ESG: The real challenge for advisers

The knowledge and skill required to effectively engage clients on ESG investing is often the first hurdle. And although today’s financial advice industry has arguably never been more highly skilled and professional, change is constant, and as things change, we all need to ensure that our knowledge and skills will also keep pace. Imagine if today’s dentists still practice like they once did? A lot more of us would be sporting dentures!

To guide a client through an ESG conversation, advisers need to feel they know enough to lead the dialogue with confidence, but that doesn’t mean they need to be an investment expert on ESG investing.

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I think advisers may sometimes fall into the trap of believing this, but it’s my belief that being an ESG investing expert is precisely not what you need to be. Going down that road leads to perpetuating the current problem of aligning your value proposition with your investment management skills, which is a problem that many forward-thinking advisers are trying to escape.

An effective adviser-client ESG conversation is about soft skills, valuable communication and the relationship every successful adviser today leverages to help clients articulate a better understanding of themselves and what is most important to them in their life. Once you have achieved this level of understanding, setting goals becomes so much more meaningful and articulates perfectly where the trusted adviser adds value. Great advisers help people live better lives.

You see, once you have helped a client articulate their values which in turn flow onto much more meaningful goals, the jump to how a client would like to see their money invested is a very natural one. Natural because this too will be linked to their overall values. Do their values point to themes such as climate action, gender equality, or cleaner oceans? Once you are in the values space within a client relationship, these investment discussions are so much easier. After all, this is not about ESG investing; this is actually about values-based investing.

But even with the conversation portion taken care of, there is still the logistical challenge that ESG investing imposes to think about.

Investment solutions in the values-based investment space are growing at a rapid pace. That said, finding an investment fund or model portfolio that suits ALL of your clients is still challenging (and I would argue, almost impossible). If you invite a values-based investment conversation with your client, you are inviting an individualised investment outcome that goes way beyond just risk profile and cost considerations. Gone is the notion that all “balanced” investors go into the standard “balance” model.

This then becomes a challenge of scale. How can time-challenged advisers even consider going back to a world where they need to be across dozens of different portfolios ensuring they are still the agreed ‘shade of green’, making investment decisions, rebalances, corporate actions, dealing with funds closing, increases in ROA production. That simply won’t work.

The solution comes back to outsourcing (or letting go) non-essential services to providers who can create scale for you. For years, we have witnessed the trend away from traditional managed funds towards managed accounts (in particular, separately managed accounts or SMAs) due to advisers searching for more transparency, flexibility and increases in efficiency. The next wave of this movement will naturally be toward solutions like individually managed accounts (IMAs) as advisers seek an even more advanced solution to help tackle the increased requirement for more individualised investment portfolios that better align to their clients’ individual requirements, but at the same time doesn’t burden them with back-office inefficiency.

The future of values-based advice and investing is evolving quickly as clients seek more personalised investment experiences than ever before. That’s why it’s essential that today’s advisers evolve as well, by creating the right value proposition and seeking efficient external partnerships to ensure the future of their clients and their businesses.

Phil Pilgrim, General Manager – Partnerships and Distribution at Implemented Portfolios