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Client first 'means responsible investment'

New Zealand advisers and fund managers need to consider clients’ desire for responsible investment of their money if they are to meet their duty to act in clients’ best interests, the Responsible Investment Association of Australasia says.

Thursday, January 18th 2018, 6:00AM 8 Comments

by Susan Edmunds

It has released new research that shows 90% of respondents expect their investments to be managed in a way that is responsible and ethical.

Under new rules, all New Zealand financial advisers will have a duty to put their clients’ interests first. Investments advisers already have the obligation but the new move will capture some KiwiSaver advisers who have not been operating as AFAs,.

Chief executive Simon O’Connor said his organisation thought responsible investment practices were part of that duty.

In its submission on FSLAB, it said: “It is RIAA’s view that under the new legislation, the new code should explicitly clarify this issue that financial advisers must explicitly ask questions regarding a client’s ethical values, and any other ESG preferences.”

O'Connor said those who wanted to fulfill fiduciary duties when entrusted with client money would have to consider how clients would expect their money to be invested in line with their values.

A growing number of clients were becoming sophisticated investors who wanted good investment products that ticked responsible investment boxes, too, he said.

The RIAA survey showed younger consumers were more likely to want to invest in a responsible superannuation savings fund than one that only looked at maximising financial returns.

That data was sourced from Australian consumers but O’Connor said attitudes were broadly consistent on both sides of the Tasman.

He said that viewpoint could come under pressure if markets came off their strong run.

“Very few are willing to say they put their values first and don’t care at all about returns. Where the vast majority sit is they want very good products and providers that fit with their ethics and beliefs as well.”

New Zealand’s big shift to responsible investment had happened, he said, as KiwiSaver providers installed negative screens on all default products.

But over the next year fund managers would find ways to do more than exclusions, he said, including more active ESG work to drive value on investments and corporate engagement. 

There would be more differentiation among managers with nuanced RI strategies, he said, and a much more detailed conversation.

More KiwiSaver providers and fund managers were using responsible investment as part of their marketing pitch. “These conversations are a nice way to get deeper engagement with clients.”

Tags: AIA ESG financial advisers FSLAB funds management investment KiwiSaver responsible investing

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Comments from our readers

On 18 January 2018 at 12:45 pm Brent Sheather said:
What a load of rubbish. In fact I would go as far as to say that, given that most of these sorts of products have extremely high fees, higher than even most of the normal high fee funds, that an adviser who advised a client to buy these sorts of products would not be putting the clients’ interests first. My view is that most responsible investment products are a scam designed to obfuscate and confuse and deflect discussion away from the important issues. Desperate stuff.

If I get any individual who expresses a wish to buy RI I tell them I don’t want to deal with them as most times it indicates the individual is stupid and doesn’t appreciate reality. The best way to handle this issue is to invest widely, stress low fees and then make donations to charitable causes. Once I explain the fees to clients they almost always s adopt this strategy. Far better than getting ripped off by scammers masquerading as responsible investors.

On 18 January 2018 at 3:38 pm Pragmatic said:
You [kinda] bet me to it Brent, as I had to re-read the article to figure out what the point was.
In reality, most investment managers consider E, S & most definitely G elements when appraising stocks... which makes any additional pricing for this service a bit of a rort.
That aside, the biggest challenge for RI is around who's ethics are most relevant?
I tend to agree that the best way forward is to invest into the most appropriate vehicle, and understand their philosophy (which will capture ESG by default)
On 19 January 2018 at 9:31 am John Berry said:
Brent, great to see you are a big fan of responsible investing. ESG integration in portfolios is a dominant trend in Europe and the US, and being a follower of global best practice it’s no surprise to me you support it.
On 19 January 2018 at 9:58 am BGW said:
Susan, this article has little relevance to NZ advisors as its based on fiduciary duties - not the (soon to be statutory) NZ duty to put client interests first. They are not the same thing.
On 19 January 2018 at 4:35 pm Brent Sheather said:
Hi John

You raise an important point. Whilst ESG might be popular with institutions my guess is that they would not embrace it at all if the only way they could do so involved being ripped off by high cost managers. An important role for financial advisers is to minimise fees and my view is if you can’t do the right thing at the right price, as is the case with ESG in NZ, you invest widely and donate your excess income to charities like Forest and Bird rather than pay extra fees to fund managers. Once I explain the fees to clients they almost always adopt this strategy.

Thanks for those comments Pragmatic you make a good point – I’m sure our active managers also consider “E,S and most definitely G elements” when appraising stocks too. I am very definitely of the view that for retail investors locally ESG is a big scam designed to further exploit retail investors.

Coincidentally there is a great story on the problems with ESG investing in the Financial Times today.

Regards
Brent Sheather
On 19 January 2018 at 5:12 pm John Berry said:
Brent, the one thing we are in total agreement on is that managers who focus on responsible investment should not charge more than conventional funds. It hardly seems responsible to charge more.

I have checked global equity fund fees of 3 managers who hold themselves out as managing responsibly - their fees are not above the average. And they don't have performance fees. Not sure who you have based your "extremely high fee" claim on.

Regards
John
On 22 January 2018 at 9:29 am Brent Sheather said:
Hi John,

I don't think it's appropriate to benchmark ESG fees against high cost funds no institution would buy. Our view is that best practice when selecting funds for our clients is to aspire to the low fees that the likes of the Super Fund and ACC deem worth owning.

Fees on ESG funds should be reasonable in relative and absolute terms. We can buy active Australian equity for clients at less than 15 bps and passive at around the same price. For global equities we pay between 10 and 50 bps for active and passive. The ERP is about 3 percent for global equities so even 50 bps is a big hit and 150 bps effectively appropriates half the risk premium.

Can you advise the all up fees of the 3 responsible managers you have investigated and their names so readers can see if they are extremely high or not?
On 22 January 2018 at 12:20 pm John Berry said:
Brent - here's an ESG global equity fund from our suite - Pathfinder Global Responsibility Fund all-in 0.93% fee. Active with 250 direct stock holdings. Just so we are comparing like for like, it is a retail compliant PIE with NZD currency hedging.

Regards
john

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