Despite all this choice of different levels of ethical investment, there will still be clients whose beliefs are so strong that application of standard, negative and positive criteria with any level of compromise will not be acceptable.
For an adviser this makes suitability, due diligence and manager selection particularly tricky. We are probably looking at bespoke discretionary management here, in other words, bringing in a specialist. Easier said than done.
Just to make things really difficult, where beliefs are that strong, there is a very good chance that the client will know more about the subject than you, the adviser.
Analysing the capabilities of the investment manager is crucial to due diligence here. While most bespoke managers will claim expertise in this area the extent of this needs to be investigated.
For clients that have specific requirements and beliefs in a particular area, advisers may find themselves in the unusual position of deferring to the clients’ greater knowledge. Groundwork and due diligence to establish a credible shortlist here is essential.
While the level of due diligence required increases in direct proportion to the strength of the client’s beliefs, this is one investment area where there appears to be no shortage of information.
Managers of ethical funds and portfolios are exceptionally proud of what they do and presumably feel it is the ethical thing to do to be as open as possible and provide as much information as possible.
Just one warning here. An appropriate ethical fund that appeals to the clients beliefs sounds like a good ‘suitability’ result. However, there is always the chance that the restrictions and compromises placed on ethical portfolio managers will result in an investment that does not match the client’s attitude to risk.
As with other funds, Defaqto do risk rate some ethical portfolios and advisers cannot afford to ignore this aspect. If there are no, or few client risk profile/portfolio risk rating matches, this needs to be articulated carefully to the client so they understand and can decide whether their beliefs are strong enough to justify taking on more (or less) risk than they would normally.
Recent, and coming regulation, in the financial services industry includes independent governance as one of the key improvements to the industry. As far as I can recall this has always been an element of ethical investment.
