Introducing our Socially Responsible Investing (SRI) Portfolio
Align your advice to your clients' values by offering a socially responsible investing portfolio without sacrificing global diversification or cost control.
It makes sense that some clients you advise try to align their investments with the values and social ideals that shape their world view. The way they live, the career they choose, and the people they care about align with their personal values; shouldn’t their investments do the same?
Today, we’re proud to introduce Betterment’s first socially responsible investing (SRI) portfolio. This portfolio enables you to align your sound financial advice to your clients’ personal values.
To learn more about how and why we’ve built the Betterment SRI portfolio, read on to the following sections. Our full approach to our SRI portfolio can be found in the technical whitepaper here.
Why Is Betterment Developing an SRI Portfolio?
Betterment is dedicated to offering a personalized experience for you and your clients. We decided to develop an SRI portfolio because, currently, there are three major ways that most investment managers attempt to execute an SRI strategy, and none meets an investor’s full needs:
- Some advisors offer SRI mutual funds, which tend to have higher fees compared to performance and often lose out on important tax and cost optimization opportunities.
- There are also several SRI-specific investment managers whose SRI portfolios may fulfill investors’ desire for SRI screening but do not always provide proper diversification against risk.
- Still other advisors pick their own basket of SRI investments—a challenging and time-intensive approach.
We set out to do better for SRI investors. As advisors, you should not have to choose between offering an SRI portfolio and offering a cost-controlled, fully-diversified investment strategy with tax optimization.
The Betterment SRI portfolio is designed to achieve this balance. It allows you to help your socially conscious clients express a preference for SRI in their portfolios without sacrificing critical advice principles that protect their returns the most: proper diversification, tax optimization, and cost control.
What Is Betterment’s Approach to SRI?
If you’ve been watching SRI products evolve over the past two decades, you probably know that the majority of the market consists of actively-managed mutual funds with high fees. Only recently have lower cost options, like SRI-oriented ETFs, emerged.
As we developed the SRI Portfolio for Betterment for Advisors, we analyzed all low-cost SRI funds available, searching for products that could replace components of our core strategy without disrupting the diversification or cost of the overall portfolio.
We found that the only asset class (i.e., portfolio component) that we could confidently replace with an SRI alternative today is the U.S. large-capitalization stock allocation. Other asset classes, such as value, small-cap, and international stocks and bonds are not replaced with an SRI alternative in our portfolio either because an acceptable alternative doesn’t yet exist or because the respective fund’s fees or liquidity make for a prohibitively high cost to your clients.
While just one asset class is affected in our SRI portfolio compared to our core portfolio, that change has an outsized impact on the social responsibility of the portfolio we’ve developed. For one, many investors are most concerned about the social responsibility of the largest U.S. companies in their portfolios, which often set standards for acceptable corporate behavior that other companies try to emulate. In our SRI portfolio, companies like Exxon, Chevron, Philip Morris, Wells Fargo, Walmart, and Pfizer may be excluded because they are deemed not to meet social responsibility criteria. Other companies deemed to have strong social responsibility practices, such as Microsoft, Google, Proctor & Gamble, Merck, CocaCola, Intel, Cisco, Disney, and IBM may make up a larger portion of the SRI portfolio than they do for Betterment’s core portfolio.
In addition, a major reason why there are no acceptable SRI alternatives for other asset classes is that the demand for these products has not been sufficient to encourage fund managers to create them. If your clients are enthusiastic about electing the SRI portfolio, they’ll be signaling to the investing world that there is a demand for high quality SRI investment options and may help to encourage the development of well-diversified, low-cost SRI funds in a wider variety of asset classes.
If you’re interested in a more quantitative understanding of how the Betterment SRI portfolio compares to our core portfolio in terms of social responsibility, you can review the SRI ratings published by MSCI (see below). MSCI’s ratings for the SRI funds used in Betterment’s SRI portfolio are higher than the ratings for the funds used in Betterment’s core portfolio. For more information on what the numbers mean, click here for our full whitepaper.
|MSCI ESG Quality Scores:
US Large Cap Equity Holdings in the Betterment Portfolio vs. ETF tickers in the Betterment SRI Portfolio
|Betterment Portfolio – US Large Cap||DSI||KLD|
Let’s Make Investing More Socially Responsible
Currently, most accessible SRI approaches make investors choose between a well diversified, low-cost portfolio and an inadequately diversified and/or higher cost portfolio comprised of SRI funds.
Diversification and controlled costs are investing fundamentals that all investors—SRI or not—deserve. They’re principles that live at the heart of fiduciary advice. The only reason other SRI solutions settle for higher costs and less diversification is because the industry isn’t challenged to offer something better. With your expertise and partnership, we believe we can create a future that does not ask SRI investors to choose.
Today, our SRI portfolio reflects a 42% improvement to social responsibility scores for our U.S. large-cap holdings when compared to our core portfolio. In the future, we will improve our SRI portfolio even further, iterating and adding new SRI funds that satisfy our cost and diversification requirements as they become available.
You and your clients can get started with our approach to SRI today, and join us as we work to expand our SRI approach together.
How would you like to get started?
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