Jeff Gitterman, CEO of Gitterman Asset Management joined Julie Cooling, Founder and CEO of RIA Channel to discuss how advisors can access targeted ESG exposure through a unified managed account (UMA).
Advisors have more choices than ever when it comes to investment structure. Mutual funds, ETFs and SMAs each offer their own unique set of benefits and access points, but have been historically difficult to manage, rebalance and customize at scale. Unified Managed Accounts (UMAs) allow advisors to multilayer ETFs, mutual funds, and SMAs into a single custodial account within a single client contract. Cerulli expects 34% growth in unified managed accounts (UMAs), which would make them the fastest growing investment by RIAs in public markets.
Changes to custodial platforms now allow SMAs to invest without trading costs. This allows advisors to customize client portfolios, such as by implementing direct indexing to further enhance tax efficiency and reduce investment costs.
Big changes may also be coming for ESG funds. In recent years, the number of “ESG” funds have skyrocketed. The proliferation of passive funds with very basic ESG screening criteria has certainly led to greenwashing and in some cases misleading investment exposure, explains Gitterman. ESG funds can make sense, though, when active managers carefully screen each company on an individual basis, especially when selecting the companies with the best ESG characteristics from each industry. The biggest leg of the three-legged ESG stool is governance, as was shown in the case of the demise of Silicon Valley Bank. Governance is the foundation for good ESG.
Over the next couple of decades, climate could be the biggest wave to hit the capital markets. Climate risk can be seen more acutely in the fixed income market, which has longer-term investments than are seen in the equity markets. While climate risk is building slowly, it can impact companies within the maturity schedule of their existing debt issues. Mortgage banks, insurance companies, and reinsurance companies are becoming reluctant to operate in specific coastal areas, such that the majority of all flood insurance in Florida and Louisiana is underwritten by the state. Both insurers and mortgage lenders are concerned about the impact of sea level rise over the term of a thirty-year mortgage or a long-term insurance policy. Investors may choose to take less climate risk in their investments, such as by purchasing municipal revenue bonds by issuers located in areas of higher elevation and lower flood risks.
Gitterman Asset Management offers a UMA that invests in active managers that carefully screen individual companies within each industry for ESG issues. The UMA is available through popular custodial platforms, such as Fidelity, Schwab, Pershing, and TD. The wrap fee includes the tax overlay services of Natixis, the underlying SMA managers, as well as Gitterman’s models, manager selection, and asset allocation services.
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