CONFIDENT
MONEY SPONSORED BY PERSONAL CAPITAL
SUMMER 2018
HAND IN HAND HOW MONEY AND MARRIAGE COMBINE WHEN YOU PLAN A LIFE TOGETHER
REBUILDING TRUST WITH THE INDIVIDUAL INVESTOR
personalcapital.com/consultation
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Up Front Sponsor’s Letter
MATTERS OF TRUST
I
t wasn’t that long ago that manpower was replaced with machinery, and soon after came algorithms, bytes and analytics. And while it’s easy for some to believe that we’re better off due to technology, there is something within our DNA that is still driven by emotion and rooted in a need to belong. Humans crave social interaction. In turn, good businesses take that to heart and make basic human nature the focus of how they operate. However, business can seem a bit antiseptic these days. We measure everything and focus a great deal on results. If business increases based on some sort of campaign, we tend to want more of that. And if it goes down, cost cutting occurs. The constant turnover of short-term tactics is simply unsustainable. Good business practice will always include metrics and data, but there is no shortcut to mattering to our clients. In other words, if we can marry great technology and good old-fashioned business acumen with empathy and trust, we have the makings of a robust and mutually enriching relationship.
GOOD BUSINESS WILL ALWAYS HAVE METRICS AND DISCIPLINE ASSOCIATED WITH IT. BUT THERE IS NO SHORTCUT TO MATTERING TO OUR CLIENTS. At Personal Capital, we have optimized our business for relationships first. Subsequently, we focus less on generating awareness and more on generating trust. It is what sustains us all. In this issue of Confident Money, we talk a lot about trust. In our cover story, “Hand in Hand,” we discuss planning a life together and the trust building that comes from solid money talk for couples. Financial matters are a common concern in any relationship. Therefore, a little discussion
SPONSOR
Personal Capital personalcapital.com MANAGING EDITORS
Anne Armento Jenn Kincaid
EDITORIAL & CREATIVE DIRECTION
Conduit Inc. www.Conduit-Inc.com
Confident Money is published quarterly Copyright 2018 To subscribe go to www.personalcapital.com/subscribe
up front can go a long way and be a great foundation for happiness. In our second feature, “Rebuilding Trust with the Individual Investor,” we take a closer look into the meaning of trust and why it matters to all of us. It is the bedrock of any relationship and is at the core of our mission. We are very proud of this issue for many reasons, but our commitment to building trust is at the top of that list. Warmest regards,
Jay Chief Executive Officer, Personal Capital twitter.com/@jayshah_pc
CONFIDENT MONEY
IN THIS ISSUE 03 Sponsor’s Letter 04 Hand in Hand How money and marriage combine when you plan a life together 08 Rebuilding Trust With the Individual Investor How—and why—the process has changed
12 The Dossier News, updates, and statistics 14 Q&A with Brendan Erne Why Socially Responsible Investing matters to you
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HAND IN HAND HOW MONEY AND MARRIAGE COMBINE WHEN YOU PLAN A LIFE TOGETHER
“FOR BETTER OR FOR WORSE, FOR
richer or for poorer…” Sounds easy enough when those words, vowed by most every married couple, are spoken. But it’s always a good idea to take a little closer look at the “richer or poorer” portion of those vows. As life evolves, so do a couple’s financial concerns. Inevitably, financial topics will vary during the course of a relationship.
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The first objective for any couple is to determine whether finances will be combined or separated. Making this determination helps in establishing, tracking and adhering to a household budget. “It is very important in the planning process to ensure that everyone is on the same page and contributing their fair share,” says Jonathan Lore, Senior Financial
Advisor for Personal Capital. “Beyond that, I think the most significant planning opportunities center around retirement and education planning.” That’s where the balanced budget and financial plan come into play. Couples need to have a clear understanding of how much they can afford to spend and how much they need to save. And these goals need to be viable.
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“Whether you’re talking about retirement, your kid’s education or a vacation home, you will need to understand how much you can afford to allocate toward your various financial goals,” says Personal Capital Senior Service Advisor Bryan Knoebel, CFP®.
