Build Deeper Client Relationships Through Ethical Investment Advice

client expectations client relationship clients’ values ethical investment financial advisers investment portfolios investors’ interest mutual bond sustainability transparency May 10, 2021

You might not think it, but ethical investment has been around for quite some time. In biblical times, the first documented use of ethical principles to govern the investment process was in Jewish laws. These laws focused on laying down numerous directives on what was classed as ethical investing.

Closer to our times, what we mean by modern-day ethical investment dates back to the 1920s and is linked to the first socially conscious investment group established in the US called the US Pioneer Fund. 

Obviously, this article is not a history lesson. We merely wanted to highlight the longevity of ethical investment as a practice to go by when discussing investment portfolios. This aside, the importance of the combination between ethics and investment is nowadays more important than ever. 

Amid issues such as climate change, resource depletion on a global level, and losses in biodiversity, the finance industry can provide the most useful means of directing capital and promote investment opportunities that are targeting these problems. 

The first step for a financial adviser to promote and support the cause of ethical investment is getting to grips with the concept and then learning how ethical investment can be used to build deeper and long-term relationships with clients. 

You can’t just spring this on investors and hope for the best. There are certain issues to address first, and this is what we wanted to do with this article.

The Pillars and Driving Factors of Ethical Investment 

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Essentially, what is meant by ethical investment is: 

  • Investment that focuses on long-term goals in terms of creating a sustainable economic, social, and environmental impact 
  • Investment that is a combination of financial and non-financial value creation 
  • Investment that incorporates the environmental, social, and economic risks of an injection of capital 

What stands behind ethical investment and acts as a major driving force is a well-defined belief system that is essentially adopted by stakeholders:

  1. First, we have the belief that ethical investment should be a service to society, a means by which capital can be used as a force for good to tackle the world’s social and environmental problems, acknowledging that returns on investment can be aligned with positive impacts.
  2. Second, we have the material belief that ethical investment is by far and large a smart investment, a means of transforming the investment process and pursuing enhanced returns by injecting new and forward-looking insights into the way of doing things.
  3. Lastly, there is the belief that ethical investment is an economic imperative changing existing trends of injecting capital with no regard to investment that focuses on long-term impact leading to income and health equalities both within and between nations. 

Ethical Investment and Client Expectations

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Clients are increasingly calling for greater transparency when it comes to their investment portfolio and how the funds are being used. This focus on clarity is based on the growing awareness that environmental, social, and governance (ESG) factors have a direct influence on company value, returns, and reputation, and that a company’s environmental and social impacts are more and more under the spotlight. 

Investors' interest and adoption rates of ethical investment are on the rise. A US survey of individual investors shows that 85% have an interest in issues surrounding sustainability and responsible investment. The adoption rates are also worth considering, with 52% of the general population respondents and 67% of millennials involved in at least one socially responsible investment. 

With greater interest also comes a shift in demand. More and more investors are looking for investment opportunities that closely match their interests and ethical values, and are open-minded to products that target specific impact areas. The US survey by Morgan Stanley shows that:

  • 84% of respondents are demanding investments tailored to their values. This figure rising to 90% among millennials 
  • 84% also wanted an impact report of their investment portfolios, this rising to 91% for millennials 

Using Ethical Investment to Build Deeper Client Relationships

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If we look at the statistics shown so far, we can conclude that ethical investment is moving into the mainstream. In Europe alone, there have been 305 sustainable fund launches in 2018, and 360 in 2019.

With consumers incorporating sustainable choices as part of their lifestyle, from avoiding single use plastics to relying more on public transport for their commute rather than their cars, it really is no wonder that they are now turning their attention to their finances and how they are used. 

What is surprising is that the adoption level of ethical investment advice among financial advisers isn’t keeping up with the increasing demand. In Australia, there are only 39 members of the Ethical Advisers’ Co-op and 29 certified advisers in the Responsible Investment Association Australasia, with the majority of these advisers appearing in both lists. Few financial advisers are actively looking to engage with their clients on the topic of ethical investment and for many, it is not even part of their review process. 

Shifting the Conversation to Ethical Investment 

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Changing your approach to ethical investment advice and building trust with your clients in the process can start with as easy a step as working out exactly what ethical investment means to you. This can be done through developing an open-ended question or two to begin the discussion, using terminology that your client will understand and resonate with.

Examples of simple questions you can ask your client may include: 

  1. Are there any companies or particular industries you would like to avoid in your investment portfolio?
  2. Are there any social or environmental issues that you feel strongly about that we should consider when selecting investments for your portfolio?
  3. If you could use your investments to create positive impact, what social or environmental areas would you like us to focus on?

Asking these simple questions will transform the type of conversation you have with your client and will help you connect on a more personal level. Doing this will allow you to strike up a different kind of relationship. 

Shifting the conversation from being just numbers based and return on investment to discussing how the client can align their moral compass and ethical values to their investment portfolio makes the whole approach much more intimate and personal. 

The Benefits of Using Ethical Investment Advice

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Besides the obvious benefit of addressing the growing interest of investors, using ethical investment advice in your approach has other benefits as well:

  • It can get the client to commit to the relationship with the adviser with both mind and heart
  • The combination of heart and mind will form a closer and longer-lasting bond that can help smooth potential market hiccups over time 
  • Because investors are in it for the long-haul, it means their assets align with a long-term view too as ethical investments focus on sustainability
  • It gives you as a financial adviser the unique opportunity to adopt a holistic approach to developing an investment portfolio that is a reflection of what your clients care most about 

Let’s Start Connecting With Clients Through Ethical Investment Advice

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It is clear that ethical investment is not just a fad but is at the forefront of what investors want and indeed expect when presented with possible investment opportunities. Across generations, clients want more transparency and guidance towards investment that reflects their values and beliefs. 

Issues such as ethics or sustainability are increasingly important, and investors are looking more and more for financial advisers that are confident with this approach and can develop investment strategies to suit these focal points in particular.

Getting around the ethical investment advice minefield shouldn’t be difficult. We can help you with your delivery and show you how to incorporate ethical investment in your financial advice. After all, ethical advisers and their clients are the ones helping to shape the sustainability of our future. 
The Ethical Advice Accelerator with Alexandra Brown from Invest with Ethics is an 8-week online program designed to cover everything you would need to know about ethical investment advice, from learning the basics through to product research and analysis and client communication. Contact us to find out more about course availability.

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