Robo advisors have a new mantra for clients: Come, all ye faithful.
These digital wealth managers, facing heightened competition, are turning to niche markets they believe are under-served. The latest? Faith-based investing.
Faith-based investing is the “bedrock” of socially responsible investing, says Blaine Townsend, director of the Sustainable, Responsible and Impact Investing Group at Bailard. SRI assets grew nationwide 38% from 2016 to total $12 trillion in 2018, but faith-based institutions account for less than 1% of that sum, according to
Despite that small percentage, robos are launching platforms to cater to their needs, perhaps because religious organizations comprise the most avid shareholder activists — 33% of investors who filed or co-filed shareholder resolutions were faith-based, according to the SIF report.
The main advantage robo advisors provide over other investment products is the enhanced ability for customization. The digital platforms can deliver more solutions in ways that ETFs and mutual funds can't, Townsend explains. And one of the biggest advantages robos may offer faith-based clients is that robos can provide the opportunity to own stock in a company, Townsend says, which means the investor can further advocate for faith-based social causes as a shareholder.
Investing along Islamic principles is the faith-based option that has gained the most traction. For example, digital investment advisor Wahed Investing had $23.8 million in client assets in the U.S. as of July and offers a platform in 130 countries allowing over 20,000 customers to invest in compliance with Shariah law.
The firm was founded in 2015 by Junaid Wahedna, after the former investment banker met with a local imam to discuss what is called halal investing. [The Arabic word halal means "permitted."] Wahedna was surprised when the spiritual advisor recommended he invest his money in the only stock the imam knew was compliant: Apple.
“They don’t know who to go to or who to trust,” Aris Parviz, head of North American operations at Wahed, explains, about clients looking for halal investment platforms. “What we’re noticing is that the demographic we’re going after, they’re an underserved community.”
Wahed’s main goal is to get its name out to members of their community, Parviz says. In order to scale, marketing is the primary driver.
“We spend quite a bit in that regard,” he says. The team is hiring more on-the-ground marketing experts to make more face-to-face interactions and push out educational content.
For robo advisor Wealthsimple, faith-based investing is just one part of filling the broader needs the company is seeing in the socially conscious investment segment. “If there’s a demand in a certain subset, we look into it,” says Daniel Tersigni, portfolio manager at the Toronto-based firm.
The firm’s “autopilot” investing platform — with over $89 million in AUM, according to its most recent Form ADV, and $5 billion combined across the U.S., Canada, and the U.K. — offers three options: round investing, socially responsible investing and halal investing.
“When people invest around their values, they’re more likely to be disciplined,” Tersigni says.
In fact, the halal and SRI platforms account for 20% of Wealthsimple’s clientele. Besides the halal option, which has stricter investing principles, people of faith gravitate toward ESG and SRI investing platforms, says Tersigni.
“ESG captures a vary wide branch of individuals,” he says. “It does kind of capture a number of issues.”
But, there are serious headwinds for robos looking to cater to faith-based investors.
Case in point: Swell Investing, which launched two years ago as an affiliate of the insurance company Pacific Life, and
“Although Swell still passionately believes in sustainable impact investing, the company was not able to achieve the necessary scale in the current market to sustain operations,” said a Swell spokesperson in a statement.
A major problem is that creating custom portfolios based on religious values can be expensive and the companies in the portfolios need to be constantly vetted to make sure they meet the requirements of religious laws.
For instance, Wahed offers a “purification” process for their clients at the end of each year, says Parviz. The digital firm recognizes that it’s virtually impossible to have a perfectly constructed shariah portfolio. Companies change positions on issues constantly and new information surfaces that reveals violations of shariah ethics, Parviz says, like business involvement in the production of pork, alcohol or gambling. Financial institutions are completely avoided.
Wahed’s shariah board evaluates the amount per share that may have gone toward a cause that contradicts Muslim morals. At the end of the year, clients get a statement uploaded on their portal offering a suggested amount to donate toward charity.
When people invest around their values, they’re more likely to be disciplined.
While halal investing has seen some growth worldwide, faith-based investing for other religions has yet to make similar headway. For Catholic Investment Strategies, a robo-investing platform based on guidelines set by the United States Conference of Catholic Bishops, getting the word out has been the most difficult part.
The firm created several portfolios with a range of risk tolerances that cater to USCCB guidelines. Clients sign up for Folio, answer questions about their financial goals, and the pre-screened portfolios provided by Catholic Investment Strategies do the rest.
“All that work is done in the construction of the strategy beforehand,” says Thomas Carroll, chief investment officer at Milwaukee-based Summit Investment Management which owns Catholic Investment Strategies.
Catholic Investment Strategies has struggled to see clients join the robo platform. “It’s been slow to take off,” says Carroll. “We don’t have a big budget. We’re just a small firm.”
Summit has over $74 million in AUM, according to its recent Form ADV. The lack of advertising dollars keeps it from scaling in the ways larger players in the market have been able to, Carroll says.
But he’s hopeful that once people see that there's an option that fits their belief set, that a robo can get them started. “There is a trade-off, certainly in terms of services, but it does provide the opportunity to get started in a way that doesn't conflict with Catholic morals,” he says.
One thing seems inevitable: as the robo industry grows to manage a projected trillion dollars in client assets in the next four years, according to projections from research firm Aite Group, newcomers — secular and divine — will need to differentiate.
“Putting yourself out there as a niche player comes more from startups,” says analyst Alois Pirker. “It's now the next generation of where the industry is going.”