The approach
It’s relatively simple: Honesty and transparency are at the core of any financial conversation, regardless of when it occurs during the course of a marriage. Knoebel suggests adopting a “spirit of cooperation” as topics are discussed, coupled with a willingness to listen and compromise. This proves important when setting goals together. Lore explains the importance of achieving balance. “It is not uncommon to find, working with couples, that there is a disparity between priorities. One spouse may be super-focused on retirement as goal No. 1, while the other wants to assure the kids are covered first.” Projections can be built via the Personal Capital Retirement Planner to show how the two goals interrelate, Lore says. “From there, we coach the clients to come to an agreement on what the parents’ contribution should be for school. Since every client is different, it is imperative that we come to an agreement on the front end. Once those goals have been identified, we can refine the earlier established plan to model out what would have to be done to solve for each scenario.”
expenses can indicate trust issues.” Knoebel sees the issue as being scientific in nature. Follow the rules and you will be successful in your financial management, though he acknowledges that emotion can play a role. “While there are several financial truths that everyone should abide by, there is also an emotional component to a conversation surrounding finances,” he says. “Everyone has a unique relationship with their money depending on their upbringing, career path and financial habits. It is important to understand that your partner’s relationship with their money is likely different than yours.” Lore believes it’s about being fair and honest. Like any relationship, it is all about compromise. “So, when it comes to financial matters,
Making it work
Solving money matters
Kristi Vanderpool, marriage and family therapist and owner of Seasons Counseling Center in Johns Creek, Georgia, says few clients come to a marriage therapist when they are happily planning their weddings or entering retirement. She mostly sees couples aged 30 to 60 who are in significant conflict, possibly considering divorce. “The most common money problems are overspending, being untruthful about spending or unable to agree on financial decisions, controlling one’s partner with money, living beyond one’s means, and debt,” Vanderpool says. “When couples bring up money problems, I look at it as a symptom of a deeper issue, which is usually trust or respect. For example, sometimes separate bank accounts or hiding
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start from your own preferences or expectations, and then be flexible with your spouse to come to area of mutual agreement.” One of the best things couples can do is discuss spending and financial concerns often. Frequent communication helps to avoid anxiety, misunderstandings and resentment, Vanderpool says. Even if one spouse is the “breadwinner,” couples should talk about money matters out of respect. In general, time can be a driving factor in how a couple approaches financial matters. “A person’s perspective and relationship with their money evolves over time, so you can’t assume that your discussion with your partner about your retirement will be the same as your discussion about your first home,” says Knoebel, adding that emotions will differ by partner. “For example, you might each have different emotional considerations when it comes to paying for your kids’ educations versus paying for their weddings. Take time to understand your partner’s unique emotional perspective for each financial goal or discussion.” Vanderpool says newer couples are usually more idealistic and optimistic in their financial discussions. “I think the longer a couple has been together, the more realistic the couple is in their financial decisions.”
