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Aaron White, vice president of sustainable investments, CIBC Asset Management.
The investment landscape in Canada has seen a material shift towards sustainable and responsible investing in recent years driven by increased awareness, accessibility, and overall client demand. Many investors are increasingly interested in investing with their personal values in mind. This was highlighted in the 2021 RIA Canada Investor Survey, where 73% of respondents stated they were very to somewhat interested in responsible investing. However, there still exists a disconnect between the advisor and investor community, as 77% of respondents agreed that they would like their advisor or financial institution to inform them about investments aligned to their values. However, only 27% of respondents stated that they have been asked if they are interested in aligning their investment portfolios with their values. In response to this growing demand, IIROC has announced an update to their KYC requirements, requiring dealers to provide clients with the opportunity to express their personal values and objectives throughout the KYC process.
For example, a client’s investment objectives may include investing in accordance with environmental, social, and governance criteria or other personal preferences, or investing in accordance with their personal values. While IIROC has not provided formal guidance on how to implement the changes in the client discovery and investment solutioning phases of the client experience, this presents a glimpse into the evolving regulatory requirements around ESG considerations and product offering. Most importantly, IIROC has provided an avenue to enable advisors to have meaningful conversations with their clients surrounding their responsible investment goals and objectives.
The investment industry is evolving and client expectations are increasingly asking advisors to go beyond traditional financial planning considerations. Investors are interested in the non-financial impacts of their portfolios, and this presents a challenge for advisors as they navigate the client discovery phase and how to manage clients’ financial and non-financial needs and expectations. Much of the previously discussed disconnect is due to the perception that there’s a lack of demand for values integration and ESG investing solutions by the advisor community. Largely, when investors are presented with a viable investment solution that meets both their financial and non-financial objectives, they take it.
The recent IIROC recommendations combined with overwhelming industry trends present a significant opportunity for advisors to and exceed client expectations. The client discovery process has historically been focused on understanding a client’s financial situation, goals, and objectives, assessing their risk tolerance and time horizon. How much risk are you willing to take and for how long? This has led to a narrow and one dimensional view of an investor’s needs and leads to one-size-fits-all model portfolios that prioritize only risk-adjusted returns. Investors are left with a lack of understanding of how their investments interact with their personal beliefs. For example, a client that is an advocate for ocean health may be investing in a plastics manufacturer. This effect has been compounded with the growth of passive investing.
In practice, the client discovery process can often fall into a discussion revolving around an advisor’s preferred approaches to investing. This could mean the firm’s platform strengths and available investment solutions or could mean discussing strategies that have been effective or successful for other clients. Engaging clients in a conversation around values-aligned investing provides advisors with a clear guide to bringing the initial engagement with clients and prospects back to the intuitive understanding of putting the client first.
Advisors that fully integrate the new KYC recommendations into their practice will garner a deeper understanding of clients and allow the advisor to reshape their value proposition. This will allow advisors to create an engaging and personalized experience around investing where specific investment solutioning takes a backseat and understanding the non-financial goals and beliefs of investors becomes a larger part of the conversation. This leads to a more customized approach where investors feel more connected to their advisor and portfolios. Shifting discussions from selling products to engaging with investors on their deeply held beliefs and values, which leads to higher satisfaction, retention, and referrals for those advisors.
Perceptions of ESG and responsible investing vary across the advisor and investor community. Advisors that integrate values-aligned investing into their practice will need to be prepared to discuss the varying degrees of investing across the ESG spectrum, from integration to impact and discuss common misconceptions about ESG and responsible investing related to returns and authenticity. Advisors should keep the discussion to the basics, use real life examples of portfolios and holdings that demonstrate how a client’s values are reflected among various different strategies, and how returns may be enhanced, altered, or detracted based on the strategy employed. The ESG and responsible investing landscape offers a breadth of investment options that allow advisors to customize portfolios to meet any investor’s financial and non-financial objectives.