Transcript:
Lynnley Browning: (
Hello, and welcome to Financial Planning’s Leaders webinar on ESG. I'm Lynnley Browning, wealth editor at Financial Planning magazine, an Arizent publication. And I'm very pleased to welcome Don Bennyhoff, the chief investment officer of Liberty Wealth Advisors. Hi Don, and thanks for being here. Thanks Lynnley. Appreciate the invite.
Lynnley Browning: (
Let's start from the 35,000 foot view level. I'm very much interested in hearing from a practice management point of view about how advisors deal with the enormous quantity of data, metrics, benchmarks, information, claims, labels and hype on so many sustainable products. How do you handle that?
Donald Bennyhoff: (
We do the best we can. Quite frankly, there is a lot of information out there. There's some very interesting research that's backed some of it, but the sheer volume of the different offerings, the different strategies, the different terms and terminology, is definitely a tad overwhelming. And so, what we've tried to do, especially because we need to be able to communicate this to our clients that know even less than we do about the topic we try and start at that 35,000 foot view ourselves. Just to help people gauge when they're asking about ESG or sustainability or socially responsible investing, what exactly do they mean? Because I think a lot of clients are kind of confused. They don't know there are differences.
Donald Bennyhoff: (
They think they're just different labels for similar strategies, and that can't be any further from the truth. So, starting at a very high level with a client when we're given a question about it is very helpful because oftentimes, we're not going to have the answer at first blush, because it's a very often a preference item. So once they begin to ask questions, we ask our questions as well, try and get centered on the right point of view and perspective for the reason for their questions. And then try and take our research from there.
Lynnley Browning: (
That definitely makes sense. I'm wondering with the welter of data points and plethora of information and with everything changing all the time.… I think the headline I read today was that a lot of big institutional investors are coming out against the EU taxonomies plan to exclude natural gas companies. How do you convey to clients what you know and what you don't know so that they can understand what they're getting into?
Donald Bennyhoff: (
Great question. The reality is that we're in a situation with this topic that's constantly evolving. It's constantly morphing from one thing to a next, whether it's evolving or just changing. I can say it will be interesting to see as time goes on. Again, given so much that we don't know about the future direction for the topic, what we try and do is anchor our clients on what they're specifically trying to gain from their query into ESG investing and whether they should or shouldn't do it. It's really less of a should or shouldn't, and we try and definitely kind of choose or make it about a preference. ‘Would you prefer to have an ESG influence in, or a specific approach to, your portfolio that incorporates more ESG strategies, or is it simply something that you're just inquiring about because you're reading about it or seeing it, and you just want more information’? I think a lot of people are trying to absorb the information, trying to make sense of the direction. And it’s, to be honest, a bit, probably, over-optimistic to think we'll be able to get, as the great Gretsky says, try and skate where the puck will be. I don't think this is the situation where everyone anyone's necessarily is going to be very successful at anticipating the direction of this discourse.
Lynnley Browning: (
I hear you. And I really like this idea that you refer to of almost tilting the investor towards ESG, rather than having them lock in specifically to something. So in the same way that, ironically, some ESG funds call themselves tilted, the investor is tilted when doing the due diligence and the questioning with the advisor.
Donald Bennyhoff: (
I couldn't agree more. It’s one of those things, I think, where too often the marketing angle for ESG makes it sound like sort of a better way to invest. And for some investors, it is better, because it more accurately reflects their own personal or ethical position on how they would like to invest — the same reason that some people feel compelled to buy electric cars because of the effect on the economy. Others might do it because gas prices are at $5 a gallon, or maybe it’s more economically inspiring them to look for a different option. I think the first thing that's important is that that when we're looking at ESG investing for sustainability more broadly, the topic is a preference item. It is the kind of thing where the jury is still out, whether it's technically a better way to invest that may yield better returns. I think risk and reward are still interrelated in the long run, and we'll have to see what becomes of it. But I think helping people understand that it’s a newer discussion point, and maybe they're learning about it for the first time. But it's not necessarily the be all end all, and it's not something that they have to do. It's just something that they may want to do if they just had those same type of ethical or environmental preferences.
Lynnley Browning: (
I'm wondering if you're seeing any sort of shift or change in how clients think about and conceptualize sustainability and sustainable investing. There's been a lot of — a bit of — an ESG backlash going on right now over issues like greenwashing and the degree to which one has to look under the hood to see what a fund really owns. You know: There have been a lot of surveys purporting to show that in particular, millennial and Gen Z investors are increasingly skeptical of the ESG premise. Now, obviously surveys are a very weak form of data, but that's one thing that we have right now to consider in the analytical toolkit. I'm wondering if you're seeing any sort of shift in clients in terms of how they think about sustainability.
