Our Thoughts

FJY Statement on Socially Responsible Investing

Clients of FJY Financial occasionally ask why we do not participate in what many people call “Socially Responsible Investing” or SRI. Investors who practice SRI strive to make investment choices based – at least partially – on whether the companies in which they invest have a positive impact on the world. Or, more popularly, these investors try to avoid choosing investments in companies that have a negative impact on the world. As investment fiduciaries for our clients, FJY’s primary goal and ultimate responsibility is to place our clients’ interests above all other interests. It is in the context of being a fiduciary that FJY has determined against making SRI part of our investment philosophy.

When trying to define SRI, we find it difficult to presume that we or any other advisor can completely and accurately define this term in a way that is consistent for and relevant to a client base as a whole. For example, which of our clients would want to avoid companies who do business with China because of China’s controversial child labor laws? Which ones believe that investment opportunities in the health care or medical research fields are worth the animal testing that may be necessary for these companies to compete successfully? Should we avoid companies that compensate their executives “excessively”? How can an investment advisor make choices among all of these “moral issues” and serve clients in a consistent manner?

FJY clients know that we take our fiduciary responsibilities very seriously. We subscribe to the Uniform Prudent Investor Act (UPIA), as approved by the American Bar Association, which states that “no form of so-called ‘social investing’ is consistent with the duty of loyalty if the investment activity entails sacrificing the interests of trust beneficiaries – for example, by accepting below-market returns – in favor of the interests of the persons supposedly benefitted by pursuing the particular social cause.” Our investment philosophy focuses on finding the best possible investments for our clients and maximizing their risk-adjusted, after-tax returns, in the context of an asset allocation strategy. We have yet to find any compelling evidence that SRI, especially given the higher costs associated with it, can achieve its goals without sacrificing returns.

For example, if you invested $10,000 in Total Stock Market ETF (Vanguard) and another $10,000 in the Vanguard FTSE Social Index over 10 year period the difference is significant. From 2004 to 2014, the Total Stock Market ETF would be worth $24,000 while the Vanguard FTSE Social Index would only be worth $20,000. Although it is only a $4,000 difference, that difference is almost ½ the initial investment amount and 2% less annually than the total stock market fund. [As Jeremy Siegel pointed out in his book The Future for Investors, between 1957 and 2003 the S&P 500 returned 10.85% per year. If you had invested in every stock in the S&P 500 during that period – except tobacco giant Philip Morris (now Altria) because of a moral decision to avoid tobacco companies – you would have ended up with about five percent per year less than if you had invested in the entire index.] The preponderance of evidence still shows that security selection, whether using economic analysis or social screens, is NOT the best way to achieve market returns over long periods of time. Our fiduciary duties to our clients require us to put their economic interests above all else and to act as prudent investors – even when our clients may wish to follow their emotions or pursue social causes to the detriment of their investment portfolios.

Our recommendation is that FJY clients consider an alternative approach. By making direct contributions to worthy causes and charities, clients can be assured that their donations are directed toward organizations that promote policies and programs in line with their own beliefs and principles.