An ethical dilemma

Fraser Donaldson – Insight Analyst (Investments)

All but four discretionary firms in our database, that provide bespoke solutions, indicate that they can manage ethical portfolios for clients on a bespoke basis. Only 15 out of the 52 managed portfolio services (MPS) that are available directly from the discretionary firm offer an ethical portfolio option. Of the 53 managed portfolio services available on a platform only seven offer an ethical portfolio option.

Whether this is a comment on the commercial realities that ethical investing is still not mainstream or an admission by DFMs that they don't have the necessary wide-ranging expertise is up for debate. The truth, as ever, probably lies somewhere in the middle.

The light green approach

A portfolio option within an MPS, and there is only one usually, is likely to have been designed to appeal to those clients who feel they should do something but don't necessarily have a specific cause in mind.

These portfolios are likely to be a bit generic in nature and take a negative criteria approach, that is they avoid as much as possible areas that are considered to be ‘unethical’, such as arms, tobacco, alcohol and animal testing. These portfolios may not avoid these investments altogether but may set a limit as a percentage of turnover. These solutions may well be termed ‘light green’.

The bespoke solution

For those clients who are going to be more specific about their beliefs, a bespoke portfolio would be the route to take. Discussion with the investment manager would elicit what types of investment to accept and what to avoid.

Investing in companies that do not get involved in some sectors may not be good enough. Some clients may expect good, positive action from their selected investment companies, such as exhibiting excellent employment rights and operating carbon neutral business.

For clients who have specific requirements and beliefs in a particular area, advisers and indeed the investment managers may well find themselves in the unusual position of deferring to the clients’ greater knowledge. Groundwork and due diligence to establish a credible shortlist are crucial here.

Analysing the capabilities of the investment manager is also paramount, and it would be sensible to involve the client in this. While most bespoke managers will claim expertise in this area, the extent of this expertise needs to be investigated. Clients with firm beliefs do need to be confident that their investment manager can demonstrate this expertise and specialist capabilities.

If ethical choices are to form part of a centralised investment proposition, this kind of due diligence could and should be done in advance.

While ethical is a kind of catch-all description, it could easily also refer to environmental, socially responsible or Sharia investing.

Bespoke managers may have expertise in specific areas but not in others, so this is worth investigating from the outset. Don't forget, ethical is an area where the client is likely to be very knowledgeable, so good in-depth due diligence is essential.