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July 19, 2017 at 06:49 AM
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.
(Related: TIAA Launches Robo-Advisor With Socially Responsible Options)
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.