Donald Bennyhoff: (
I have. I can't say that we've had either a lot of clients ask about sustainability or ESG. We are getting some, and we're getting more than we were in the past, but that's mainly becauses we were getting so few. I think there continues to be a lot of debate about what all the terms mean, because people have a tendency to define these things themselves in their very personal ways. And that's really one of the consequences of having a discussion around such a broad topic. ESG investing or sustainability often leads people to believe that it's a sort of homogenous strategy or narrow approach to investing, when it's anything but. I think that's part and parcel with some of the contradictions that we're seeing. The confusion that we're seeing among investors is that when they are looking at the topic themselves, they see all sorts of definitions, and some of them seem to suggest similar strategies. But then they end up with very different portfolios.
Donald Bennyhoff: (
That’s the nature of the industry and it's a nature of the factors that many of these investment strategies are trying to lean on to get these environmental, social and governance factors as part of their strategies. It's still an emerging market with an emerging set of ratings. There's a variety of ratings out there. And I think right now everyone is is trying to drink from the fire hose as they say, because whether you're an individual investor or professional in most cases, there's a lot of information out there. There's a lot of terms that are being thrown around, used almost interchangeably and very often they're not. So it's leading to a lot of confusion and it's leading a lot of investors to wonder really what it is they're asking for, you know. That’s why we've tried to steer away from the labels in discussing these type of strategies with clients that are asking about them and really narrow into, what are you looking to accomplish? Is it you're really looking for a strategy that's trying to focus on environmental or carbon emissions, and try and get them to narrow the field into something a little bit more specific. Because I think the generalities are killing us all.
Lynnley Browning: (
No, I hear you. And I'm wondering in those conversations with clients really zeroing in on what the client cares about most, maybe it's sustainable farming, maybe it's pay equity, whatever, regardless of what the client is interested in, once you nail that piece down, then what do you do? What kind, how do you go about the process of determining funds that might be suitable for that client and how do you present them and do they get presented with any sorts of caveats? I mean, do you have to do a massive amount of due diligence and look at filings and see exactly what's in an index, not just the top 10 holdings, but you know, scroll down to the very bottom to make sure there's not something scary looking in there. How does that part of the conversation go?
Donald Bennyhoff: (
Yeah, that's oftentimes when a client asks about ESG or introduces the concept of sustainability broadly, it's really the beginning of a long discussion. It's not as simple, I think as most investors anticipated it being, it usually seems like. “I'm interested in an ESG fund.” And then they expect us to have our favorite funds available to them and we just kind of rattle off a few. And then they let us know if it sort of meets their needs or if that's what they were they had in mind. It's just not that simple.
Lynnley Browning: (
No, it's not. And I feel like clients think ESG is almost like a deli where you go in and order, you know, your panini cooked just so with this type of cheese and that type of mustard, and it’s not.
Donald Bennyhoff: (
It's really the truth. It's a similar challenge to when people talk about hedge funds — they're not asset classes, they're not a single strategy. There's a lot of different ways to approach that topic, and sustainability and ESG is another one just like it. And the reality is that especially when clients are specifically focused, when we start asking the questions and they start saying, well, here's what I think I'm looking for: I would really like companies that not only avoid, or a fund that not only avoids, energy or those type of industries that are generally carbon producing and not all that great for the environment, if they just stopped with, they want to focus on something that focuses on investing in companies that are low carbon footprints, that's far easier than when they start taking it to another level.
Donald Bennyhoff: (
Like you're saying, like when you're trying to choose, not just the bread for your deli sandwich, but you start to get into the cheese and you want a specific cheese and a specific mustard, and you don't want this fat, another thing more of those caveats that you bring to the table in this topic, the harder and harder it is to research. Most of the services that are commonly used, that we use, to help research our funds still haven't caught up with all of these particulars and the parameters that that investors are looking for. So you can really only sort for mutual funds or ETFs by these sort of very broad mandates or brush strokes. And it narrows the field down to a few hundred, but not a few funds. And that's where really the work begins. We personally believe in trying to help our clients customize the portfolios to the degree that one doesn't distract from the overall asset allocation and diversification, and where it's practical. As we get some of thesemore personal preferences, where we are picking the cheese and picking the mustard, it really does require us to delve deeper and deeper sometimes look at the reports and the individual holdings, but even, even then it doesn't answer all the questions.
Lynnley Browning: (
And that's very laborious and time consuming. I mean, you could spend a day, at minimum, just trying to cough up the basic SEC filings showing what's what. I mean, to that extent, that ESG proposition for advisors is kind of a heavy lift. The industry wants to market it as the opposite of that, but when it comes to really looking at what's behind the curtain, it takes a lot of work. But I'm wondering to what degree discussions about sustainable investments with clients can lead to insights for advisors about non-sustainable issues for those clients on other financial things, like retirement or home buying or estate planning or life insurance or annuities. Because the ESG conversation, it gets about preferences and beliefs and values and fears and hopes, and all of that filters that into other arenas of the, the financial picture. How much does the ESG question open up the conversation about broader financial planning for clients?
