Values-Driven Investors Getting Low-Cost Retirement Options

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By David B. Brandolph

High-tech robo-advisers continue to innovate. They are now bringing low-cost and customized socially responsible products to retirement investors.

Mutual fund companies such as Calvert, Vanguard, Domini, TIAA, Parnassus and others have for years offered investments promoting environmental, social and governance standards. They typically screen out investments in companies based on behaviors the fund’s management deems to be offensive or include companies considered to be more responsible. Funds commonly target companies involved with tobacco, alcohol, weapons, fossil fuels, pollution, human rights violations and those that aren’t furthering sustainability.

Most of these funds are one-size-fits-all ESG investments. Investors, however, may only be partially on board with a fund’s goals. For example, an investor may be content that a fund screens out tobacco and weapons while not wanting it to steer clear of alcohol-related companies.

Technology advancements are now permitting a better ESG fit for investors who want to ensure their investments reflect their values. Investors are also getting greater value for their dollars, as many of these investments are coming with low fees.

Recently, three startup robo-advisers—companies offering high-tech computer-based investments online—have sprung up to offer low-cost ESG products in retirement saving vehicles.

Customized ESG Investments

San Francisco-based robo-adviser OpenInvest began offering customized investment products in 2016 targeted at people looking to put their money in places consistent with their values. It currently offers individual retirement accounts and hopes to clear legal hurdles enabling it to market to 401(k) plans in about a year, Joshua Levin, the firm’s co-founder and chief investment strategist, told Bloomberg BNA Feb. 10.

The company has compiled an extensive database reflecting how companies behave with respect to a number of ESG factors, he said.

Investors sign up online and indicate what matters to them. OpenInvest then uses its database to design passively managed U.S. stock and bond investment portfolios consistent with each individual investor’s values. Investors can exclude or include specific industries or even individual companies.

OpenInvest recently added a feature that allows investors to use a “Trump screen” to pick their investments. Want to divest from President Donald Trump’s companies and products or from companies that have supported him? There’s a screen that allows investors to do that. Hate Trump’s policies? Investors can weed out investments in companies that back the president’s policies or can specifically add firms that support policies he doesn’t. This “Trump screen” has been “wildly popular” among OpenInvest customers, Levin said.

OpenInvest’s technology permits investors to have customized portfolios at an annual cost of 50 basis points (0.5 percent), a fee much lower than most traditional one-size-fits-all ESG funds.

Low-Cost Options

Grow Invest, also based in San Francisco, began offering ESG investments via an online app in 2015 in hopes of attracting millennials and others as investors. Through the app, investors can put together a diversified investment portfolio by choosing from three ESG model funds—conservative, moderate and aggressive. These investments come at a very low annual fee—25 basis points (.25 percent).

That’s comparable to Vanguard’s FTSE Social Index Fund Investor Shares (VFTSX), which charges a 22-basis-point annual expense ratio. The Vanguard fund tracks a benchmark of large- and mid-capitalization U.S. stocks that have been screened for certain social, human rights and environmental criteria.

Grow Invest intends to offer an IRA in its app in about three months, Matthew G. Casey, the firm’s director of retirement consulting, told Bloomberg BNA Feb. 13.

Pay Only What’s Fair

Investors who don’t want to pay anything for ESG model portfolios also have an option.

They can choose Los Angeles-based Aspiration, which offers IRAs online in an actively managed ESG investment fund. Although the company’s Redwood Fund isn’t customized to an investor’s specific values, it’s unique in that it doesn’t charge fees to its customers.

Instead, Aspiration asks its investors to pay only what they believe is a fair price. The company’s chief executive officer, Andrei Cherny, told Bloomberg BNA on Feb. 10 that 85 percent of Aspiration’s users elect to pay a fee. While he wouldn’t reveal how much they pay on average, he said the fund receives fees that are consistent with other similar mutual funds.

Morningstar, which evaluates and rates mutual funds, indicates online that the Redwood Fund collects fees of 50 basis points per year. Aspiration also donates 10 percent of its profits to charity, Cherny said.

To contact the reporter on this story: David B. Brandolph in Washington at dbrandol@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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