“While there are several financial truths that everyone should abide by, there is also an emotional component to a conversation surrounding finances” - Personal Capital Senior Service Advisor Bryan Knoebel, CFP®
Coming to an agreement about finances as a couple isn’t one-size-fits-all. Priorities can differ between spouses and change over time. Communication is key, along with mutual respect and keeping an open mind to one another’s feelings and beliefs. “I have helped several couples understand their spending habits as a first step in a financial plan,” Knoebel says. “It can often be the most difficult discussion to have, as everyone has different priorities.” Knoebel says his most successful clients have not viewed these difficult discussions as “fights,” but as opportunities for growth. By far, the couples who achieve the best outcomes are able to find a way to laugh and learn throughout the process. Sometimes, engagement is only with one spouse. That’s why Lore encourages both spouses to become part of the planning
discussion and invest in the conversation. His focus is on helping clients get on the same page and identify what is most important to them as individuals. “Once you break through that barrier, it is common to see both spouses then very engaged and happy with the interactions with their advisors,” Lore says. “We are no longer just a financial provider, but instead, we be-
come their trusted advisor.” Vanderpool holds the belief that the manner in which people spend money actually reflects their inner life. Maybe a person is controlling of his or her spouse or living beyond his or her means to impress others. Some may be generous with their friends or adoring of their children. And others may be smart about their budgets or, unfortunately, anxious
because of mounting debt. “If clients have differing views on money, I sometimes have them share how their parents managed money when they were growing up,” Vanderpool says. “This creates insight and empathy for each other. It also facilitates a conversation about what is important to them now, and how they can work together as a couple to achieve their goals.” SUMMER 2018
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For San Diego restaurateur Tim Klepeis, the turning point came in 2016, when two CPAs he worked with scoffed at his assertion he’d be able to retire at 55 after selling his business and two buildings. “They kept insisting I would need to keep working,” says Klepeis, who had operated the restaurant for 25 years. The admonishments prompted Klepeis to take a more hands-on approach to his retirement planning. While listening to a podcast during one of his long bicycle rides around the city, Klepeis heard about a new generation of firms. They were using powerful financial planning apps that enabled consumers to aggregate information from all their password-protected bank, credit card, mortgage, retirement and other online accounts onto an online “dashboard” for a single and more holistic view of their personal finances. After coming across positive third-party reviews, Klepeis began using Personal Capital’s
free app to create a “fantasy portfolio.” The app automatically recommends changes to his asset allocation based on his personal information and investment objectives. It showed him that if he managed his expenses carefully, he could retire with proceeds from those sales. “The app was key for me,” Klepeis recalls. “It even had a fee analyzer right in the app. Prior to the app, I was thinking I was going to have to keep working. Every financial planner told me that. But the Personal Capital app showed me that my expenses are completely manageable, and I can adjust them very quickly. It’s the reason why at 55, I’m retired.”
REBUILDING TRUST WITH THE INDIVIDUAL INVESTOR
HOW—AND WHY—THE PROCESS HAS CHANGED By Charles Lunan
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“I used to go in and check my balances three times a week. But with Personal Capital’s free dashboard, I’m checking my spending instead, because it’s really easy to see trends in terms of money going out and one of the few things you have control over is how much you spend.” – Chad Guenther, 38, Personal Capital user
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An issue of transparency
As normal as it may seem to today’s digitally-savvy consumers, There is a major shift in how consumers build trust with financial advisors. Ten years ago, firms acquired and retained clients primarily by establishing personal relationships through face-to-face meetings that might include an occasional dinner or even a round of golf. So, what’s changed? The answer lies in part in renewed concerns over the lack of transparency into how the professionals who manage America’s retirement accounts are regulated. On one hand are Registered Investment Advisors (RIAs), who are held to a “fiduciary standard” under the Investment Advisers Act of 1940, which requires they always put their clients’ interests ahead of the financial interests of their firm. On the other hand, there are stockbrokers, who are held to what the Financial Industry Regulatory Authority (FINRA) calls its “suitability standard.” The standard stipulates that while stockbrokers’ individual product recommendations must be consistent with their clients’ best interests, they are not obligated to recommend the least expensive security or investment strategy as long as the recommendation is suitable. To make sure it’s fully aligned with its clients’ interests, Personal Capital has elected to build portfolios with commission-free products, such as stocks and certain Exchange Traded Funds, or ETFs, which – in addition to having lower expense ratios – offer certain tax
advantages unavailable from mutual funds. “This is what most attracted me to joining Personal Capital,” says Tyler Morris, a Senior Financial Advisor who works at the firm’s Denver hub. “We don’t sell money market funds, mutual funds, insurance, etc., and thus aren’t pressured to push something that isn’t warranted. I’ve been down that road, and when you have a new insurance product or new fund company to sell every month, you’re not helping your clients or yourself.” Personal Capital’s free dashboard is used by 1.6 million people and has won many accolades, but the company only makes money when it signs clients up for asset management services, which it began offering in 2009. Since then, more than 15,000 individuals, including more than 1,500 high net-worth investors, have hired the company to manage more than $7 billion in assets. Personal Capital Senior Financial Advisor Gregory DePalma says most of his clients have come to him after being unable to get a straight answer on costs and compensation from previous advisors. “Almost all the time, those advisors turned out to be stockbrokers who were not acting in the best interest of clients,” says DePalma, who also happens to be a certified financial planner (CFP®). “The lack of information about what true costs are is a huge problem.” To address this problem, the U.S. Department of Labor proposed requiring all financial advisors working with retirement accounts follow the fiduciary rule starting June 9, 2017.
