In most circles, the name Domini is synonymous with socially responsible investing. But for many broker/dealers, the Domini name represents a laudable, but not personally profitable, investment philosophy.
Now Amy Domini, president, CEO and founder of Domini Social Investments of New York, the socially minded investment advisor, is hoping to change that. Joining other socially responsible investing (SRI) companies that sell through brokers, Domini has just registered its first-ever 4.75% front-end loaded mutual fund designed just for the brokerage set.
Domini currently serves as the advisor to three socially responsible no-load mutual funds -- one retail equity, one institutional equity and one a bond fund -- and in 1990 helped create the Domini 400 Social Index, which invests primarily in large-cap companies that must pass rigorous social and environmental screens. That SRI index was the first of its kind and is owned and maintained by KLD Research & Analytics of Boston.
Domini has bragging rights to advising the Domini Social Equity Fund, which launched in 1991 and is the third-largest socially responsible equity fund with $1.5 billion in assets, according to Morningstar of Chicago (see chart). Domini also serves as advisor to the $199 million Domini Institutional Social Equity Fund, which debuted in 1996 and, with a $2 million minimum investment, is geared toward endowments and foundations. Domini also manages the Domini Social Bond Fund, which rolled out in 2000 and has $61 million in assets.
"We certainly aren't abandoning the no-load channel," Domini said. "Our feeling was that by putting on the load, we are adding another distribution channel."
The newly registered Domini Social Equity Advisor Fund will, just like its no-load counterparts, track the Domini index. The fund will have one single A share class whose front-end load steps down from its 4.75% maximum charge. It will also carry a 25-basis-point 12b-1 fee.
Domini admits that she has seen the trend toward more and more investors seeking the advice and counsel of financial intermediaries, but don't expect to see her firm hiring legions of wholesalers to woo registered reps. Instead, the plan is to be included in various brokerage firms' wrap platforms, Domini said. Although Domini, a former stockbroker herself, estimated that close to three-quarters of fund sales end up being no-load or load-waived, many brokers are still commission-based, which is why she deviated from offering strictly no-load funds.
Brokerage firms are definitely moving to a fee-based financial planning model, but the evolution has been slow to progress, according to a recent report, "Remaking the Model for Mutual Fund Distribution," by Financial Research Corp. of Boston. While the changeover is decidedly taking place, brokerage firms still rely on mutual fund wrap programs. In addition, many of the individual financial advisers who are in the transition process prefer to sell level-load C-shares to clients, as that share class still provides a commission stream.
As for Domini's soft launch into the broker/dealer channel, will that now pit the firm against more veteran socially responsible fund managers, such as Calvert of Bethesda, Md., which have long distributed their wares through broker/dealers? "We hope we're not seen as a gnat on the windshield," Domini said. Calvert has a preeminent reputation for socially responsible investing and a wholesaling infrastructure able to educate advisers about the benefits of socially responsible investing, Domini noted. Although her firm hopes to build its case that it has something to offer brokers, outshining Calvert is not on the firm's list of expectations.
"Calvert is only committed to that channel. They have a jump on us of 15 years," Domini said. "Lots of brokers want to have a socially responsible investment option, but we weren't the ones who have everything for them." Although Domini currently has no plans to offer another load fund, she doesn't rule out eventually cloning the bond fund to offer a similar version to financial advisers. "This is kind of a soft launch. We'll see if we get some traction first."
Domini isn't the only socially responsible fund advisor toying with entering the broker/dealer distribution channel. Tom Gainey, vice president of institutional sales at the $1.4 billion Pax World Funds of Portsmouth, N.H., admitted that his firm regularly discusses whether or not to take the quantum leap to offer a front-loaded socially responsible fund. Right now, the Pax World Balanced Fund is no-load, but carries a 25 basis point 12b-1 fee. Two other Pax World Funds are also no-load but carry a slightly larger 12b-1 fee of 35 basis points.
"In recent years we have had fairly serious in-house discussions about this," Gainey said. "We get inquiries on a fairly regular basis from commission-based advisers and organizations," he added. "It's a daunting choice just because it is a very involved process. So far, we haven't chosen to do that." Gainey said that assets under management have been growing, despite being absent from the broker/dealer channel, largely from fee-oriented investment advisers and the retirement plan market.
But not all SRI funds experience success in the broker/dealer channel. "We've been tiptoeing into the broker/dealer channel, and we are getting out of it," said Robert C. Schwartz, president and CEO of Schwartz Fund Distributors. Schwartz sells the three Ave Maria mutual funds, each of which is "morally" managed according to the teachings of the Roman Catholic Church. Schwartz Investment Counsel of Bloomfield Hills, Mich., serves as the funds' advisor.
The funds carry no front-end load, but they do have a modified C-share that charges a 1% back-end contingent deferred sales charge and a 50 basis point trailer. The problem was that the brokerage community was asking for A shares, which runs counter to the company's culture, as it would be expensive to investors, Schwartz said.
"We contemplated adding multiple share classes, and decided it was not in the best interest of investors," Schwartz said. Consequently, the Ave Maria funds will do an about face and go 100% no-load within the next year, he said.