The impact of the investment market is EXPECTED to more than double over the next decade—and will coincide with the largest transfer of property in history, empowering a new generation of impact investors. To stay competitive, wealth advisors will need to adapt.
This is easier said than done. Advisors often struggle to connect with clients about impact investing, whether it's due to a flood of new products, skepticism about current impact, or increasingly complex reporting standards.
That's why it can make sense to start simple and focus on aligning your client's investment portfolio cash holdings with their values.
The challenge facing wealth advisors
Building a relationship of trust is often cited as the key to being a successful wealth advisor, but that may not be enough in today's day and age. The new generation of investors want different products and investment alternatives. Specifically, investment products that match their personal and social values.
Many financial advisors are playing catch up. In 2019, a Fidelity survey found that roughly half of advisors thought impact investing was a short-term trend; A similar percentage said they understood the impact of the investment well, and most had not yet talked to their clients about it.
Since then, impact investing has gotten more complicated. Regulators around the world are pushing for increased transparency and reporting standards. Hundreds of new products—in asset classes ranging from stocks and bonds to microloans and mutual funds—have hit the market claiming to be impact-focused. Meanwhile, skepticism about whether these products have a tangible impact has grown amid a lack of clear measurement standards and widespread claims of greenwashing.
Older investors, with whom advisors must also maintain good relationships, may share this skepticism and/or lack of knowledge about impact investing. This, in turn, can put advisors in between, say, an older and younger member of a family office client.
Ultimately, understanding a client's value-based investment objectives is not the same as understanding their traditional investment objectives, especially if different generations are involved.
Start Simple
Often the best way to solve complex problems is to break them down and start simple. In that spirit, a good place to start with impact investing is to focus on aligning the “cash holding” portion of an investment portfolio with an investor's values. Doing so is not only an easy way to facilitate impact investing, but can help bridge the gap between older and new investors: after all, it's hard to argue against efficiency, clarity and simplicity of placing deposits in a bank that suits the values.
How does this work in practice? Say your client is interested in reducing fossil fuel production. Perhaps, however, its deposits are held in a bank known for making large loans to oil and gas companies. Moving these deposits to an FDIC-insured bank that better aligns with its values would be a great first step in advancing its impact investing goals.
More importantly, these banks may be as small or smaller than many customers are used to, as large banks tend to have their hands in a wider range of activities (ie, while they may lend to “green” initiatives, they are likely to lend to fossil fuel organizations as well). If your customer deposits exceed the FDIC limit of $250,000 per institution, it is important to be able to distribute them to a trusted network of value-aligned banks.
Ampersand's latest survey of depositors and financial managers shows the value of such an approach. For example:
- Two-thirds of respondents from financial institutions and financial services firms report that interest in value-based banking has increased in recent years;
- A majority (55%) of depositors would be willing to give up a portion of their returns to an institution that is consistent with their values;
- Nearly four in 10 value-minded depositors are willing to give up 15% or more of the return on their impact investments; AND
- Over half (55%) of depositors are concerned about bank safety after the 2023 bank failures, underscoring the importance of FDIC insurance.
Developing a comprehensive deposit management strategy on behalf of your client can not only keep funds safer and improve the spread of value, but also deliver increased returns. The national average return on consumer savings accounts is just 0.58%, while banks typically lend to those with excellent credit in the ~8-25% APR range. This leaves a lot of room for negotiation if you have the right partner.
In 20 years, I predict that what is now called impact investing will be simply called investing, and investor values and impact outcomes will become part of the investment equation in the same way that financial risk and return are today.
Getting there, however, will be a challenge. Keeping it simple by aligning cash holdings with the right financial institution can be a great way for wealth advisors – and their clients – to get started.
Reid Thomas is Head of Strategy at deposit management services firm Ampersand