Responsible Investing – Fact finding and segmentation

As the year starts to draw to an end, much of the noise around responsible investing has focussed on imminent regulation and what this will mean for advisers. I say imminent, but there’s still no precise detail on when this will happen the consensus seems to be pointing to H2 2021.

In terms of what will be implemented, indications so far have been that regardless of UK-EU relations, the MiFID II structure will be implemented and with it, responsible investing becomes a mandatory fact find area. Once it does arrive, the key for advisers will be the positioning and approach to questioning.  Too simple and the nuance gets lost and clients potentially end up in something unsuitable but too detailed and you end up with a difficult if not unmanageable situation.

Defining and discussing responsible investing

The logical starting point is to set the scene by educating the client on what responsible investing is, so you’re both working from a common understanding. In the absence of strict definitions, there’s a real risk of talking at cross purposes and the client ending up with something inadvertently unsuitable. Personally, I base my view of the market around the Investment Association’s framework that was developed last year: it takes 'Responsible Investing' as the catch-all term and then breaks this down into a spectrum from agnostic (i.e. ‘normal’ investing) through to philanthropy. It’s not perfect but it gives as good a framework as any to start from.

With a common understanding in place, the conversation can start moving towards identifying your client’s preferences. I see this as a gradual filtering process so that you can effectively distil what really matters to them, starting relatively broadly and then working towards specifics – it can also identify client segments for you.

It’s worth remembering we’re talking about people’s ethics, values and potentially religious beliefs here rather than a financial objective. It’s an intrinsically personal matter and rarely black-and-white, so starting with the detail could just end up in a needlessly complicated process that doesn’t really get you any closer to a suitable solution.

The spectrum of feelings towards responsible investing

I’d base my high level segmentation on the strength of the client’s feelings towards responsible investing. If they’re not fussed then you can just revert to your standard fact finding approach and investment proposition. For those that aren’t agnostic, you could categorise them as ‘some feeling’ and ‘strong feelings’. By ‘some feeling’ I mean their views are broad enough to be captured in an off-the-shelf solution like a fund or a model portfolio and by ‘strong feelings’, they have some specific, detailed views that they want accounted for in a more personalised way. There’s also a financial consideration to this segmentation. For example, ‘some feeling’ may also be those that aren’t willing to pay the price for a more personalised solution or those that can’t achieve their financial goals due to the additional cost of a personalised solution – it may seem crude to put a price on someone’s views, but I think that it’s a reasonable discussion to have with the client, if only for the purpose of transparency.

Where next then? For those in the ‘some feelings’ segment, it’s then on to identifying which bit or bits of the spectrum they want accounted for in their investment solution. You’ve set the scene already so it should be easy to drill down to their preferred bits. Whether it’s one or all, it doesn’t really matter as the point is you can bring together the various generic elements as required e.g. if they like ESG and Impact then split them and include both areas in the portfolio. By extension, you’ll need to have provision in your CIP for each element of the responsible investing spectrum.

In the ‘strong feelings’ camp, the assessment naturally needs to get into more detail. Once you’ve identified which bits of the spectrum they want, then drill down into the specifics of their views – what areas do they want to invest in and which do they not want an exposure to – they may even have views on specific companies. For example, a client you’d generally consider to be in the ethical/exclusions investing space, may specifically be indifferent to alcohol production but have a very strong view that they don’t want any exposure to banking or financial services. Equally, the Covid pandemic has, anecdotally at least, made many people take stronger views on the companies they buy goods and services from – logically I can’t see them wanting to invest a chunk of their pension with these companies either.

It’s pretty clear that the whole situation around responsible investing is an evolving situation and there is currently no right answer. As with all regulatory change, getting your house in order for day one is vital. Investing time in understanding the responsible investment world and developing your fact finding approach sooner rather than later should make it easier to update your CIP/ CRP and also produce a ‘final’ approach once the details have been confirmed.

The information contained in this page is for professional Financial Adviser use only. If you are a private investor, please visit the Private Investor section or contact your Financial Adviser for more information.

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