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Robos are getting political. Will Wall Street follow?

Robo advisors have come out of the political closet.

Forged in the wake of the financial crisis and political movements like Occupy Wall Street, digital advisory firms have become decidedly open about their political agendas. By advocating for the democratization of financial advice and stronger consumer protections, digital investment platforms have become the face of progressive politics in the market. That’s attractive to young investors — assets managed on digital platforms are expected to soar to $1.26 trillion by 2023, according to a report by Aite Group.

Take OpenInvest. After the election of President Donald Trump, the San Francisco-based startup offered an investment vehicle that explicitly excluded companies that supported the new president. Created in 2016, Stand up to Donald Trump screened data sets and industry groups for “companies whose current executives have openly spoken out against the president,” or proactively withdrew from Trump’s now-defunct business advisory council after violence erupted at a right-wing demonstration in Charlottesville, Virginia, according to the firm.

The robo advisor decided it could not stand for, “hate, discrimination or violence,” says cofounder Josh Levin. “After deep reflection, we decided Trump had crossed some of those red lines.”

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Donald Trump, 2016 Republican presidential nominee, arrives to speak during a campaign rally in Hershey, Pennsylvania, U.S., on Friday, Nov. 4, 2016. As the U.S. presidential race heads into its final weekend, Trump is showing strength in Iowa and Ohio pre-Election Day voting, while Hillary Clintons advantage in early balloting looks stronger in North Carolina and Nevada. Photographer: Andrew Harrer/Bloomberg

A business model that plays to political leanings could prove useful, experts note. In a fund industry that is competing in a race to zero, firms may look to further differentiate offerings to entice new consumers. “We covered diversification; we covered low cost,” says Scott Smith, director of research and analysis at Cerulli. “The question becomes: what’s the next big thing that investors will want to get behind?”

“Americans vote with their consumption dollars,” agrees Hardeep Walia, CEO of Motif. Trump’s election inspired the Bay Area-based digital firm to come out with a values-based portfolio tool in 2017, described as the “first fully-automated portfolios that align your financial goals with your values.”

“[Millennials] are very good voters [with] their dollars and there has been a bunch of startups who have come into this space to say, ‘Let people vote with their retirement dollars.’”

Digital upstarts are diverging from the traditional wealth management playbook that largely uses lobbying and conservative-oriented political action committees to effect change. Wealth management firms and their affiliates donated approximately $20 million in campaign contributions through PACs during the 2018 midterm election cycle. JPMorgan Chase and Bank of America gave a combined $811,000 to Republican candidates alone — amounting to 62% of the firms’ total combined contributions.

Bank of America maintains a PAC program to allow employees to be engaged in the political process, according to a spokeswoman. Like other financial institutions, the bank is prohibited from directly contributing to the PACs, which are funded by the employees' voluntary personal contributions.

JPMorgan Chase declined to comment.

But the leftward trend among robos is not just political — it also reflects a next generation of investors who increasingly demand transparency in all aspects of the investment process. Indeed, no robo’s mission statement is complete without an ode to transparency and consumer protection. Earlier this year, Betterment CEO Jon Stein lamented the death of the Fiduciary Rule as a win for big business and voiced concerns about the stringency of the SEC’s best interest standard, which passed in June.

“Unfortunately, this misleadingly titled rule may best serve the marketing interests of large financial corporations to the detriment of individual investors,” Stein told Financial Planning after Reg BI passed earlier this month. “It is a gift of sheep’s clothing to the wolves of Wall Street."

Stein, the head of the industry’s leading robo advisor by assets — some $14 billion — also warned the American consumer not to mistake regulatory action for progress, adding the rule will likely harm end investors.

But the industry is learning that setbacks to the fiduciary cause can have unintended consequences.

Schwab, Vanguard and LPL explained their approach to campaign donations as the industry and its supporting sectors provided $19 million in PAC contributions.
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The publicity that followed the fiduciary rule being nixed in January may have turned the tide of public opinion in favor of greater transparency and consumer protection. Massachusetts proposed its own fiduciary in June. And, in a rebuke to the Trump administration, state regulators also charged Scottrade with unethical conduct, which marked the first known enforcement action under the defunct Fiduciary Rule, in February.

“Despite the efforts in Washington to kill the Fiduciary Rule, the impartial conduct provision remains in place,” Secretary of the Commonwealth William Galvin said in a statement at the time. A pre-hearing conference is still ongoing, according to spokeswoman.

Joining the ranks of those seeking to impose a higher standard of care on brokers and advisors are state regulators from New Jersey and Nevada.

While digital firms like Betterment, Wealthfront and Personal Capital have been vocal about liberal causes in the media, individual employees at independent startups also donate decidedly to Democratic candidates, according to campaign contribution records. These include prominent Democrats like Hillary Clinton in 2016 and, more recently, Beto O’Rourke, who was narrowly defeated in a Senate race in Texas last year and announced his presidential run in March.

“When it comes to our employees, we want them to be able to support whichever issues they are most passionate about,” says a Betterment spokeswoman, in an email. “We encourage an open dialogue and strive to provide an inclusive environment for a diverse set of thinking.”

Wealthfront and Personal Capital did not return requests for comment.

Such campaign donations are one way robo advisors are hoping to encourage political participation and add to the discourse. “We're voting with our consumption dollars, but not our investment dollars,” Walia told Financial Planning last year. “We're blindly giving them to the Vanguards of the world, who then vote, and we're passive.”