Donald Bennyhoff: (
Well, I think the spirit of sustainability at the highest level is about using what you need and then trying to leave the rest for the longer term or even perpetuity. There's multiple, multiple definitions of sustainability. It is really the highest level of this discussion and the broadest definition, but it does have parallels for when we talk to clients about how to view their portfolios and their wealth more broadly, because most of our clients do have to juggle various needs, whether it’s relying now for cash flow for their current spending, matching that with longevity risk and matching that also with some sort of goal for legacy, whether that’s to bequeath asset, to their children or to charity. There tends to be this mix of goals and objectives.
Donald Bennyhoff: (
And sometimes that sustainability conversation does lend itself well to a familiar framework for that discussion. Right. But actually I use, I have a tendency to, when when it's appropriate, use that philosophy that they're, again, more accustomed to. A lot of our clients are older. So they’ve sort of been used to juggling these various goals with different time horizons, near-term vs. sort of longer-term horizons. And so using that familiarity to make sustainability investments or investing a little more familiar to me is helpful as well. And so it's, I can use sustainability to make the investment portfolios or investment strategies, more clear or familiar. I actually use what they're accustomed to with the investment strategies, you know, and try and make sustainability a little more familiar sense for many of them. It’s sort of a new term and they're asking questions for the first time.
Lynnley Browning: (
Sure. Have you seen with clients, among clients, a misunderstanding or misapprehension of what sustainable investing actually is?
Donald Bennyhoff: (
Yeah, I think people think it's very clear cut. And I think, you know, in some cases there are some aspects that are clear cut. If you looked at sort of the typical strategy that's used in the industry for ESG, they tend to fall into two major buckets, and there's certainly more, but there is this idea of, you know, owning companies that best reflect your ethics or preferences or excluding the companies that don't reflect those ethics or preferences. So this inclusion screen versus exclusion screen, it makes it feel very definitive. Like a company is either good or bad, depending. Yeah.
Lynnley Browning: (
It, it seemed like it's binary. So...
Donald Bennyhoff: (
Absolutely. And that's certainly the case, but in probably the minority of the cases, and that's because more and more companies are running their businesses with these sustainability factors in mind. They are looking at their business from the standpoint of efficiency and waste. They're trying to be more energy efficient. They're trying to generate less waste, trying to generate less carbon, because all of these things worth work against their efficiencies and profits. They're also at risk for, when they're looking at their employees, trying to make sure people are well represented, they're well taken care of, they feel like they are advocates for the company and the way the company works, because that makes for happier, more productive employees and maybe poses less risk for the company itself.
Lynnley Browning: (
Right. I mean, corporations — companies — are definitely without a doubt looking at themselves through the ESG lens. So even if you don't buy into, say, sustainability, or don't have any sustainable or impact funds — and I use all those terms interchangeably — you, by investing basically in any company of any size, are taking a stake in their view of sustainability and what it means and how they're managing it. It's kind of like, you may not like cryptocurrency, you may hate Bitcoin, but if you own stock in say, Tesla, you already in fact kind of own a little bit of Bitcoin indirectly because it's on Tesla's balance sheet. So it's kind of like, it's here. It's not going away. It's part of the woodwork. What's going to be the next step for how advisors explain all of this to clients?
Donald Bennyhoff: (
I'll be honest. I don't know. I think most of us are working through it as we go. Like I said, you know, it's an evolving topic and a very evolving part of the marketplace. I think we're evolving our practices as well. For example, I know many firms that work with clients to try and keep things at that 35,000 foot view. We tend not to allow clients to get too far into the weeds. They establish a sustainability portfolio, or, maybe a little bit more pointedly, an ESG strategy. And for clients that are looking at it or asking about it, they can say, yes, we have a sustainability strategy, which is a little broader than the ESG strategy, which is a little narrower. But we're trying to keep out of really all the nooks and crannies where people sometimes can get lost.
Donald Bennyhoff: (
And sometimes it becomes a distraction so that they end up spending so much time trying to find the perfect investment, they never get invested in the first place. And we all know that that generally is a bad idea. So honestly, I think with many firms, especially with ours, we're working our way through these various strategies. Like I said, we're trying to help clients find the strategy that makes sense, given their specific preference, but quite frankly, that may not be a practical solution for the long term. We're taking the more conservative approach and giving it a try to see how efficient or inefficient it is or practical or impractical. I'll be honest, the jury's still out. I do think that there is benefit in trying to help people kind of understand that, that’s okay, let's try and keep this at a high level.
