GlobalData Plc

Three reasons why wealth managers cannot ignore SRI

Wealth managers should take a closer look into sustainable investments. Behind the hype there is the opportunity to grow assets under management (AUM) and revenue while building a socially responsible image.

Sustainable, responsible, and impact investments (SRIs) aim to deliver financial returns while taking into account environmental, social justice, and corporate governance issues. Stemming from this approach is a wide range of investment strategies that consider religious beliefs and social impact, among other factors. Assets held in these products grew by more than 25% over 2014–16. There are three main reasons why wealth managers should not ignore this trend.

First, in times of volatility investors’ risk aversion can undermine advisor revenue, as investors retreat to deposits. However, according to our 2016 Global Wealth Managers Survey, dissatisfaction with traditional portfolios also fuels demand for innovative products (for instance, in Canada it is the top driver for alternatives as an asset class). SRIs offered in the form of fee-based funds are a perfect alternative for at least some of the assets divested from equities and bonds. A lack of returns can be balanced with the opportunity to contribute to social change.

Secondly, SRIs attract a key new demographic. Millennials, who are soon to inherit their millionaire parents’ wealth, are the main driver of SRI demand. They are the generation with the most assets allocated in SRI products, and are most interested in them. Wealth managers will benefit from resonating with this segment.

And last but not least, there is an advice gap when it comes to investments compliant with religious beliefs. Christians and Muslims make up for more than half of the world’s population. Advisors looking to increase their AUM should include Christian-friendly and Sharia-compliant products in their proposition.

There are already providers that consider SRIs an important part of their offering. In early 2017, Morgan Stanley added sustainable investment portfolios to its proposition. Following its lead, UBS was recently reported to be raising assets from ultra-HNW investors for The Rise Fund, a private equity impact fund. Meanwhile companies that have been offering sustainable investments for years, such as Deutsche Bank, have seen demand for these products grow steadily.

Traditional wealth managers will face competition. A wide range of digital solutions, including OpenInvest and Wahed Invest, provide competitive products and customer-friendly apps that might prove more attractive – particularly to tech-savvy millennials. But wealth managers’ competitive advantage is that they can provide the necessary knowledge and insight, helping clients assess how a specific ethical fund’s philosophy is in line with their values.

As demand for SRIs is on an upward trend, being able to satisfy not only financial goals but also ethical aspirations is crucial. Wealth managers able to achieve this will be more successful than fintech disruptors in growing a loyal customer base, along with AUM.

By Silvana Amparbeng, Wealth Management Analyst

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