Although the current Administration has suspended implementation of the rule pending further review, Morris says the proposal irreversibly raised consumer awareness. “With more emphasis on the fiduciary standard, more people are starting to look at transactions in their IRAs and ask, ‘Why are they doing this?’” Morris says. “They are questioning the timing of a decision to buy or sell. The consumer – especially this far into a bull market – is very skeptical.”
Helping the individual investor
Chad Guenther, 38, has always craved greater insight into his financial life. Like Klepis, Guenther’s big epiphany came not just from being able to estimate how much he was paying in fees, but better visibility into his own spending. “I used to go in and check my balances three times a week,” he says. “But, with Personal Capital’s free dashboard, I’m checking my spending instead, because it’s really easy to see trends in terms of money going out and one of the things you have control over is how much you spend. You can’t control what the stock market does, but if you are careful, you can sock away an extra $500.” This is typical of many Personal Capital users. DePalma says a handful of his clients have detected credit card theft earlier because they check their Personal Capital dashboard much more frequently than their individual credit card and debit card accounts.
3 WAYS TO SEE WHICH SIDE YOUR ADVISOR IS ON American investors overwhelmingly believe all investment advisors should adhere to the fiduciary standard, but only about half are certain they’re working with a fiduciary. That means nearly four of 10 people working with a financial advisor don’t know if their advisor is legally obligated to always put their financial interests first. Below are a few steps investors can take to find out where their advisor stands:
No. 1 – Pull their firm’s ADV Form Download the most recent copy of this annual regulatory filing
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with the Securities and Exchange Commission from https://www. adviserinfo.sec.gov to find out whether the firm and its employ-
ees are registered as investment adviser representatives, broker-dealers or both.
No. 2 – Ask about dual registration If the firm employs both fiduciaries and stockbrokers, ask your advisor whether they’re registered as a fiduciary, a broker-dealer or both?
No. 3 – Ask about compensation If your broker has dual registrations, ask him if he is compensated when selling shares of mutual funds, annuities or any other financial products. If he says yes, he may not be acting as a fiduciary and you’ll have to decide whether you trust him to put your financial interests ahead of his own.
The coming stampede
“We have a lot of folks engaged with our tools,” Morris says. “I think our clients are more hands-on. Ten or 20 years ago, retirees could rely on pensions and Social Security and use
So, while the Administration ponders whether to implement the Department of Labor’s fiduciary rule, consumers and much of the financial service industry appear to be embracing it. They also are clearly gravitating toward hybrid firms like Personal Capital that offer both digital and human registered investment advisors. A recent study from Business Insider Intelligence,”The Evolution of Robo-Advising”, forecasts that more than $1 trillion in assets will be managed by robo advisors by 2020 and $4.6 trillion by 2022. Much of that growth is expected to come via apps being rolled out by banks, broker/ dealers, mutual funds and other traditional advisory services now jumping on the bandwagon. So, the question becomes, “Why do so many Americans still get their financial advice primarily from stockbrokers and insurance salespeople who earn their living from commissions and other fees?” DePalma cites several factors. First, consumers simply don’t know how their advisors are compensated and are often too intimidated to ask. Either they don’t want to admit their ignorance, or they don’t want to jeopardize their friendship with their IT IS MORE IMPORTANT broker. THAN EVER FOR “These are strong personal CONSUMERS TO ASK relationships that these brokers have THE RIGHT QUESTIONS built, to their credit,” DePalma says. “It’s always a golf buddy, or sister-inAND BE PREPARED law, or an old college buddy. But you TO WALK AWAY IF have to ask, ‘How good of a friend THEY DON’T GET THE can they be if they are charging a 3 RIGHT ANSWERS. percent management fee, plus 1.5 percent on money market funds, mutual funds, annuities, etc.?’” It is more important than ever for consumtheir investment as extra income. Now that ers to ask the right questions and be prepared there are no pensions, it’s up to workers to save to walk away if they don’t get the right answers. that money in an IRA. Millennials and younger After all, it’s your personal capital. generations realize this is kind of on us.”
