The impact investing market is expected to more than double over the next decade—and will coincide with the largest wealth transfer in history, empowering a new generation of impact-hungry investors. To stay competitive, wealth advisors will have to adapt.
That’s easier said than done. Advisors often struggle to connect with clients about impact investing, whether it’s due to a deluge in new products, skepticism over actual impact or increasingly complex reporting standards.
That’s why it might make sense to start simple and focus on aligning the cash holdings of your client’s investment portfolios with their values.
The Challenge Facing Wealth Advisors
Building a trusting relationship is often cited as the key to being a successful wealth advisor, but that may not be enough in today’s day and age. The new generation of investors wants different products and investment alternatives. Specifically, investment products that align with their personal and social values.
Many financial advisors are playing catch up. Back in 2019, a Fidelity survey found that roughly half of advisors thought impact investing was a short-term trend; a similar proportion said they understood impact investing well, and most had not yet talked to their clients about it.
Since then, impact investing has only gotten more complicated. Regulators around the world are pushing for increasing transparency and reporting standards. Hundreds of new products—in asset classes ranging from equities and bonds to microloans and mutual funds—have come to market purporting to be impact-focused. Meanwhile, skepticism about whether these products are having a tangible impact has been mounting amid a lack of clear measurement standards and widespread claims of greenwashing.
Older investors, with whom advisors must also maintain good relations, may share this skepticism and/or lack of knowledge about impact investing. This, in turn, could put advisors in the middle of, say, an older and younger member of a family office client.
In the end, understanding a client’s values-based investment objectives is not the same as understanding their traditional investment objectives, especially if different generations are involved.
Start Simple
Often the best way to solve complex problems is to break them down and start simple. In that spirit, a good place to begin with impact investing is to focus on aligning the “cash holdings” portion of an investment portfolio with an investor’s values. Doing so is not only an easy way to ease into impact investing but can help bridge the gap between older and younger investors: after all, it’s hard to argue against the efficacy, clarity, and simplicity of placing your deposits in a bank that fits your values.
How does this work in practice? Say your client is interested in reducing fossil fuel production. Maybe, however, her deposits are being held in a bank notorious for making big loans to oil and gas companies. Shifting those deposits to an FDIC-insured bank that better aligns with her values would be a great first step in advancing impact investing objectives.
Crucially, these banks may be smaller or more niche than many clients are used to, as big banks tend to have their hands in a wider range of activities (i.e., while they may lend to “green” initiatives, it’s likely they also lend to fossil fuel organizations). Should your clients’ deposits exceed the FDIC limit of $250,000 per institution, it’s important to be able to spread them across a trusted network of values-aligned banks.
Ampersand’s latest survey of depositors and financial executives demonstrates the value of such an approach. For instance:
- Two-thirds of respondents from financial institutions and financial services firms report that interest in values-based banking has increased in recent years;
- The majority (55%) of depositors would be willing to give up a portion of their returns to an institution that is aligned with their values;
- Nearly four in 10 value-inclined depositors are willing to give up 15% or more of return on their impact investments; and
- Over half (55%) of depositors are concerned about bank safety after the 2023 bank failures, underscoring the importance of FDIC insurance.
Developing a comprehensive deposit management strategy on your client’s behalf can not only keep funds safer and improve value alignment but also drive increased returns. The national average yield for consumer savings accounts is just 0.58%, while banks typically make loans to those with excellent credit in the ~8-25% annual percentage rate range. That leaves plenty of room for negotiation should you have the right partner.
In 20 years, I predict that what is now referred to as impact investing will just be called investing, and investor values and impact outcomes will become part of the investment equation in the same way that financial risk and return are today.
Getting there, however, will be a challenge. Keeping it simple by aligning cash holdings with the right financial institution can be a great way for wealth advisors—and their clients—to get started.
Reid Thomas is Chief Strategy Officer at deposit management services firm Ampersand
