are part of an unprecedented number of reviews globally, looking at the regu- lation of wealth management products, provid- ers and intermediaries in the wake of the GFC.
This new duty of care should see advisers change focus from “product” to “client”. One way to meet the new obligations and gain a competi- tive advantage is to specialise in responsible investment (RI) advice.
RI AND FIDUCIARY DUTY
“Fiduciary duty” will fundamentally change the practice of investment advice, substantially transforming the adviser-client relationship. Advisers will have to spend more time getting to “know their clients”. An in-depth client-adviser relationship is at the core of responsible investment advice.
“At the end of the day it’s about really know- ing your client,” says Lisa Greeves, principal of Greeves and Associates, a WA-based member of the Responsible Investment Association Aus- tralasia (RIAA) and a RIAA-certified adviser.
“If you really do know your client and take the time to talk with them at length about their values you will learn of any ethical leanings. It’s then about structuring your investment solution to consider their areas of concern.”
Karen McLeod, an adviser with one of Queensland’s dedicated RI businesses, uses her client’s personal values to drive their wealth management plan. Key to that plan though is, does the client have the investment risk profile to be able to satisfy ethical concerns? For example, are they able to buy direct shares to get the transparency they’re after from an individual company? If not, which managed product can provide the best fit?
ESG = RISK MANAGEMENT
There is growing acceptance amongst the world’s largest pension funds that environmental, social, and governance (ESG) issues can pose a material threat to an investment’s performance. This has been driven by the United Nations Principles for Responsible Investment – an initiative with 760 signatories globally representing $20 trillion, or, on some measures, one quarter of the world’s funds.
In the world of financial advice, these issues can threaten the performance of each client’s portfolio. It will be part of an adviser’s fiduciary duty to be equipped to advise on these matters, irrespective of a client’s stance on environmental or social issues.
According to the landmark 2005 Freshfields Report and the 2009 follow-up report by the Asset Management Working Group of the UN’s Environment Program Finance Initiative, “…it would be expected that the investment consultant or asset manager would raise ESG considerations as an issue to be taken into account and discussed with the client… if the investment consultant or asset manager fails to do so, there is a very real risk that they will be sued for negligence on the grounds that they failed to discharge their professional duty of care…” This report refers to advice given to institutional investors, but the argument could apply to “retail” advisers.
“There are pressing ESG issues you need to protect your clients’ investments against,” says Justin Medcalf, another RIAA-certified adviser and director of Green Equity Management.
A new paper from the Network for Sustainable Financial Markets, entitled Wealth Management in a Post-GFC World, argues: “The GFC has starkly demonstrated the consequences for investors of ignoring ‘hidden’, long-term risks – a position which threatens to be repeated with respect to climate change and broader environ- mental, social and governance issues.”
It argues fiduciary duties can only be “discharged” if there are mandated legal requirements for effective ESG integration. Advisers serious about fulfilling their fiduciary duty will need to be well informed about how potential investments manage ESG risks.
Specialist RI advisers say it’s often clients who are on the lookout for such risks.
“Clients will test you on your recommendations because they will typically be watching what the company is doing as well,” says Adam Ordelman, an adviser with Bridges who is certified by RIAA. “The conversations you have with your clients can be quite robust.”
RI AS A WAY TO SURVIVE AND THRIVE
Specialising in RI will give forward-looking advisers a way to embrace their new obligations and build a competitive advantage.
“The good old days when an adviser offered advice that delivered on their client’s goals but also benefited them through commissions bred an approach to advice that didn’t need to deal with the whole client,” says Medcalf.
“But post-2012, with the abolition of commissions, advisers will need to be able to provide a complete service to clients and, irrespective of whether an adviser agrees with a client’s position on ESG issues, they will need to be able to offer advice that takes these issues into account.
“There are reports that a lot of practices will close after 2012 because they won’t be able to successfully convert their business model to a ‘fee-for-service’ practice because they don’t have a strong value proposition – again, responsible investment advice can be this proposition.”
According to the Network for Sustainable Financial Markets report, all financial service providers need to address ESG issues if they are to follow industry (and world) best practice. Those willing to shift to more “sustainable models” can thrive: “Scalable, profitable and higher quality business models are achievable, but this requires leadership, new thought, innovation and know-how. Enduring value and market share advantages exist for those players prepared to undertake the necessary transformations.”
ADVISER AS PARTNER AND EDUCATOR
The Network for Sustainable Financial Markets says improving consumer financial literacy is essential. RI advisers say “client education” is key to the strong relationships underpinning their success.
Karen McLeod says RI clients take financial literacy seriously.
“They expect more information from advisers and they want more information on what they’ve bought. They just don’t want to know the financial performance of companies; they want to know about a company’s environmental performance, their employee conditions. Clients expect returns that go beyond financials… If you can’t find something that fits your client’s profile, often the client is happy to sit in cash until you can.”
After running his own advice business for a year, Adam Ordelman says: “The client and I now make the decision together – it’s a more collaborative process, which means I have to educate the client more, but this builds a stron- ger relationship.”
MAKING THE CHANGE
So how do you go about transforming into a responsible investment advice practice?
The peak body for RI in Australia, the RIAA, offers an online course that takes three to four hours to complete and covers: what constitutes responsible investment; how to create an RI profile; different approaches used to create RI managed funds; how to analyse shares in light of ESG issues; what issues drive responsible investors; and how to start offering RI advice. You can also get a first-hand understanding and meet other RI advisers in September this year, in Sydney, at RIAA’s conference, featuring a one-day adviser master class.
You can become a Certified Responsible Investment Adviser through RIAA. You will need to successfully complete the online course; incorporate appropriate questions in your Fact Find; ask clients what ESG or ethical issues they want addressed; and have RI products from more than two providers on your approved list. As a Certified Responsible Investment Adviser you demonstrate your commitment to providing RI advice and join just over 30 other certified advisers.
Megan Lewis is marketing and communications director at the Responsible Investment Association of Australia (RIAA)
