Brendan Erne (02:32):
And while it was fun, while it was great, I think I did come to the realization that even the best active managers out there can’t consistently outperform over time. They may get it right for 10 years straight, but all it takes is one mistake to erase all that outperformance. And I saw the very real-life impact of that in the 2008 financial crisis and what that did to individual investors, retirement portfolios, and just retirement in general. So I made the realization that passive management was really the prudent way to go about this and to go forward on a forward-looking basis for most investors and that’s really the process of just kind of buying a highly diversified portfolio that replicates the market as opposed to trying to outperform the market. And there’s just been a lot of research showing that the best way to build wealth over time with broad diversification and low cost will tend to do better than active management.

Brendan Erne (03:23):
That’s why I made my way into Personal Capital, the company I work for today. And we’re very much, that’s part of our core investment philosophy. And here at the company, I am the director of portfolio management and more specifically in recent years, I have focused on socially responsible investing.

Robert Leonard (03:39):
As I was preparing for our call today I saw that early in your career, you were a financial advisor, and then you transitioned into being an analyst. I have a couple of questions about being the advisor. When you were an advisor, were you picking individual stocks, or was that more of, like, a traditional financial advisor role and you didn’t get into the stock-picking until you were an analyst?

Brendan Erne (03:59):
As a financial advisor, you were really investing in funds. So you were actually recommending individual mutual funds, not necessarily the individual stocks, that really comes into the play of professional management when I was working for a registered investment advisor. But yes, as an advisor, I learned very quickly that that industry has a lot of conflict of interests and there’s a lot of selling involved. I really did not like that aspect of it and so I very quickly decided, “Okay, I’m moving on in my career. I like more of the research. I like more of the analysis. I don’t want to sell.” So that’s why I made the transition into an analyst role.

Robert Leonard (04:32):
Was the advisor role, everything you just mentioned, were you not expecting that when you went into that role? And the reason I ask that is because when I was in school or even before I really started college, I worked at a credit union and we worked with financial advisors and I thought that’s what I wanted to do. And then I learned more about everything that you just mentioned and I quickly realized that being a financial advisor was not what I wanted to do. So I’m curious, it was a similar situation for you.

Brendan Erne (04:56):
I knew that there was selling involved. There was no question about that. I guess what I didn’t anticipate was the amount of pressure that there would be to sell specific investments, as opposed to having full autonomy to kind of do what you want. And of course, you could do that, but I realized that it’s very difficult to be aligned with the client at all when you’re compensated for the type of product that you’re selling them. So I had a short stint in that and then very quickly made that transition out, so probably a similar experience in that regard, but just had to test it out first.

Robert Leonard (05:31):
Yeah, I did notice that it was relatively short, but that’s kind of what I figured. I didn’t have a ton of detail when I did my research, but I saw that it was short and then I saw what you transitioned to. So I was like I bet this wasn’t exactly what he expected it to be, kind of like what happened for me. And thankfully I never actually became a financial advisor. I learned before I did, but I went through that similar thought process.

Brendan Erne (05:50):
Yeah. I mean, to me it was a good experience because just to see what the other side of the industry, what goes on in that side of the industry was I think fairly enlightening to know kind of what you can try to fix by doing it differently and that’s really guided a lot of the roles and positions that I’ve held since then.

Robert Leonard (06:08):
Of course, today we have fiduciaries and we have financial advisors that are fee-only and things like that, so they’re not as swayed by commissions, I guess you could say, as you might’ve been in your early days or as any financial advisor would have been back then, has that changed how the need of financial advisors… Do you think individual people need financial advisors?

Brendan Erne (06:32):
I do. There’s a tremendous amount of people out there that need help, want help, and don’t have the expertise or the time of day to manage their own portfolios. So when you talk about a financial advisor though, there are two different meanings to it. There’s the one that works for a broker-dealer, which is compensated based on the types of products they sell and that’s the one that you need to be careful with because they’re inherently like the worst people or their interests aren’t aligned. There’s just that conflict of interest, right? If they can make more money by selling a specific investment, you got to be aware of that, because that specific investment may not be the best one for you. But there’s financial advisors default, like you said, in the fiduciary camp and they’re… A registered investment advisor is a prime example of that and that’s who I work for today, where it is a fee only. We’re not compensated for any products that we sell and we do provide truly objective advice.

