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A Case for Belief-Aligned Investment Advice: An Opinion

Belief based investing

This article was originally published on The Financial Revolutionist website ( as a guest opinion post.

[Disclaimer: This post is intended to support investor activism, irrespective of investors’ political preferences.]

If recent world events are any indication, we should expect to see an increase in individual investors demanding that their investments reflect their beliefs; it’s their money, after all. The gap in today’s personal finance and investment advice space to service this demand presents an opportunity for all types of financial advisors (human, hybrid, automated) to not only re-engage their existing customers, but to also engage a new generation of investors.

Do investors really care beyond risk and return?

The highly charged political climate has seen people across the world become more vocal about their beliefs?—?be it about climate, guns, fossil fuel, job displacement, immigration, data privacy, education, religion, racism, sexism, etc. Furthermore, thanks to digital ubiquity and social media, consumers are getting used to firms quizzing them about their beliefs in an effort to personalize services. This trend will continue well beyond the Cambridge Analytica and Facebook saga. Millennials, who want to be heard and are willing to take action towards that end (#TimesUp, #DeleteUber, #DeleteFacebook), now outnumber Baby Boomers. For those who say Millennials do not have sufficient wealth to warrant the industry’s attention, I’d respectfully remind them that digital ubiquity and belief activism are age-agnostic. Moreover, by some estimates, Millennials are inheriting assets at a rate of $250 billion per year. This confluence of political climate, demographic change and digital ubiquity is encouraging more people to put their money where their hearts are.

The transparency and belief gap

The problem/opportunity in this backdrop of belief-based activism is that while investors are eager to have greater transparency over their investments, financial advisors have not fully embraced the opportunity this provides them. Let’s take an oversimplified journey and follow the money trail of household investments to illustrate this point. Individual investors and employers (i.e., retirement plan sponsors), advised by financial advisors or investment managers (human or automated), invest their money in industries or individual companies through stocks, bonds or structured investment products like mutual funds, fund of funds, REITs, etc. In short, individuals support specific industries and/or companies with their money in retirement, brokerage or other managed accounts. In an ideal scenario, investors will support industries/companies that deliver value and divest from those that don’t. This premise, however, does not hold in reality because it assumes the presence of two vital components: transparency and investor empowerment. I’ll explain.

What is value?

First, there’s the definition of ‘value’ itself. In a 2017 study conducted by U.S. Trust, 76 percent of Millennials said they consider their investment decisions as a way to express their social, political and environmental values. Recent award-winning research on impact investing also concluded that investors value the advancement of positive externalities when allocating capital. So, for a growing portion of retail investors, ‘value’ delivered is the sum of a) tangible monetary return and b) intangible return tied to their core beliefs. Since these end-investors do not typically know if their retirement money is being invested in alignment with their belief systems, they can’t say if the investment delivered has a net positive or a net negative value.

Prospectus and proxy notifications: Are you kidding?

Of course, shareholder communications like a prospectus and/or proxy voting notifications are distributed to satisfy regulatory disclosure requirements. However, most would agree that these communications usually do not help investors truly understand how their money is put to use. And even sustainability ratings, where available, do not address ‘belief-alignment’ questions for a lot of investors. So, there’s not enough transparency.

With or without this transparency, right now, the average investor is not empowered to make a significant dent (like reducing the market value of a company), without the help of larger players in this supply chain (i.e., the institutional money managers). So, there’s not enough empowerment.

I expect the demand for both to grow, and therein lies the opportunity for financial advisors.

The opportunity

Financial advisors and retirement plan managers are closest to the end-investors in this value chain. Currently, human advisors are in the best position to not only to understand the ‘belief’ preferences of the individual or the plan participants (e.g., teachers, factory workers, etc.), but to also provide transparency on if and how investments reflect those beliefs.

Since regulations do not do spell out belief-based return when defining fiduciary duties, only a few advisors do this due diligence proactively and help their clients align their investments with their beliefs. Needless to say, such advisors shine, because clients see that their advisor ‘gets them.’ These advisors distinguish themselves not just from the automated investment advisors (robo-advisors) but also from their human peers. This is where true opportunity lies.

Currently, these select advisors are working against the odds to fulfill this need. While Environmental Social and Governance (ESG)-based investing and Socially Responsible Investment (SRI) options provide some help, they cater to a subset of the investor population. After all, what is viewed as ‘socially responsible’ by one set might seem the opposite for another. Furthermore, if a client wants to invest in only ‘made in America’ companies/funds, the advisor may not find ESG criteria helpful. Without adequate tools, the process of combing through data to look for misalignment and suggesting alternatives is labor-intensive. So, to satisfy this market need at scale, advisors?—?human, robo or hybrid?—?need the support of wealth technology providers.

Providers who offer innovative ‘plug-and-play’ technology solutions and tools can in turn benefit as ‘belief-aligned’ advice grows through solutions that:

  • Apply gamification to help an advisor assess a client’s ‘belief system,’ similar to risk tolerance.
  • Enable advisor-client conversations to re-assess a client’s beliefs based on current events. For example, Polly Portfolio’s bespoke conversation model that prompts an advisor to ask specific questions based on a client portfolio’s exposure to external events could be extended to re-assess impact on a client’s beliefs. ForwardLane, whose contextual advice solution assesses impact of external events on a client’s portfolio, is another provider suited for this purpose.
  • Provide a rating for stocks and mutual funds on belief-based factors, much like financial factors, by expanding ESG factors. Morningstar or current ESG rating providers like MSCI and Bloomberg or new age fintech companies that apply machine learning to assess company actions can provide such solutions.
  • Provide ‘belief-parameter/factor’ breakdown of an individual’s entire portfolio or retirement plan and suggest replacements/alternative investments to align with those parameters. Albridge and Addepar could provide such a service by extending their solution suite.
  • Help retirement plan sponsors find fund managers who align with plan participants’ and/or sponsors’ ‘belief’ preferences. Firms like Essentia Analytics and FinPsy, which match fund managers based on ‘behavioral dispositions,’ have the capabilities to provide such solutions.

Way forward

Wealth management firms offering hybrid advice models in a fiduciary capacity, like Personal Capital and more recently, Betterment, are well suited to introduce belief-aligned investment advice in the industry. Their human advisors can translate subjective insights while automated tools can drive efficiency. RIAs (and custodians supporting them) might seem like a better choice, but it’s easier to gather insights and implement consistently in a hybrid model. If current robo-advice leaders like Schwab and Vanguard decide to offer belief-aligned advice, they’ll have to address the belief-factor ratings of their own mutual funds in portfolio construction. If some form of belief-based rating becomes readily available, even limited-scope, direct-to-consumer robo-advisors like Acorns and Robinhood can serve investors who seek belief-aligned investment advice even when just starting out.

From an implementation perspective, far more fundamental questions like “How do you ensure all sides of beliefs are represented?” “Should certain types of accounts be excluded from such alignment?” and “How to involve regulators?” need to be answered in the process.

Ultimately, it boils down to whether a wealth management firm sees ROI in this pursuit. So, I’ll conclude with these thoughts:

The financial services industry remains in the middle of a data ownership tug-of-war between core stakeholders. But if the recent Facebook episode is any indication, companies that provide transparency to preemptively answer investor questions may be able to avoid costly consumer backlashes.

Of course, many investors will still focus only on monetary returns due to their circumstances or priorities. However, it’s safe to say that many of the people who have taken to the streets in recent days also have investment accounts. Will people who march for change stop when it comes to their investments? I wouldn’t bet on it.

Authored by the founder of S2E Consulting