According to the US SIF Foundation’s 2020
As the interest in ESG (environmental, social and governance) investing continues to surge and expenses and minimums decline for SMAs (separately managed accounts), we are able to empower our clients and provide them with different investment options so they can better align their values with their portfolios. Given these trends, I am looking particularly closely this year at SMAs as a way to help my clients with their ESG goals.
Many of the clients I work with have a very clear goal to target ESG or sustainable funds in addition to more traditional financial goals — saving for retirement, child college expenses, etc. Many of them are younger and have strong values when it comes to climate change, and most often a mutual fund or exchange-traded fund that has a specific ESG tilt is an appropriate fit.
I prefer using a sustainable mutual fund that grades companies on their greenhouse gas emissions, as well as a few other factors such as toxic spills or water management. Then the fund will overweight the cleaner companies and underweight the worst offenders.
However, some clients want more customization rather than a one-size-fits-all approach. As we all know, each client is different — even within the ESG niche — and an SMA is a great vehicle to give a client a more in-depth, personalized approach. Furthermore, these accounts allow you to continue focusing on a well-diversified allocation. In some cases, depending on the account size, you can use the SMA for a client’s U.S. large cap portion of the portfolio and then build around the remaining asset classes.
Not only do SMAs provide a high level of customization for niches like ESG, they also have the ability to be more tax-sensitive. If a client is in a high tax bracket and expecting additional income this year or is working to get out of a concentrated legacy position over time, you can implement specific strategies within the SMA to cap the amount of capital gains to be realized over a given time period.
The client also has the benefit of increased control on tax-loss harvesting and none of the year-end capital gain distributions you would expect from mutual funds. With the added uncertainty of upcoming tax legislation with the Build Back Better Act, now is a great time to utilize the tax efficiency of SMAs for clients.
Of course, this isn’t the right option for everyone. Advisors need to be cognizant of account minimums and the overall cost. It should also be pointed out that not all SMA fee structures are created equal.
As you’re building out the SMA portfolio, there needs to be a conversation with your client about how it will perform differently from its benchmark depending on the number of screens or exclusions that have been put in place. With some platforms, you can toggle different screens to see the overlap with the current strategy when compared to the benchmark.
It is exciting to see the growth in ESG investing and the trend in SMAs toward lower costs and lower minimums coming together. Whether it is a new prospect or an existing client, taking the time to truly understand their values and long-term goals, and having the investment options available to help them achieve their goals, is how we empower purpose-filled lives.