Brendan Erne (07:22):
And I think that’s one of the kind of the great proliferation that I’ve seen within the financial services industry is kind of the rise of the RA and that kind of conflict-free investment advice where you’re not compensated on products. So I think there’s a lot of good managers out there that are able to provide sound, just good advice and without that conflict of interest. So I do think there’s a lot of help out there for people that aren’t the ones that spend their time of day reading all about the investments that they’re in and the kind of do it yourself are, so to speak, they just want to do it all on their own. There’s a lot of people that need help.

Brendan Erne (07:53):
And I’ll be honest. I mean, money, in general, is one of the most emotional aspects of anyone’s financial life and so having someone there to talk to about that can be really beneficial for a lot of people.

Robert Leonard (08:07):
I don’t have these details, so I’m curious to learn from you, how has compensation changed for financial advisors as we’ve transitioned into a fee-only and fiduciary role for financial advisors, are those types of advisors making significantly less? And of course, I mean, this is going to vary wildly, but just generally speaking as a fee-only advisor and a fiduciary who’s not making their living from these large commissions, are those types of advisors making significantly less than someone who did have those large commissions?

Brendan Erne (08:38):
The answer is yes. I mean, as a company, you are making less because you’re charging a flat fee relative to going out there and promoting all these products, which often a lot of advisors used to have those flat fees as well, in addition to making commissions. And so there is just… I think that’s also what’s one of the best things that’s happened to them over time, is it’s really just been steered towards the investors’ benefit, and we’ve seen costs fall pretty significantly over the last several decades. And so yes, for a financial advisor, it’s more difficult, so you probably have to take on more clients in order to achieve that same kind of scale, so to speak, which is why obviously the use of technology can be beneficial to help you scale. But yes, as a whole, obviously you’re out there making huge commissions by selling products you’re probably getting a lot more profitability.

Robert Leonard (09:24):
Fast forwarding from that point in your career to 2018, you pivoted in your role at Personal Capital a bit to lead a new project that was being launched focused on socially responsible investing. What exactly is socially responsible investing? Why were these types of new portfolios needed?

Brendan Erne (09:44):
So maybe I’ll start with your second question first, why the portfolios were needed. So as a firm, at Personal Capital… Well, as the director of portfolio management, I had a line of sight into all of our incoming clients and all the different things that they wanted to do or customize within their portfolios. And we have about, I think a third of our clients have some form of customization on their portfolio and a lot of them came in with, well, I don’t want to own tobacco, or I don’t want to own big oil. And they would have these specific things that they’d want to exclude from their portfolio, which we could, of course, we could do very easily. But I think what occurred to me, it was that there was this missing gap where, yes, we can make those one-off customizations, but there’s no holistic portfolio that can also address companies that are doing better on certain sustainability metrics. And so that’s where the idea came from, was to try to create a more holistic unified approach that can tackle a few different issues.

Brendan Erne (10:38):
And then I’ll jump now into the kind of what is socially responsible investing. So I think it’s a couple [of] different things. There’s been an evolution really where it started. I mean, this is so widely used today actually is just an exclusionary investment or what’s called negative screening. And that’s what I just described of people wanting to exclude more controversial categories from their portfolio. So again, this is widely used across the world today, but I think where the industry has transitioned to is the next phase, which I’m not sure if you’ve heard of the term ESG, which stands for Environmental, Social, and Governance. And really these are kind of the three separate categories or pillars, so to speak that are used to assess a company’s social responsibility or its sustainability.

