As she does at the end of each year, Erika Safran of New York-based Safran Wealth Advisors reaches out to clients to discuss how their investments are doing and whether they're meeting their financial goals.
What was different this year: These check-ins came just days after the shooting deaths of 20 first-graders and six teachers at Sandy Hook Elementary School in Newtown, Conn. Two clients, Safran says, were so appalled by the mass murder that they wanted to re-evaluate their portfolios to ensure they weren't profiting from the manufacture and sale of the guns used in the shooting. "This was the first time that I have had clients make a portfolio request that was the result of an external event," Safran reports.
In fact, one client wrote a heartfelt email saying not only that he wanted to move away from guns in his portfolio, but also that the shooting made him rethink his own role in social change.
"After much thought, and no small amount of admiration for the move by Cerberus to sell its stake in a firearms maker, I've decided I'd like to move into socially responsible investing," he wrote. "For me that means, at least for now, no fossil fuels companies and no weapons makers." Because most of the client's $750,000 portfolio was in index funds, he asked Safran to conduct a detailed analysis of which funds own gun stocks.
NEW DEBATES ON WEAPONS
Ever since the shootings on Dec. 14, there's been a renewed debate on gun control. One battle is being waged on the legislative front, with the federal government and several states poised to take tougher anti-gun measures. (Tougher laws already have been approved in New York.)
Yet some investors have begun wondering whether they can use the power of the purse to bring about social change. A number of big public pension plans, including those in California, New York and Chicago, have either frozen or divested their stakes in gun makers. The current gun maker divestiture movement was touched off days after the Sandy Hook shooting when the California State Teachers' Retirement System put enough pressure on one of its holdings - private equity firm Cerberus Capital Management - that the firm put its Freedom Group, a collection of the country's premier gun manufacturers, up for sale.
What has surprised some advisors is the extent to which shootings have made individual investors want to take matters into their own hands too. Sean Lee, a financial planner and retirement income specialist in Murray, Utah, a suburb of Salt Lake City, fielded four new requests from clients who had had enough of guns in their portfolio. "Many of our clients are retired and they have grandkids that are that age," Lee says of the young shooting victims in Newtown. "Stuff like that tends to hit home."
Lee says he was a bit surprised by the reaction, given his firm's location. "We're a conservative state and we have some of the biggest gun manufacturers here," he says - a reference to Browning, maker of automatic and semi-automatic assault rifles.
On the other hand, about 10% of his clients already ask him to exclude alcohol, tobacco and defense names because of religious beliefs, he says. And his clients do have a history of making portfolio changes as a reaction to news events. After the 2010 oil spill at a BP site in the Gulf of Mexico, he got a slew of requests asking him to eliminate that company from their holdings - although, he says, "that was more to protect the earnings that they had gotten because there wasn't a lot of confidence in BP."
Some advisors aren't quite so fast to react to client requests. Philip Lee (no relation to Sean Lee), a wealth manager with Modera Wealth Management's Boston office, had clients approach him about the gun issue. One couple wanted to know what exposure they had to the three publicly traded gun makers, Sturm Ruger (RGR), Smith & Wesson (SWHC) and Alliant Tech Systems (ATK). After conducting a review of the $2.5Ã¢â¬â°million portfolio, Lee found it was minimal - less than $250. "I offered to liquidate the entire mutual fund holdings to eliminate their exposure," Lee says.
But doing so would have meant incurring long-term capital gains taxes of $9,400. "During our discussion, they realized that the allocation was incredibly small, and they were willing to tolerate it, so they chose not to act." Instead, Lee says he suggested the clients gift appreciated assets and some cash to anti-gun organizations.
EVOLUTION OF SRI
While the growing focus on guns is new, the broader category of socially responsible investing has grown steadily in recent years, reaching $3.74 trillion at the end of November - a bit more than 10% of the American investment marketplace, according to the Social Investment Forum, a trade organization that publishes data on the sector. SRI assets grew by 22% from 2010 to 2012, the group reports.
The industry has moved beyond simple indexes of companies that exclude alcohol, tobacco and defense stocks; new instruments now cover a multitude of asset classes and geographic areas. There are also exchange-traded SRI offerings, bringing the world of low-cost, transparent trading into the mix. Advisors say it's now possible to build a well-diversified portfolio of just SRI funds.
Eliminating guns doesn't sacrifice much return for clients, advisors note. "I can make more money buying other companies, so I just don't care if I don't own gun makers," says Greg Bitz, founder of Metropolitan Financial Group in Chevy Chase, Md., who invests along socially conscious lines. "It's not like we're eliminating Apple. I know Apple is going to outperform a gun maker."
Until their recent slump, Apple shares did indeed outperform the gun makers over three- and five-year periods. But the firearms companies have held their own. Shares in Smith & Wesson are up 73% over the 12-month period ended Jan. 30, and the others are not far behind.
When asked to carry out a client's wishes to divest of a sector, some advisors believe it's their duty to comply. "I am here to guide them and help them achieve what they want to achieve," Safran says. "If part of their financial objective is to create a better world for their future, and they feel like they can accomplish a better world through how they invest, then I'm on board."
James McDonald, president and chief investment officer of Index Strategy Advisors in Houston, has gone a step further. He was so shaken by the Newtown shootings that he expressed his heartache in a blog post on his firm's website, talking about the relief he felt the night of the mass murder when he saw his own 6-year-old son come home. McDonald also wrote about the amount of firearms stocks that index funds own. "I'll be watching the choices of fund companies closely, and to the fullest extent possible, direct my [clients'] portfolios to those investments that minimize or, if possible, eliminate weapon makers from investment consideration," he wrote.
McDonald says the blog post generated quite a bit of interest among his clients - with some expressing wholehearted support and others vehement disagreement.
Soon after, McDonald took additional steps. He set up a new investment vehicle for his clients, based on the MSCI environmental, social and governance-related indexes, which excludes weapons makers. About a dozen clients have asked for this investment option, although McDonald hasn't yet made the investment, wary of committing new money at what could be market highs.
"I'm not sure if this will make a difference," McDonald says about the impact of excluding guns. "Fortunately for my clients, these indexes have outperformed."
Ilana Polyak, a Financial Planning contributing writer in Northampton, Mass., has also written for The New York Times, Money and Kiplinger's.
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