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News | Updates | Statistics
DOSSIER
Differences between genders and generations underscore the importance of working with an advisor to create a personalized financial plan that changes as your life changes. As couples get older, money becomes a bigger source of stress on the relationship. A good advisor can help people work through their differences and make sure they stay on track through the ups and downs that are part of any relationship.” – Michelle Brownstein, CFP(R), VP of Private Client Services at Personal Capital
LOVE TRUMPS MONEY PERSONAL CAPITAL SURVEY RESULTS*
THE
78% of Americans say finding love is more important than being wealthy, yet money is the #1 source of relationship stress. Six in 10 Americans would rather share financial statements with their partners than their browser history. Americans overwhelmingly agree that finding love is more
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important than being wealthy (78% versus 22%). In fact, finances are barely on the radar when it comes to important traits in a significant other. Only 9% of respondents said they consider financial security among the most important qualities in a potential partner, while 57% cite honesty as an
important quality. While both men and women selected love over money, men didn’t feel quite as strongly about it: Men are significantly more likely than women to say they would rather be wealthy than find true love (26% versus 17%). 65% of men would rather share financial statements than internet browser history, compared with 55% of women. However, women are twice as likely as men to say financial security is among the top qualities they look for in a significant other (12% versus 6%). 54% of respondents said money is the biggest relationship stressor, followed by communication (26%), work (7%), in-laws (7%) and children (6%).
*This survey was conducted online within the United States by ORC International on behalf of Personal Capital from March 1-7, 2018 among 2,008 U.S. adults ages 18 and older.
7 things you should know about your finances If you want to be successful at financial planning, Craig Birk says the strategy is simple – know what you have, how much you make, what you owe, how you spend and how you are investing for the future. Birk, who leads the Personal Capital Advisors Investment Committee and serves as Executive VP of Portfolio Management, believes
that if you have a solid foundation, a thorough assessment of your position will make that abundantly clear. And, if you face serious challenges, clearly understanding them will empower you to make adjustments and significantly improve your situation and financial future. Following is a solid, basic checklist of seven
things you should know about your financial life: 1. The value of your assets 2. Your asset allocation
3. The total of your liabilities and debts 4. Your net worth (assets minus liabilities) 5. How much you spend on a monthly and annual basis – and where you spend it 6. How much you earn after tax on a monthly and annual basis 7. How much you pay in fees
YOUR 5-STEP PLAN TO MONEY MANAGEMENT SUCCESS It’s not rocket science — if you employ a smart spending strategy, consistent saving and effective investing, your dream of financial freedom is attainable. And, it doesn’t hurt to have a plan. In fact, any successful venture — personal or professional - starts with some structure. To help set you on the right path, Shannon Lynch, a Senior Financial Advisor at Personal Capital, offers these five simple tips:
No. 1 – Build an emergency fund
No. 3 – Assess your situation
No. 2 – Establish goals
No. 4 – Track your current circumstances
Enter your financial catastrophe here. Regardless of what it is, if you don’t have an emergency fund, you’ll have to turn to other options like credit cards. Most single-income families should have at least six full months in reserve. While this typically is the default time period, single people or dual-income families may be able to get by with less.
Are you saving for a house? Are you thinking about starting your own business? Do you know when you want to retire? It’s important to have goals. Too many people don’t look beyond their short-term financial needs, so they never give themselves a chance to build the financially secure future they truly want. Change that today.
