Socially Conscious Investment Practices

Part
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Part
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Socially Conscious Investment Practices - Part 1

OVERVIEW

In short, my research indicates that US-based users/investors are generally satisfied with their robo-advisers. In a study conducted by Investopedia and the Financial Planning Association (FPA), 75% of the 2,002 users surveyed indicated that they were most satisfied with the performance of their robo-advisers, followed by their transparency in fees. However, users were least satisfied with the tax loss harvesting capabilities, followed by their responsiveness to questions (both online and via call centers). Most users are uncomfortable with the idea of using robo-advisers during periods of extreme market volatility. Due to the novelty of robo-advisers, there is little academic research conducted on user experiences vis-a-vis robo-advisers. Below you will find a deep dive of my findings.

SATISFACTION LEVELS

In 2016, Investopedia and the Finance Planning Association conducted a joint study involving 2,002 users of robo-advisers who were of legal age (21+) and were involved in household investment decisions. The study indicates that users of robo-advisers report fairly high rates of satisfaction. On a 5 point scale, 75% of survey respondents reported that they were 'satisfied' or 'very satisfied' with the performance of their robo-advisers. 74% of respondents reported similar satisfaction levels for fee transparency, with multiple platform accessibility (65%), investment options (64%) and rebalancing services (61%) trailing closely behind. In contrast, respondents were least satisfied with the responsiveness of their robo-advisers to questions, with only 49% and 48% of respondents reporting that were 'satisfied' or 'very satisfied' with their responsiveness to questions submitted online and via call centers, respectively. Survey respondents were least impressed with the tax loss harvesting capabilities of their robo-advisers (45%).

PAIN POINTS

The Investopedia/Financial Planning Association survey results seem to corroborate the findings from other sources with regard to the importance of 'holistic experiential aspects' of robo-advisers and digital finance in general. Query responsiveness and tax planning activities require high levels of interaction and present technological capabilities as they are stand are not advanced enough to evaluate multiple nuances of an individual's financial life to produce a coherent strategy.

A 2017 journal article which studies the customer experience of digital finance in the UK and the Netherlands notes that companies that combine their digital offerings with existing offline personal advisory services (such as Vanguard and Schwab) perform much better and grow much faster than their other competitors in the market. This is because most of the advantages of using robo-advisers including lower costs, faster application processes and higher transparency are rooted in automation and therefore does not significantly improve customer experience. KPMG's study on the effectiveness of robo-advisers concurs with this finding, citing Vanguard's Personal Adviser Services (PAS) as a successful hybrid that has combined both 'high-tech' and 'high-touch'. The article also notes that at the time of publication, there are no other existing academic studies that analyze how the use of robo-advisers impacts user experience. After searching exhaustively through journal databases, it seems that the author's observation still holds.

LIMITATIONS

It is noted that nearly half of all respondents (40%) in Investopedia and the Financial Planning Association's joint survey are 'uncomfortable' or 'very uncomfortable' with using robo-advisers during times of significant economic volatility. This may be associated with the need for human financial planners/advisors to navigate complex situations. In line with conventional tech adoption narratives, older investors tend to be the least aware regarding the existence of robo-advisers and are also least likely to use them. This is particularly true for investors older than 61. Millenials, on the other hand, are most likely to search for robo-advisers and use them.

CONCLUSION

In conclusion, the existing body of research shows that users in the US are most satisfied with the performance and fee transparency of robo-advisers and are least satisfied with matters concerning responsiveness to queries (both online and via call centers) and tax loss harvesting capabilities. This is because despite the fact that the advantages of using robo-advisers are rooted in their ability to automate certain processes, they are still unable to evaluate multiple nuances of an individual's financial life to produce a coherent strategy. A corollary to this is that users are also markedly uncomfortable with using robo-advisers during periods of high economic volatility due to this very reason. Due to the relative novelty of robo-advisers, academic research on the relationship between robo-advisers and user experience remain scant. Lastly, millenials are most likely to use robo-advisers in contrast to older investors (especially those above 61 years of age, who are also least likely to be aware of such services).
Part
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Part
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Socially Conscious Investment Practices - Part 2

Consumer demand for socially conscious investment is on the rise and this growth is expected to continue due to the high levels of Millennial interest. According to a Morgan Stanley survey, 86% of Millennials are interested in sustainable investing, which equates to a consumer investing opportunity of approximately $30 trillion. Below is an overview of our findings.

