Guest post: "Talking to clients about social investing"

Socially responsible investing can make for a difficult conversation between investment managers and their clients. But it doesn’t have to be that way if you follow the tips provided by my friend Annie Logue, the author of Socially Responsible Investing for Dummies.

Often, an individual client will walk into an office with a list of industries and companies that he or she does not want to own. Some clients have well-thought out objections or religious obligations that set the tone, but others have a vague idea of the goodness or badness of an industry without any real reasoning behind it.

How do you deal with such a customer?

Social criteria can be legitimate investment constraints, so one tactic is to approach it as a constraint. Get the client to identify the real issues, ideally in writing. Are they religious? Well, you can’t argue with religion! If they are more vague, then use some good questioning to get them onto paper, or ask the client to do some research. Some good sources are CSR Wire and Triple Pundit.

The real conversation is about what your client would rather invest in. Social investing doesn’t have to have lesser performance than traditional investing; the KLD Social Select 400 Index has minimal tracking error to the S&P 500 and, right now, outperforms it slightly. The secret is making sure that the companies you do invest in have a similar risk and return profile. If your client wants to sell BP, then you’d better find a company with similar characteristics. Replace BP with a speculative green tech company, and you’re changing the portfolio’s nature. Replace it with a large multinational food company with responsible business practices, paying a high dividend, and subject to commodity price fluctuations, and you’re getting closer to the portfolio contribution of BP without the oil exposure.

Keep holding the conversation, too. BP had a great reputation for its social responsibility right up until April of 2010. Social investing is still investing, and you still take on company risk. Just as there is no perfect job and no perfect boyfriend, there is no perfect investment. Remind your client of the long-term goals. Many clients prefer to separate their investing from their philanthropy, figuring that the more money they make, the more money they can donate and the more time they have to volunteer.

Finally, turn your clients into activists. Talk to them about proxies. They can vote their proxies and have an influence on companies even if they do not change their ownership positions. That gives the client power without disrupting an investment position.

Social investing doesn’t have to underperform, and it doesn’t have to be a wedge between you and your client. You can use a client’s interest as an opportunity to educate them and to show how you can add value to their portfolio.
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