The Vanguard PAC donated 60% of its $280,000 in contributions to Republican candidates.

“Our public policy efforts are dedicated to advancing a legislative and regulatory agenda that gives investors the best chance for investment success,” said a Vanguard spokeswoman in an email. “This includes engaging on issues related to retirement savings, financial access, tax policies that encourage Americans to save, and other policies that help investors meet their intended goals.”

Indeed, the majority of wealth management firms are not publicly promoting a party affiliation, which could alienate a vast swath of potential clients. “We do not take party sides as a company,” says a Betterment spokeswoman. “We do take stances on specific issues that will impact retail investors.”

Instead, firms say clients are driving the new political products. “After Trump won the election, we had a lot of concerned clients,” says Levin, who co-founded OpenInvest in 2015. “We went back and forth on the question of whether or not to get so political.”

Levin insists his startup, which currently manages $5.8 million in client assets and recently raised $10.6 million in its Series A funding round from Silicon Valley-based venture capital firm Andreessen Horowitz, is neither anti-Republican, nor anti-Democrat.

“Firms are now slicing how we look at the social issues,” says Dennis Gallant, senior analyst of wealth management at Aite Group. “It’s not just looking at small- or large-cap and set parameters. You can really set up something unique.”

robo advisor funding feb 20 2019

For example, OpenInvest’s “Divest from Dark Money” investing screen allows investors to restrict companies that fail to publicly disclose whether corporate funds support of oppose political campaigns, according to the firm, something it says has become a major concern for clients.

“Ranking those money flows is extremely important to people,” Levin says.

Only 11% of the S&P 500 companies fully disclose political spending and 12% do not disclose spending at all, according to the Center for Political Accountability, a nonprofit that benchmarks political disclosure practices of leading U.S. public companies.

Betterment is also offering products that give clients the ability to manually screen out companies based on social causes they are affiliated with using an SRI tool. While the screen isn’t specifically tailored for political purposes, clients can remove companies they deem to have a negative impact on society.

“For those that want to fund the efforts of ‘good’ companies, and reward companies with ‘good’ policies, they have the option to do so,” a spokeswoman says.

Companies and corporations are increasingly taking stands on social and political discourse in order to attract the next generation of investors.

Notably, Nike employed the marketing tactic by endorsing Colin Kaepernick after the former pro football player caused controversy by kneeling during the national anthem in a protest against racism. The sportswear company, known for its iconic advertising campaigns, many of which have referenced social issues, understands the “overriding sentiments” of its customer base, according to a report by Forrester.

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Alexandra Povlishock is vice president of provider technology services for Optum.
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The indexing giant’s pilot Digital Advisor will be priced at 15 basis points, but allocate client assets almost entirely in proprietary funds.
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Experts predict that three quarters of chief marketing officers in all industries will consider such campaigns this year. But only half of those campaigns that are realized will be successful, predicts Jim Nail, a Forrester analyst.

“Political issues are certainly beginning to become much more prominent as an investment criteria,” says Nail. “Since the last election, those issues have really taken the next step forward.”

As the country becomes increasingly polarized and consumers look to effect social change with their pocketbooks, wealth management may be forced to enter the fray. While the robos have been outspoken about their political leanings, traditional wealth managers have been less likely to take sides.

While incumbents with robo advisors — like Vanguard and its $120 billion in digital assets — have taken the lion’s share of digital assets, the future impact of smaller independent robos remains up for debate. At present, only a sliver of retail investors even know that leading robos exist. Only 15% of investors are aware of Betterment, just 8% know of Wealthfront and a mere 5% have heard of Personal Capital, according to a recent Cerulli Associates survey. Smaller firms like OpenInvest were not even included in the questionnaire.

“It’s an aspiration at this point,” says Cerulli's Smith, about political investment vehicles having the ability to impact the course of an election. “We might end up seeing it sliding more into institutional investing — where there’s a few billions dollars moving around — than retail.”

But consumers are headed to robo investing. Fifty-eight percent of Americans expect to use a robo adviser by 2025, according to a survey from Charles Schwab, and 45% believe robo advice will have the biggest impact on financial services.

As the popularity of impact investing continues to grow, the public may be able to vote as effectively with their wallets as they do at the polls. “You can play this niche to some attention,” Gallant says. “Maybe you get some initial seed money to parlay that into something larger.”

Assets in ESG investment funds rocketed to $12 trillion in the U.S., up 38% from the $8.7 trillion reported in 2016, according to a 2018 US SIF Foundation report.

But while firms like Motif and OpenInvest may have built a salient business model based on this research, there are inherent dangers. For example, the number of clients interested in political screens will always be limited, says Gallant, meaning a finite cap on total assets.

Politics may not be the best metric to guide investment decisions, either. Investments with long time horizons may want to steer clear of political agendas that can often change in a few short years. Firms will have to say on top of changing client demands, Gallant says, adding that he doesn’t foresee such screens lasting more than a decade.

The largest hurdle might just be the power of money itself. Although the public has come a long way in demanding transparency and aligning their values with their purchases, investment vehicles are only deemed successful if they can ultimately beat the markets.

Will idealism ultimately trump the bottom line?

“Not always,” Walia says. “In some cases, at the end of the day, it’s just hard to get returns.”

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