Donald Bennyhoff: (
That's where we talked originally about looking at it as a tilt. Again, depending on the level of conviction, it's very similar to that idea of active versus indexing. They're just — it's a continuum. It's not an either -a binary choice, as you mentioned. People can have both, given the right understanding and the right preferences. That's not to say that that anyone needs one or the other because it is decidedly better or worse. A lot of these things are about preferences. There are some things that you can do to keep it simple, and keeping it at a 35,000 foot view probably is not the worst thing for investors or advisors.
Lynnley Browning: (
Do you think, as companies everywhere are looking at the world and themselves through an ESG lens, there will come day when RIAs will look at themselves through that same lens?
Donald Bennyhoff: (
Hmm...
Lynnley Browning: (
And you guys are out drilling oil and, you know, mining, you know, titanium and things like that, but, you know, you still have a carbon footprint. There's still the S and the G in ESG — social and governance. Are those issues that the RIA ecosystem we'll be looking at?
Donald Bennyhoff: (
I think similar to what we were discussing before where many companies are already incorporating some of these thoughts into their own management, whether it's environmental or social or governance, I think firms like ours are doing that as well. We pay a lot of attention to what we're doing. Like any business we wanna run as efficiently as possible.
Lynnley Browning: (
Can you give me specific details…
Donald Bennyhoff: (
Sure. So, you know, probably the most obvious one is, at least to me, is that we've tended to set up a virtual business. Within our firm, most of our employees are working from home. We lean heavy, heavily on technology. We’ve tried to reduce our waste through making sure that we go as, um, doing things like paperless processing for statements or conversations back and forth. We try and keep things, you know, digitally, whenever possible. Yes, it has an environmental impact, but it also has an efficiency aspect in cost cutting for us. Those costs, um, by cutting those costs, it allows us to do more with that money and contribute that back to better service and toolss for our clients. You know, we do look at other things like employee satisfaction. You know, we want employees to feel like they're recognized and have a voice. We want employees of our firm to be advocates of our firm and be extremely happy and content to work here as long as it makes sense to work here. We don't want turnover. You know, personally we think that leads to a better work environment, a better service environment for our clients. It's our way of trying to do well by doing good.
Lynnley Browning: (
Got it, got it.
Donald Bennyhoff: (
Like you said, thankfully, we're not in, you know, we're not looking for oil. But we are certainly, you know, “drilling” our company to the point where we can find the efficiencie wherever possible, to try and make clients as well as our employees happy.
Lynnley Browning: (
Where do you and your colleagues get your news about sustainability and ESG funds and trends and developments in the space?
Donald Bennyhoff: (
Well, these days it comes whether we're looking for it or not. It comes seemingly from everywhere. So I I'm actually quite selective. I do have a tendency, you know, my background, is from a research background into investing and asset allocation and investment strategies. So I do tend to look at the industry. I don't look at the marketing and most of the material that comes to advisors comes through a marketing unit of whichever firm is providing it. Often I have a tendency to be proactive. There are some very, very good websites out there.
Lynnley Browning: (
What are you thinking of?
Donald Bennyhoff: (
I'm sorry...?
Lynnley Browning: (
Which websites are you thinking?
Donald Bennyhoff: (
Okay, if we're naming names, I'll throw a hat tip out to “Abnormal Returns.” I've used them for as long as I can remember, mainly because as a blog aggregator, they saved me a lot of time. They are doing what I would otherwise be doing individually by going out, looking for material that doesn't have a marketing angle. It's looking for thought leadership. It's looking for data driven insights rather than sales driven insights.
Lynnley Browning: (
For sure.
Donald Bennyhoff: (
So I lean on blog aggregators like them to try and bring the thought leadership that's out there into something that's a bit more manageable. And I review their site on a daily basis. Most of the time, I read a fraction of what's posted there, but it certainly allows me to feel at least like I've got a bit of a toe in the water on not just the topic of sustainability, but many other topics that we're forced to deal with as advisors. And, you know, when clients ask, they expect us to be maybe not experts, but they expect us to be knowledgeable. And I think services like “Abnormal Returns” and others like it really provide us the opportunity to feel like we can stay knowledgeable about these topics.
Lynnley Browning: (
No, for sure: “Abnormal Returns” is good. Don, thank you so much. This has been absolutely fascinating. I have loved hearing how all of this works from the advisor-end and from the end of people in the trenches and on the front lines. You're not trying to make an ESG fund. You're not trying to market or sell an ESG fund. You're trying to see if an ESG fund makes sense for a client. So it's been really interesting to get into the details of how that process works. Thank you.
Donald Bennyhoff: (
Well, thank you. I really appreciate the invite today and thank you for shining a little light on it. I think everyone, whether it's advisors or investors, could use some help and the variety of perspectives that are out there to maybe get our hands around the topic a little better.