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How wealth advisors can facilitate impact investments [Part 1/5 Perspectives in Impact Investing series]


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Note from Global Partnerships: Starting today, we’ll be rolling out a 5-part series on impact investing that presents the variety of perspectives of different actors in the impact investing space. A wealth advisor (Arabella Advisors), philanthropic investor (Shell Foundation), institutional investor (OPIC), impact evaluator (FSG), and social enterprise (Luciérnaga LLC) will each provide insight into their role in the impact investing space, the challenges they face, and the optimism they hold for creating and measuring impact. This blog series will provide readers with a unique insider’s view from the vantage point of different players throughout the impact investing sector. The series will also inform readers about the opportunity to create lasting social change through these various actors. We look forward to hearing your thoughts and welcome your feedback.


Part 1: How wealth advisors can facilitate impact investments 

by Cynthia Muller, Senior Director of Impact Investing, Arabella Advisors

As high-net-worth individuals and families increasingly seek to make positive social and environmental impact with their investments, wealth managers are facing the challenge of incorporating impact investing into their practice. While there is an active pipeline of nearly 450 public funds and over 450 private fund managers, impact investing still has some growing to do as a field. Wealth advisors who wish to meet the increasing demand for impact investing can better retain clients by partnering with other experts in the field to serve new needs.

Impact investing has grown as a philosophy and as a practice over the last two decades. We know that an estimated $41 trillion in wealth is expected to transfer from the baby boomers to the millennials over the next 30 to 40 years, that one out of every nine dollars under professional management in the United States is invested for positive social and/or environmental impact, and that there is rapidly growing interest in investing with purpose by the GenX/Y and millennial generations. Major institutional players (Merrill Lynch Bank of America, Goldman Sachs, Morgan Stanley, and others) have begun to offer a variety of impact-themed products and platforms to impact-hungry investors, and foundations large and small are employing new strategies to invest.

As Senior Director of Impact Investing at Arabella Advisors, I am regularly approached by wealth advisors who want to learn how better to help their clients, and my response is: the mountain is not as high as you think.

The two questions we most frequently get from wealth advisors are where to find deals and how to assess them. In a nascent field, there is no roadmap for identifying the right investment. But by learning the fundamentals, wealth advisors can facilitate the process. Here are key steps to take: 

  1. Understand your client’s desired impact and identify the corresponding approach. Deals are hard to find, even though many funds and fund managers are practicing impact investing. The first step for wealth managers is to help clients distinguish between different forms of social impact and corresponding investment approaches. People in the field tend to approach impact investing from the lens of their own professional perspective. For example, some define socially responsible investing (SRI) as forms of impact investments. While a range of investments may achieve some form of positive social or environmental impact, SRI is a passive approach; those making the investments aim to support companies or initiatives that a) do not have negative social or environmental impacts or b) have responsible practices but not necessarily social impact goals.

    Conversely, one of the main tenets of impact investments is intentionality: creating positive social and environmental impact alongside producing financial returns. Those making impact investments have a particular impact goal in mind and ideas of ways to track it. And from what we are experiencing, investors—particularly the next generation of wealth holders and institutional foundation leadership—are increasingly recognizing the distinction between the two approaches. Thus prior to beginning the process, it is important to ascertain whether your client merely wants to screen out negative impacts of his or her investments or whether he or she has a social impact goal in mind. For clients who want to see the direct impact their investments have on the causes they care about, simply passing an SRI screen will not suffice. True impact investments require active engagement with funds, companies, and organizations.

  2. Gauge your client’s expectations. The next step is ascertaining how much your client wants to be engaged. Impact investments require building a relationship with the investee. It’s important to know whether your client wants to interact with the investee and what kinds of reports they want back—impact updates, mid-term impact analyses, etc. Knowing the level of detail you will need to share also helps you plan for how much work the investment will take on your part.

  3. Understand your client’s risk tolerance. As in the process of establishing a traditional investment strategy, it is important to establish parameters with your client upfront when establishing an impact investing strategy. Understand their sector preference—i.e., which issues they want to target—and their financial risk tolerance. Based on this, you will be able to narrow the list of spaces and opportunities in which you’ll look for potential investments.
  4. Partner with experts. Armed with these fundamentals, you are ready to begin looking for deals, and this is where other resources come in. Industry networks like the Global Impact Investing Network (GIIN), US SIF, and the Mission Investors Exchange provide detailed, user-friendly information on entering the field. And partnering with impact investing experts will help you find the right deals without having to devote enormous resources to it.

    Field experts who know the space and players will have a sense of where to look for deals that meet your client’s basic parameters, as well as the relationships with fund managers necessary to structure deals. They can also help assess risk and reward, which is different for impact investments than for traditional investments:  the ways in which you gauge the social impact of an opportunity is not standard, but customized for each investor. Moreover, experts can help you establish a monitoring system that ensures you can provide your client with regular updates on the investment’s performance.

    Having partnered with wealth advisors on a range of activities—assessing specific deals, helping them integrate impact investments into current portfolios, guiding the process of getting started, and sometimes simply serving as an on-call partner to help with questions or issues that arise—we believe there is enormous potential for professionals to work together to meet growing client needs and build the field.  

Contrary to popular belief, a wealth advisor who learns enough about impact investing to be able to ask the basic questions is well on his or her way. Partnering with others and outsourcing, so to speak, the nitty-gritty, will enable you to meet new client demands without having to overhaul your practice.

About Arabella Advisors

Arabella Advisors is an advisory firm that helps philanthropists and investors achieve greater good with their resources. They support clients in using all their assets – grants, investments, relationships, and time – to maximize for positive impact. Their comprehensive and personalized services help deliver results for families and individuals, institutional foundations, impact investors, and corporate clients worldwide.

Read more: http://www.arabellaadvisors.com/

 


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Blog Tags: financial return   fund manager   impact         wealth advisor   

Investors sit in a meeting
Photo of investors by The Orkla Group. Edited by Global Partnerships. Used under Creative Commons Attribution License. Source: https://flic.kr/p/6zyzsH.

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