Merrill, Morgan Stanley on impact investing

Morgan Stanley and Merrill Lynch are placing major strategic bets on impact investing, figuring a broad and varied product menu will give their advisors a competitive edge with the next generation of prospects.

Working with big fund managers, the two wirehouses have created platforms that include strategies in every asset class. Impact investors incubating a nest egg can add a portfolio of environmental, social and governance (ESG) growth stocks. Those who want income can buy green bonds. Those able to take on more risk can participate in private placements.

“We’re thinking about the thematic areas that investors are interested in and looking at the product mix,” says Hilary Irby, head of Morgan Stanley’s impact-investing platform, which launched in 2012 with about 70 products. It now has 120 and supports assets of $3.5 billion; the firm hopes to pull in another $6.5 billion in five years. “The platform is designed to be responsive no matter what the client’s interest is,” says Irby. “We have mutual funds, ETFs, separately managed accounts, plus private equity and private debt opportunities.”

Although millennials are a big part of the demand story, they’re not the whole story, she adds. Women, too, are big drivers of the impact movement. And “ultra-high-net-worth investors are increasingly recognizing that they don’t need to separate their philanthropic work from their investments,” says Irby. “They can combine them.”

Indeed, half of HNW and UHNW investors say environmental and social impact plays a significant role in their investment decisions, according to recent research by Merrill’s parent company, Bank of America. Among millennials, 75% believe they can express their values through their investments.

“About 20% of our private clients use impact investing today,” says Linda Stephans, a Merrill advisor in Chicago whose team manages $6.5 billion. She adds she and her colleagues are fielding more and more questions about impact investing from clients and prospects.

But, where 10 years ago advisors had to explain that values-based investing often meant compromising performance, clients no longer have to make the trade-off. “You don’t have to give up something to increase the portfolio’s meaning to you and your family,” says advisor Kristina Van Liew, who works with Stephans.

Their team recently helped a client who wanted to invest in infrastructure for underserved communities. Previous impact investments had increased this client’s equity risk, which Stephans and Van Liew wanted to offset. So they found a fixed-income strategy from a manager specializing in public projects, including water and education, in financially challenged municipalities. “This is high-grade fixed income with steady-Eddie returns,” says Stephans. She and Van Liew added a mutual fund from a second manager who focuses on affordable housing and revitalization of underserved areas.

Impact investing is coming of age because the whole advice industry is shifting more toward goals- and values-based planning, experts say. Indeed, advisors are finding the concept is getting their wealthy clients’ children in the door. “Especially in the family-office space, it’s most useful for connecting to the next generation,” says Mark Rogers, co–executive director of the Jbara and Rogers Financial Management Group of Morgan Stanley in Farmington Hills, Mich. The practice has AUM of just over $1 billion.

High-net-worth clients whose heirs had been generally indifferent to managing the family money find that their adult children become engaged when they learn they can make a social or environmental impact as well as receive an economic return, Rogers says. Morgan Stanley’s impact platform lets him build diversified, well-balanced portfolios just as he would in the traditional space, he adds. “We’re trained to make money,” says Rogers of his fellow FAs [financial advisors]. “This platform is created to do that.”

Something for Everyone

Mass-affluent investors can make an impact, too. At Merrill Lynch, self-directed clients on the Merrill Edge platform have access to around 100 ESG-themed strategies, including mutual funds and ETFs. Meanwhile, a robo called Motif Investing uses algorithms to let investors create a 30-stock portfolio around their personal enthusiasms — including, say, clean energy or women-owned companies — for $10 per motif. (The company also makes an asset-allocation and portfolio-rebalancing tool for RIAs, priced at 0.15% to 0.3% of account size.)

CEO Hardeep Walia says advisors can customize portfolios in ways that go far beyond risk tolerance. For example, two investors might both warrant an 80% equity asset allocation, based on their age, earning profile and attitude toward the markets. The motif approach lets an FA give them the same allocation but on completely different themes, according to their values.

Giving clients the impact-investing option is great for the relationship, says Morgan Stanley’s Rogers. He makes it a normal part of the onboarding process. “Sometimes, they don’t even know what I’m talking about,” he says. After he explains, “they say, ‘Yes, I really like that.’ And then you just have this connection.”

Editor’s Note:  This article first appeared on the website of Financial Advisor IQ on November 17, 2014.

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