In 2016, FactSet collaborated with Scorpio Partnership to assess how high net worth investors (HNWIs) rank the importance of culture when evaluating their wealth managers. We conducted a survey of 1,022 HNWIs from four leading financial centers: Singapore, Switzerland, the UK, and the U.S. On average, our respondents had a net worth of $6.2 million; one quarter of the respondents had a net worth of over $10 million. Almost a third of the sample were investors under the age of 35 and the average net worth of this group was $6.7 million, highlighting the relevancy of these findings for future business planning.
The views of investors offer up several calls to action for the industry. HNWIs want systems and people in place who can facilitate effective information flow. They want their wealth managers to deliver technology-augmented communications, quality investment insight, and a dynamic approach to managing personal data. Above all, they require a deep understanding of how their wealth manager and portfolio matches their social values. While HNWIs are increasingly demanding that the companies in which they invest have positive practices regarding environmental, social, and governance (ESG) issues, they are still looking for a good return on their investment.
Integrate Social Responsibility in the Heart of the Business
By having an open and transparent culture, HNWIs believe that they can get a better sense of who their wealth managers are and what makes them tick. The client perception is that aligning behind a set of common values can empower their financial relationships.
Wealthy investors want to make sure they are working with organizations that are both ethical and accountable. Having a responsible wealth manager is crucial for 82% of HNWIs – this figure rises to over 90% for the wealthiest investors and those from the U.S. At the heart of their definition of responsibility is having a full line of sight into the internal activities of the firm. The majority of HNWIs surveyed refer to transparency in their wealth manager’s business performance and investment process as important evidence points.
Among the core wealth management demographic – those under the age of 55 – responsibility also means seeing and understanding how the business is fostering connections with the wider community. These investors want to learn about employee volunteering initiatives and collaborations with philanthropic organizations.
Investors Are Demanding Social Responsibility in Their Portfolios
The investor focus on responsibility does not stop at working with socially-minded institutions. HNWIs want to integrate responsibility into every part of their wealth strategy. Rather than simply focusing on growth, HNWIs want a clear view of where their money is being invested and how it is supporting society. Socially responsible investments – which consider both financial return and social good – now make up one-third of HNWI portfolios. This proportion is higher still among the younger generation and Swiss investors.
An ethical investment process is no longer an additional perk of the portfolio development as it was for baby boomers. Over 60% of millennials expect their wealth management firms to screen investments based on ESG factors. This proportion dips marginally to 53% of investors aged 35-54.
The drive for integration of socially responsible investments into portfolios is universal. In the U.S. and Switzerland, slightly fewer than half of investors expect their wealth management firms to screen securities based on ethical criteria. In the UK and Singapore, this applies to more than half of HNWIs.
Crucially, the impetus for socially responsible investing is set to grow. Almost 70% of investors surveyed intend to increase their allocation to ethical investments in the next five years. This trend is being driven by Generation X – those between 35 and 54 years of age. One quarter of investors in this age bracket anticipate a significant increase in the social credentials of their portfolio and a further 46% expect marginal increases. Millennials have taken this focus one step further. Ninety percent want to grow their allocations to responsible investments, with half of these investors planning a substantial redistribution.
In many respects, calls for a more socially responsible investment strategy mark a power shift in the dynamics between client and advisor. Now more than ever, HNWIs are demanding greater insight into where and how their wealth is being invested and they are looking to their financial professional to guide them in making investments that align with their values.
Wealth Managers Play a Key Role in ESG Investing
FactSet’s survey results are consistent with other studies. In December 2018, Allianz Life Insurance Company of North America (Allianz) partnered with research company Ipsos to conduct an online survey to investigate consumer attitudes toward socially conscious investing. The results of the Allianz ESG Investor Sentiment Study indicate that 79% of U.S. investors want to invest in a company that cares about the same issues as them. However, many of these investors admit that they don’t know how to evaluate companies on the ESG criteria that align with their priorities.
Millennials are more likely to support companies with positive ESG policies than other age groups. While 55% of all respondents believe that an investment strategy focusing on ESG causes probably means low returns, millennials are more inclined to believe that companies supporting social causes will have strong financial success in the long term. Approximately 55% of millennials who work with a financial advisor have discussed ESG investing as part of their portfolio; this compares to just 25% of Gen X investors and 11% of Baby Boomers.
No matter how important ESG issues may be for investors, they rely on their financial professional to help them make investment decisions. More than three-quarters of investors (76%) expect their financial advisor to keep them informed about the business practices of the companies in their portfolio. For millennials, this information is even more important; nearly nine in 10 (89%) expect their advisor to provide thorough research on a company before making an investment recommendation.
According to the Allianz study, just 18% of investors working with a financial advisor have ESG investments in their portfolios; however, 51% expressed an interest in ESG investing. This is an obvious opportunity for wealth advisors. As Allianz points out, “market trends indicate that the demand for responsible investment options will keep growing over the next decade, particularly as millennials – the generation exhibiting the greatest interest in responsible investing – come into financial maturity.”
HNW investors clearly believe that wealth and responsibility go hand in hand. As such, they want to make sure every part of their strategy for financial management is aligned to their ethical values – from the wealth manager they work with to the credentials of their underlying investments. The requirement of financial providers is to ensure that responsibility is built into the heart of the business and is clear to the client.