Clients want sustainability and advisers take full advantage of it

The preferences of retail investors for sustainable investments over traditional investments are well documented. Investors are even willing to accept lower returns or higher costs for the benefit of owning sustainable investments.

And in the past, it was justifiable for advisers to charge higher fees for managing portfolios that are sustainable compared to traditional portfolios. After all, with a lack of sustainability information and a sustainable products, it required considerably more effort to build a sustainable portfolio than a traditional one.

But today, the availability of information is much better, and sustainable funds are available everywhere. The hard work today is less about identifying which stocks or funds are sustainable, but which ones of the many sustainable funds are engaged in greenwashing and which ones do a really good job.

Yet, advisers seem to continue to charge higher fees for sustainable portfolios while not exerting any more effort to manage these portfolios when compared to traditional portfolios. A recent study recruited 345 advisers in the United States for an experiment. They were asked to create equity portfolios for hypothetical clients some of which wanted sustainability criteria integrated into their portfolios while others didn’t. Once the advisers had selected the stocks for the client portfolio, they could charge the clients a fee for managing it. 

The result was that on average, the sustainable portfolios were offered at a fee 5bps higher than a traditional portfolio. You may say that this additional charge is reasonable given that advisers have to be more selective when picking their stocks and have to include additional information.

When the researchers asked the advisers before they selected stocks what the outcome of the result was, the advisers openly acknowledged that they expected sustainable portfolios to come at a higher fee, but they also expected that they would spend more time selecting stocks and constructing these portfolios.

But when the researchers tracked the work of the advisers in selecting the stocks and constructing the sustainable portfolios there was no meaningful difference. In fact, both in terms of time needed to select the stocks and construct the portfolio as well as in terms of clicks to collect the information about the stocks there was no difference visible. Unconsciously (or maybe consciously), advisers charged their clients a higher fee for the same amount of work and effort. And personally, I don’t think this behaviour is sustainable in the long run.