How Much Do Wealth Management Clients Really Care About Environmental, Social and Governance Issues?
Wealth Clients Environmental Social Issues
The wealth management world stood still for a moment this past January when BlackRock, the world’s largest asset manager that oversees roughly $7 trillion in investments, announced that it would put environmental, social and governance (ESG) goals at the center of its investment strategy, immediately halting investments in companies that present a high sustainability-related risk, such as coal producers.
The day of the announcement, the firm experienced its largest one-day inflow ever, with $1.5 billion in new investments pouring into one of its funds. The firm quickly followed the announcement by launching a new sustainability-focused ETF, which received more than $600 million in investment in its first week.
What does this mean for the wealth management industry? Are investors serious about putting social and environmental issues at the forefront of their financial decision-making process?
J.D. Power has been exploring this issue for several years, taking the pulse of professional asset managers, advisors and individual investors as they make critical decisions about where to invest. The following Wealth Management Insight assembles the collective observations of various wealth management constituencies on the real role of ESG in the investment decision making process.
Advisors Choose Asset Managers Based on ESG
The superstar investment team is dead. Long live the socially-conscious asset manager. According to the J.D. Power 2019 Advisor Digital Engagement Study, which evaluates how financial advisors interact with asset management firms digitally and how that digital experience affects future intentions to invest client assets, ESG is the second most important factor wealth managers consider when evaluating a prospective new asset manager, right behind “helps me do my job better” and ahead of “solid investment returns.”
By contrast, that asset manager’s reputation for having a “world-class investment team” is fifth on the list of most important considerations for wealth managers.
That’s a big deal. In the current market environment, where wholesalers are disappearing, fees are being compressed and interactions are becoming increasingly digital, asset manager brand image and selection is being driven by perceptions of environmental and social awareness. Returns, of course, are still important, but it is clear that wealth managers are looking for something more for their clients.
Millennials Put Their Money Where Their Hearts Are
Younger wealth management clients appear to be factoring social issues into their investment decision making process. According to the J.D. Power 2019 Full-Service Investor Satisfaction Study, 58% of investors under age 35 rate their advisory firm a 9 or 10 (on a 10-point scale) on social causes. That compares to just 41% among those over age 40.
Overall, across the study sample, wealth management clients who scored their firm a 9 or 10 for social causes had average satisfaction scores of 919 (on a 1,000-point scale). This compares with an average satisfaction score of 727 for those who scored their firms at 6 or less. Additionally, 76% of clients scoring firms with a 9 or 10 on social causes say they will “definitely” recommend their investment firm to friends and family, versus just 28% among those scoring their firm as a 6 or less.
Millennials1 are also much more likely to want to be directly involved in investment selection, even when they are working with a professional advisor, so they are bringing that social consciousness into the decision-making process. Nearly half (44%) of millennials who currently work with a financial advisor describe themselves as “Validators”, who view the financial advisor as a sounding board for their ideas rather than someone they expect to manage investments on their behalf. By contrast, just 19% of Boomers fall into this category, underscoring a significant shift taking place in how investment decisions are made. Millennial preferences may continue to change as their wealth and complexity of needs increases over time, but as the first generation of digital native investors, with always-on access to information on companies and investment research tools, they are unlikely to evolve in the same way Boomers have.
Beyond Lip Service – ESG Gets Real
For many years, ESG was little more than a novelty in the wealth management industry – a specialist category where things like socially-aware mutual funds and sustainability-focused ETFs would appeal to niche subsets of investors. That is no longer the case.
ESG has gone mainstream. While BlackRock sealed the deal with its January manifesto, the movement has been building for some time, as evidence by the perspectives of investors gathered over the last several months of J.D. Power syndicated studies. It is still early in the industry’s evolution toward a more socially conscious approach to investing, however. Over the next several months, we expect several firms to double-down on ESG, launching new initiatives, new types of investment products and new marketing initiatives that tout their unique approaches to ESG.
For the financial firms at the center of this rapid shift in investor priorities, now is the time to move beyond simply paying lip service to ESG issues. Firms must find ways to more effectively ‘prove’ their commitment and demonstrate to various stakeholders that this is an important topic to the organization. Key questions that leaders must ask include:
- Are you collecting and communicating the right ESG metrics?
- Are you delivering that information to the right individuals in the right way?
1J.D. Power defines generational groups as Pre-Boomers (born before 1946); Boomers (1946-1964); Gen X (1965- 1976); Gen Y (1977-1994); and Gen Z (1995-2004). Millennials (1982-1994) are a subset of Gen Y.
- Is the quality and accessibility of information adequate?
- What improvements are needed to achieve the transparency needed for firms to demonstrate they are truly walking the walk and well as talking the talk?
This J.D. Power Wealth Management Insight is based on data collected in the J.D. Power 2019 Advisor Digital Engagement Study, the J.D. Power 2019 Full-Service Investor Satisfaction Study, and J.D. Power 2019 U.S. Self-Directed Investor Satisfaction Study. It includes feedback from more than 11,000 individual investors and asset managers.
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This J.D. Power Wealth Management Insight was authored by Mike Foy, director of Wealth and Lending Intelligence at J.D. Power. Please contact us at the numbers below to connect with Mr. Foy or to learn more about the underlying research.