Brendan Erne (11:21):
The environmental category might include categories like carbon intensity reduction programs or renewable energy projects, things like that. The social category might be employee diversity or health and safe working conditions for employees. Whereas governance is more traditional things, board independence, executive compensation, things of that nature. But we now have a number of different firms that actually score companies based on these sustainability metrics. And so you can actually assess a company’s ESG score and then proactively go out and find companies as a result that are better managing environmental, social, and governance issues. So that’s called positive screening or inclusionary filters. So you now have the ability to kind of do a combination of both. You can not only just exclude categories that you don’t want to own in your portfolio, but you can go out and find companies that are better managing or proactively addressing environmental, social, and governance issues. So that’s really where I think SRI has transitioned to today is the focus on ESG.

Robert Leonard (12:22):
So would you say that SRI, which is Socially Responsible Investing is the same as ESG, or are they slightly different?

Brendan Erne (12:29):
So within the industry, there are technical differences between the two. I try not to let clients or investors get too caught up in that because I think ultimately it all rolls up into the same end goal, which is a more sustainable portfolio that aligns with your values. And so technically like the exclusionary screening that aligns with your values is more of the socially responsible side of things, that’s more value-based whereas ESG might be a little bit more financial metric-based, but as a whole, I think the two go absolutely hand in hand, so I try not to even differentiate between the two when I’m talking to clients. To me, they’re one and the same.

Robert Leonard (13:06):
What made you want to lead a project like this? Why did you resonate with Socially Responsible Investing personally?

Brendan Erne (13:12):
I mean, there’s probably a number of factors that played a role here. I mentioned I grew up in the Seattle area. I think it was a Pacific Northwest. I’ve always just kind of had an affinity for the outdoors, just really enjoyed nature. I like to think I’m a passionate photography enthusiast as far as like nature and landscape photography and so I just really enjoy that aspect to it. So that’s kind of geared me towards the environment side of things and so I’ve always kind of had… that’s been in front of my mind is just kind of being respectful to nature and the environment.

Brendan Erne (13:38):
And then the same time, 2018 was right about the moment when my wife and I were having conversations about starting a family and we talked about it and we just… There are all sorts of these risks out there and I just want to make sure that my family has the same opportunities to see a better world and to go to Yosemite and see it for all its majesty and not have wildfires completely decimate all the natural wonders that I’ve been so fortunate to be able to see. And so that’s another aspect to it. And just being in the Bay Area and in California in general, I mean, I know climate change for a lot of people seems like this far-off intangible thing. I mean, it’s really not. I mean, in the San Francisco Bay Area, we have just been hit over and over and over again by these just devastating wildfires where the entire city area is just covered in just shrouds of smoke.

Brendan Erne (14:28):
And I know that’s not entirely driven by climate change. There are other factors involved as well, but that’s a big driver and it’s a very tangible thing. It was just front and center and I saw the clients that were asking for these types of things in portfolios, so I just used it to kind of become my passion project and just my sole focus was to try to help investors kind of invest in a more sustainable manner moving forward.

Robert Leonard (14:49):
If an investor decides to invest in a way that is more focused on socially conscious companies, are they accepting lower returns than otherwise could be achieved? What does data show for socially responsible companies’ returns versus the broader market?

Brendan Erne (15:10):
That is a great question. And that is probably the single biggest hesitation you see anywhere for someone that’s considering a socially responsible portfolio. The fear is that by investing this way, they are going to have to sacrifice returns relative to traditional fund investments or just investing in general. And there’s been a lot of research in recent years, kind of in the last like five to six years or so on this very topic. And I’ll break it down in a couple of different camps. There’s the financial performance of companies that are kind of better managing sustainability metrics, so like their profitability, for example. And then you also have the stock performance of companies that again, if you align your portfolio towards a more sustainable or ESG mandate, how they’re going to perform.

Brendan Erne (15:55):
And so on the financial aspect of it, what we’ve seen is that these sustainability metrics, ESG issues, they’ve been proven to be financially material to a company’s bottom line. What I mean by that is they actually impact profitability. So when you think about, let’s just say an industrial manufacturer who then focuses on reducing their carbon and water footprint. Well, what does that do? That increases the resource utilization and lowers their cost of capital that flows directly into earnings and higher profitability. And the same can be said for companies on those social and governance factors, companies better able to retain top talent or treat their employees well are better able to retain top talent. Whereas greater levels of diversity, particularly at the board level have been linked to greater levels of innovation and financial performance.