Know what you have versus what you owe, otherwise stated – assets versus liabilities. Where do you stand? What changes do you need to make to ensure your success? Don’t let more short-term goals, such as buying a house or a car, overshadow your long-term goals. Prioritize and allocate appropriately to fund each of your important goals.
(and need to) save each month, and write yourself a check before any other expenses.
No. 5 – Invest
Your goals cannot be met by merely collecting interest on the money you have in savings. Retirement, alone, is a big goal that requires a judicious investment strategy. Start with your employer’s retirement plan. If you don’t have access to a retirement plan through your employer, start your own IRA account. Once you have an account, you need an investment strategy that matches your tolerance for risk. You may have different strategies for different goals, but you should always track your risk and keep overall costs to a minimum.
Know what you’re saving versus spending. If you have significant debt, you may need to reduce it and stop using debt in the future. If your monthly living expenses are too high, start to explore some new options. You owe it to yourself to make your goals the ultimate priority. In order to reach your objectives, consider how much you can
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a better job managing environmental, social and governance issues.
WHY SOCIALLY RESPONSIBLE INVESTING MATTERS TO YOU As the Director of Portfolio Implementation at Personal Capital, Brendan Erne has played a critical role constructing and managing Personal Capital’s Socially Responsible Personal Strategy, as well as building out the firm’s broader research team. Prior to Personal Capital, he spent several years at Fisher Investments as an equity analyst covering the technology and telecommunications sectors. A CFA charterholder, Erne also co-authored Fisher Investments on Technology, a comprehensive guide to understanding and analyzing investment opportunities within the technology sector. Following are his thoughts on why Socially Responsible Investing is important to Personal Capital clients:
Define socially responsible investing.
“Socially responsible” is still a very broad and subjective concept. What one investor deems socially responsible is often completely different from another. Up until recently, it has mostly fallen on each investor to decide what companies, industries or sectors they should exclude from their portfolio – with the goal of aligning their investments with their personal beliefs. So, if someone didn’t want exposure to tobacco or gun producers, they’d simply exclude them from being purchased in their portfolio. This form of “exclusionary” investing is referred to in the industry as “S.R.I.,” and is the most common form of socially responsible investing being used today. And while excluding specific categories can be effective, a newer and much more robust form of socially responsible investing is gaining momentum. This methodology is referred to as ESG (Environmental, Social and Governance). It is through these high-level categories that a company’s “social responsibility” is assessed. The “E” covers areas such as carbon emissions and renewable energy projects, the “S” includes policies like employee diversity and safe work conditions, while the “G” encompasses
issues like board independence and executive compensation. While there is no global standard on how to evaluate these metrics, a handful of third-party firms have established thorough research and
OUR SOCIALLY RESPONSIBLE PERSONAL STRATEGY COMES WITH ALL THE SAME BENEFITS AS OUR CORE STRATEGIES. IT’S STILL DYNAMIC AND DATA DRIVEN, BASED ON EACH INDIVIDUAL’S UNIQUE FINANCIAL SITUATION AND GOALS. ranking methodologies. By using these ratings, investors can go much further in their application of socially responsible investing. Instead of simply excluding companies they don’t want to own, they can actively seek out companies doing
Personal Capital Advisors Corporation is a registered investment advisor with the Securities Exchange Commission (“SEC”). Any reference to the advisory services refers to Personal Capital Advisors Corporation. SEC Registration does not imply a certain level of skill or training. This press release may certain forward-looking statements. These forward-looking statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. Past performance does not guarantee future results. Different types of investments involve varying degrees of risk and there
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Why did Personal Capital decide to offer a socially responsible strategy?
This is really the combination of a few different factors, the first being the growing demand from our clients and prospects. Over the last few years, we’ve received an increasing number of requests for some sort of socially responsible offering. We wanted to be able to meet this need. The second, and perhaps the most important reason, is it just feels right. It’s a natural adaptation to the world we live in. Whether it’s increasing awareness of the environment, disparities in the workplace or other socially conscious issues, there is a growing sense of urgency to do better by the planet and by each other. It seems only fitting we’d want to apply this mindset to investing. The last reason is we saw an opportunity to produce something truly unique. There just aren’t a lot of socially responsible offerings in the market right now, and most of the ones available suffer from material shortcomings. There was a gap that simply wasn’t being addressed through traditional channels.
