Betterment, the leading independent digital financial advisor, has just launched a socially responsible (SRI) portfolio strategy that’s available on all its platforms – retail, advisory and (401k). Wealthfront, a smaller rival, announced in a recent blog post by its CEO Andy Rachleff that the robo-advisor is also working on an SRI portfolio but did not disclose when it would be available.
Both robo-advisors say the portfolios are a direct response to growing demand from clients.
The Betterment strategy is based on index ETFs and substitutes the iShares MSCI KLD 400 Social ETF (DSI), comprised of about 400 stocks with strong sustainability profiles, for two Vanguard funds – Total Market (VTI) and large-cap value (VTV) for 33% of a client’s core portfolio. Another iShares fund, the MSCI USA ESG Select ETF (SUSA) can be substituted for DSI for tax loss harvesting purposes.
Both iShares ETFs are based on MSCI indexes that give a heavier weighting to companies with high sustainability ratings and exclude companies involved in nuclear power, tobacco, alcohol, gambling, military weapons and civilian firearms, GMOs, and adult entertainment.
The result is an SRI core portfolio with an ESG tilt, says Dan Egan, Betterment’s Managing Director of Behavioral Finance and Investing. It excludes companies deemed to have a negative social impact, such as engaging in poor labor practices or environmental destruction, and includes companies delivering a social good such as maintaining more inclusive workplace or a focus on environmental sustainability.
The Wealthfront strategy, in contrast, will be based on individual stocks in the Dow Jones U.S. Total Stock Market index, which are available on the firm’s direct indexing platform. Clients using direct indexing will be able to exclude individual stocks in four categories: fossil fuels, deforestation, weapons and tobacco as well as other stocks in their personal exclusion list.
Dan Egan, Betterment’s Managing Director of Behavioral Finance and Investing, told ThinkAdvisor that the firm’s move into SRI was driven by Betterment’s customers and employees who have “wanted this for a while … We’ve been hearing about the desire to personalize portfolios in this way.”
Betterment made the move only after it was sure that the change would not result in any diminution in “goal-based planning, tax-loss harvesting or location,” said Egan.
The cost for the Betterment SRI strategy is 20 basis points for a core portfolio with 70% in stocks and 30% in bonds, 10 basis points more than its traditional core portfolio, said Egan. Those fees are in addition to the any advisory fee a client pays, which ranges between 25 and 50 basis points, depending on whether the service is completely digital or includes a human advisor.
Asked why Betterment chose the iShares ESG funds over Vanguard’s, Egan said the $2,000 minimum for the Vanguard funds was too high. Its SRI portfolio using iShares funds requires only a $300 minimum.
Egan said there will be no tax consequences for investors switching into its SRI portfolio for tax-advantaged retirement accounts, and the firm “will try to manage the transition as tax-efficiently as possible” for those making the switch in taxable accounts.
Betterment’s new portfolio is a first step in its SRI strategy. The firm hopes to expand the strategy to include international and bond funds once it can identify funds that aren’t too expensive and have enough liquidity.
“At the end of the day we’re just looking to make portfolios align with customers,” said Egan. “The key is having a really good solution as a fiduciary intermediary,” said Egan.
The firm has $9.06 billion in assets under management and 257,880 accounts as of July 17, according to its latest ADV filing with the SEC. Wealthfront has $6.76 billion AUM and 165,480 accounts.
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