Brendan Erne (16:43):
And that’s really the common theme that we’ve seen emerge from all this research on sustainability metrics is that those performing better managing ESG issues tend to be more profitable and produce stronger financial results. Now, does that translate into better stock performance? I think the pivotal piece of research on this that I like to point to was done by Deutsche Bank and the University of Hamburg, I think back in 2015. This was a meta-analysis where they aggregated over 2000 studies on socially responsible and ESG investing, going back as far back as they could in time. And the primary conclusion or one of the primary conclusions of this was that you did not have to sacrifice performance by investing more responsibly, relative to traditional fund investments.

Brendan Erne (17:32):
So that right there dispels the biggest myth around SRI or ESG investing is that you have to sacrifice returns. Now there’s even a growing body of research in recent years, you might actually even get a performance benefit from investing this way. I mean, you’ve seen this from a few different or a number of different out there. There’s one out of the Harvard Business School. I know MSCI and Sustainalytics have both produced research on this topic. So time will tell whether this holds true, but if you know you don’t have to sacrifice performance, I mean, in my mind, why invest any other way?

Robert Leonard (18:04):
You just touched on exactly what my next question was going to be is do you think, just personally, and this could be your own gut. Do you think over the next five to 10 years… You mentioned how these companies are actually often more profitable. Do you see that leading to actually better stock returns in the future?

Brendan Erne (18:22):
Unclear whether I expect outperformance from this. I mean, to be honest, I’m kind of ground in my investment philosophy in that I’m expecting this to perform the same as it does to traditional fund investing, but if it does it outperform, great. I mean, that’s icing on the cake, but I do believe more and more companies are beginning to realize the financial benefit of better managing these types of issues and how that can actually impact their profitability. So I do think you’re going to see more and more companies incorporating ESG mandates within their own ranks to try to kind of evaluate those metrics.

Robert Leonard (18:57):
Do you think there’s a…I guess you could call it a misconception for investors that if a company is focused on these ESG measures, that they’re actually going to be less profitable? Because I know for me, at least when I first started looking into ESG, I figured that’s going to come with increased cost, not actually increased profitability. So do you think there’s a misconception with broad individual investors with that same idea?

Brendan Erne (19:21):
Yes. I do believe there’s a misconception. I think it’s funny within the industry [that] there are kind of two driving forces. So really the ESG, the Social Responsible Investing it started in Europe and that’s where it gained the most traction and that’s where it’s probably the most widely used today. And it transitioned to the US primarily in the institutional world and the kind of ultra-high net worth family office, so to speak space and they were transitioning to it. And that’s where it’s growing like wildfires in the institutional world because specifically, they’re beginning to recognize the financial benefits that apply in ESG actually can improve profitability, improve risk management, things of that nature. And what you’re starting to see, I think, as this to trickle down into the retail space for individual investors where slowly, I think they’re starting to realize, “Oh, wait, no, there could be benefits to investing this way. This isn’t just like a feel-good movement.”

Brendan Erne (20:17):
It’s kind of like the weird have your cake and eat it too. Like you can align your portfolio with your values, invest towards a more sustainable future, but also potentially produce stronger financial results.

Robert Leonard (20:28):
We talked a couple of minutes ago about the very minute difference between ESG and SRI. Is there a difference in returns for ESG versus SRI? Even though they’re pretty similar, but there is a slight difference you mentioned, so do you see different returns for those two types of investing?

Brendan Erne (20:46):
It’s totally dependent on the situation. I think with an SRI it can be a little bit dangerous if you take it too far, if you start excluding too many categories from your portfolio, then you start to sacrifice diversification and in that sense, you could potentially have a performance detriment. Now, again, this could go the other way and you could just isolate one segment of the market that just goes up and up and up. But I think that just presents higher risks the more you remove from the portfolio. So you have to still focus on diversification. I think the result mixes two, whether one or the other produces no better return.