How do you build these types of portfolios? What makes them different from your core strategies? Our Socially Responsible Personal Strategy is available to clients with over $200,000 in investable assets. The biggest difference between this strategy and our core strategies is the U.S. equity component of the portfolio. Here, we partnered with independent research firm Sustainalytics for their ESG scores and ratings, and built a “best in class” portfolio of individual stocks. This means, on average, companies selected have an overall ESG ranking in the 90th percentile relative to their domestic peer groups. This is far higher than most other ESG funds and ETFs available in the market. We also removed the energy sector due to its heavy concentration in fossil fuels and filtered out companies with material exposure to adult
can be no assurance that the future performance of any specific investment or investment strategy will be profitable. Changes in investment strategies, contributions or withdrawals, and economic and market conditions will materially alter the performance of your account. All investing involves risk of loss including the possible loss of all amounts invested. The information contained herein is being provided for discussion purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, securities in the company listed.
less earnings volatility and less systemic volatility. So, at the end of the day, I’d say we don’t expect any material performance deviations from our core portfolios over full market cycles. We just might see a tad more volatility given the more concentrated investment universe after removing energy.
How is your socially responsible strategy different from others in the marketplace?
entertainment, gambling, tobacco, controversial weapons, weapons-related military contracting and small arms. The rest of the portfolio is built with a diversified mix of more traditional ETFs. This is primarily due to the fact that the industry is so new, and there just aren’t a lot of “ESG-optimized” ETFs with attractive pricing or sufficient liquidity. We do, however, continually monitor what’s available, and fully expect to add some of these funds once they gain a bit more traction. Overall, the best part of our Socially Responsible Personal Strategy is it retains almost all of the same benefits as our core strategies. We still apply our Smart Weighting methodology, which more evenly weights the factors of size, style and sector. It maintains exposure to all six major liquid asset classes. It’s customizable and data-driven, based on individual financial goals and retirement objectives. And we still take a disciplined approach to rebalancing and tax management.
What should investors expect in terms of return compared to core portfolios?
Performance is probably the most common concern for someone considering a socially responsible investment portfolio. And there have actually been numerous studies going back in time attempting to quantify the impact. At this point it is still inconclusive whether socially responsible investing can generate any outperformance, but most studies indicate it can at least match performance of the broader market. Moreover, a recent study from MSCI (Foundations of ESG Investing, Part 1: How ESG Affects Equity Valuation, Risk and Performance) produced some interesting results around companies with higher ESG rankings. It found that higher ranked companies tended to be more profitable and paid higher dividends, showed lower incidents of large stock drawdowns, and exhibited
This is where I think we truly shine. As I said earlier, we take a best in class approach to finding socially responsible companies. On average, they rate above the 90th percentile in their domestic peer groups. As a comparison, one of the most widely used “ESG optimized” ETFs is DSI, a fund from iShares. If you applied the same ranking methodology, the fund’s average ESG percentile would only fall in the mid to high 70s. That’s a pretty big difference. We also incorporate our Smart Weighting methodology to prevent unwanted sector, size and style skews. Many existing socially responsible offerings can have more than a third of their portfolio in a single sector. DSI, for example, is more than 30 percent technology stocks. That’s a huge bet to have on one sector. Our use of individual stocks also allows for more precise target weights, as well as more granular opportunities for tax loss harvesting. Moreover, it means the portfolio remains fully customizable. If a client doesn’t like a specific company or industry, they can simply restrict it. You can’t do this with a fund or ETF. The last point is one I mentioned earlier. Our Socially Responsible Personal Strategy comes with all the same benefits as our core strategies. It’s still dynamic and data-driven, based on each individual’s unique financial situation and goals. It simply does all this while also applying a socially responsible filter to the portfolio. SUMMER 2018
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personalcapital.com/SRI