The Boston-based mammoth financial services company Fidelity has begun offering FAs whose clients custody assets with it a way to develop “values-aligned” separately managed accounts for them, according to the company’s announcement this week.
Fidelity, which has $7.7 trillion under administration, is making the offer through a referral relationship with New York-based Ethic, a four-year-old RIA with $179 million in assets under management.
“This is a joint venture where Fidelity will identify wealth management firms we work with and refer them to Ethic,” Nicole Abbott, a Fidelity spokeswoman writes in emailed answers to FA-IQ’s questions.
Ethic does not pay Fidelity to be on its platform, according to Ethic’s CEO Doug Scott. Advisors “can use Ethic’s technology platform to either select existing ESG [environmental, societal and governance] models built around certain themes, or to create a custom allocation using direct indexing,” according to the description the company provided in its joint press release with Fidelity.
“We actually welcome other market participants that actively promote awareness of environmental, social and governance issues and that offer sustainable solutions to all investors. We believe that our collective efforts across the entire investment community will be vital in addressing the defining issues of our time – which, after all, is the primary reason that we founded Ethic,” Scott writes in a statement emailed to FA-IQ. Ethic offers customized SMAs to other RIAs, RIA networks, and now platform provider Fidelity.
“We work with these firms to build proactive solutions for advisors who are seeking a compelling approach to values-aligned investing. We partner with advisors to simplify this process, which gives them the confidence to engage more deeply with existing clients and new prospects,” Ethic’s spokesperson Alex Laipple writes in an email.
What does Fidelity’s new relationship with Ethic mean for FAs and their clients?
“It was unlike anything we have ever seen,” says Jennie Sowers about Ethic’s SMAs. Sowers is an FA and partner at New York’s Kore Private Wealth, founded in 2018 by a $4 billion team that broke away from Merrill Lynch. Fidelity’s team, which helps advisors plan their clients' charitable giving, initially introduced Kore FAs to Ethic about six months ago, Sowers says.
Since then, Kore has asked Ethic to help develop a core “values aligned” SMA for the firm. Clients are interested but moving cautiously into ESG investing, Sowers says.
“We are still in the early innings,” she notes. Ethic’s quoted schedule is in the range of 30 to 40 basis points for client stakes in the SMA, she says.
Fidelity expects other FAs to jump at the opportunity to get help for clients with socially responsible investing, but it has not set specific goals.
“There’s no set number of firms that we’re targeting for the initial rollout, but we will start with large RIAs and family offices that are looking to incorporate values-based investing into their overall strategy,” Abbott writes.
Fidelity is “being selective out of the gate” about which type of FA it refers to Ethic “because we want to ensure that we provide an exceptional client experience for the initial group of firms,” Abbott writes.
But ultimately Fidelity expects a broad range of FAs to use the services.
“We do expect to make the Ethic offering available to a larger number of Fidelity clients in the future, but we have no confirmed timing for that at this time,” Abbott writes.
But at least one FA expresses skepticism about the new Fidelity-Ethic offer — specifically about its novelty.
“There is a little bit of confusion in terms of ESG,” says Sheryl Rowling, a financial advisor and founder of San Diego’s Rowling & Associates, which manages more than $340 million in client assets and does not use Fidelity to custody those funds.
For the FA and their clients seeking to select funds which have high ESG ratings, plenty of industry rankings, including Morningstar’s, exist to help them out without having to charge clients higher fees.
For advisors and their clients who want to purchase equity or debt in companies or governments aligned with their social values, Seattle-based Parametric Portfolio Solutions, founded in 2001, offers those services to FAs, including ones who have Fidelity custody their clients’ assets. And Parametric does so for about 25 basis points additional cost for clients, rather than 35 or 40 basis points, Rowling says.
“It’s up to the advisor to explain the difference of all these,” Rowling says.