Understanding ESG and SRI

Environmental, social and governance (ESG) practices refer to the "practices of an investment that may have a material impact on the performance of that investment." Environmental factors may include energy consumption, pollution, and climate change. Social factors may include human rights, community engagement, and child and forced labor. Governance factors may include transparency and disclosure, stakeholder rights, and quality of management. By integrating ESG factors into an investment, one can identify the "potential risks and opportunities beyond technical valuations." According to the Morgan Stanley Sustainable Signals report, 71% of investors agree that ESG practices have the potential to "lead to higher profitability and maybe better long-term investments." More than 60% of Millennials expect investments to be screened based on ESG factors compared to 29% of Baby Boomers.

The phrase socially responsible investing (SRI) emerged in the 1970s. It is based on the premise that investors should "screen out stocks incompatible with their personal values." This type of investing remains popular for "values-focused investors" such as "religious-values funds" that could screen out companies that produce alcohol. Negative SRI screens may include other addictive substances, gambling, weapons, terrorism affiliations, "human rights and labor violations", and environmental damage.

SRI is more of an exclusionary approach to investment, whereas ESG practices are values-neutral as "ESG fund managers screen-in companies with strong business models", while SRI managers screen out stocks that go against their values.

Demand for Sustainable investing

According to the Governance and Accountability Institute, the most important ESG criteria to investors are as follows:

• Environmental investment factors, applicable to $7.79 trillion in assets under management (AUM);
• Climate change, applicable to $1.42 trillion in AUM;
• Clean technology, considered for $354 billion in AUM
• Social criteria, applicable to $7.78 trillion in AUM
• Governance, applicable to $7.70 trillion in AUM
• "Product specific criteria," applicable to $1.97 trillion in AUM

To put the SRI market size in context, it equates to "$1-in-$5 of all AUM." That is an estimated $9 trillion out of $40.3 trillion of AUM. Between 2014-2016 SRI grew 33% to $8.72 trillion, which is evidence of tremendous growth in sustainable investing AUM in the US.

The interest in sustainable investment is on the rise, particularly for Millennials and women. According to a Morgan Stanley survey, "Millennials drive growth in sustainable investing." The survey suggests that investors are increasingly becoming interested in making sustainable investments, particularly Millennials. In 2015 84% of Millennials were interested in sustainable investing, which grew to 86% by 2017. The general population has also taken to ethically responsible investment as 71% of investors opted for the sustainable route in 2015, which increased to 75% by 2017.

According to an OppenheimerFunds study, 69% of Millennials that come from families with a net worth of over $35 million are interested in "socially responsible investing." By 2025, Millennials "are projected to make up 75%" of the US workforce and are the "$30 trillion consumer investing opportunity," that could push the demand for socially conscious investment practices in the US.

The Morgan Stanley survey also suggests that women show more interest in sustainable investment than men, with 84% of women showing interest and 67% of men in 2017. This is huge demand, especially since women control $11.2 trillion in assets.

CONCLUSION

SRI and ESG funds are similar in that they both take into account the social and ethical impact of an investment. However, the difference is that SRI funds are more value-driven and often exclusionary in practice. ESG practices take into account social and ethical factors when making an investment as a means of determining the risks and rewards of a particular investment. Both SRI and ESG are an important part of sustainable investing, which is currently an $8.72 trillion market.

Sources
Sources