Brendan Erne (21:23):
I think, again, the one study I continue to point to is that broad base that addresses both SRI and ESG going back in time and just found that as a broad consensus portfolios did not underperform conventional investments.

Robert Leonard (21:38):
With nearly every person having a different definition of what socially responsible is, does that make it difficult to assign these general returns to these types of investing? Because let’s just say you and I build two different portfolios that we each define as socially responsible. I’m going to have a different set of companies than you because maybe I don’t think oil’s bad, but I think tobacco is and maybe you’re the vice versa of that. Just as an example. Everybody thinks about socially responsible different. So does that make it difficult to apply these broad return numbers to these strategies?

Brendan Erne (22:14):
A little bit. I mean, I think ESG again is a little bit separated from that because that has more defined characteristics that have kind of grown more refined over time and those continued to improve and be standardized. They’re not standardized yet. But yes, every investor’s values are going to be different and that’s one of the challenges with a socially responsible portfolio is how do you address all of that? So I think there’s kind of a broad level of consensus on some of the more controversial categories. People will probably say tobacco, probably say maybe small arms, firearms, things like that that maybe should be excluded from the portfolio, but other people might view it differently.

Brendan Erne (22:48):
And so this is where I think having a portfolio of individual stocks is actually beneficial for anyone investing in a socially responsible or ESG portfolio because it gives you the ability to make those types of customization. So if, for instance, think Walmart’s not a good investment or it goes against your values, you can exclude it from your portfolio. If you’re investing in traditional fund investments, you can’t do that. So again, I think having individual stocks allows a greater level of customization so that one can truly tweak something, a portfolio to their values.

Robert Leonard (23:22):
I want to dive a bit deeper into the diversification piece. A lot of the new ESG funds and ETFs make it easier than ever to invest with your own values in mind. But what I’ve seen with a lot of these funds is that they tend to be quite concentrated in one sector. How does this impact investors? What solutions are there to not be so concentrated yet still invest with your values in mind? Is it just having an individual stock picking portfolio like you just mentioned?

Brendan Erne (23:53):
That’s one way. It’s difficult when you’re doing off-the-shelf funds because yes, as you mentioned, they can often be heavily concentrated in a single area. Things like tech or com that’s very, very common. And to highlight kind of the potential impact of this, I would even take it back further in time before even the application of the ESG was around to just kind of passive indexing, let’s say in the year, 1999, or in the year 2007. Let’s say you were thinking you want a diversified portfolio, so you go out and you buy the S&P 500 Index fund. Lo and behold, over a third of your money was going to be invested in the tech sector. And we all know what happened there, in the.com bust, that sector alone declined 80% in value.

Brendan Erne (24:38):
So that had a significant impact on investors’ portfolios and the same thing happened in the financial crisis, 2007 and 8. Financials was by far the largest sector in the S&P 500 and it was over about a third of it approximately, and that also declined almost 80% in value in the subsequent downturn. And so you have to be careful when you buy funds that have that kind of concentration. So you want to own technology. You want to own com. You want exposure to most areas of the market, just not when it’s a third of your portfolio. So what I try to tell people when they’re building a portfolio, let’s say with funds and they go out and they pick like a core ESG fund for kind of their core US equity holding within their portfolio, you can supplement. You don’t have to have every aspect of your portfolio socially responsible or ESG aligned because the thing you don’t want to do is just sacrifice the core principles of investing, which is diversification. I mean, that is the cornerstone of any successful portfolio over time.

Brendan Erne (25:39):
And so again, if you need to supplement by adding some sector-specific ETFs that are not ESG aligned, or maybe small-cap or whatever the case might be to kind of offset some of the concentrations that you have in your core fundholding, that’s probably a good route to take.

Robert Leonard (25:56):
What do you see as the future of socially conscious investing or ESG investing?

Brendan Erne (26:02):
The future I think, there are a few things. The first being, I think, ESG is going to be widely accepted as no longer just socially responsible. I think I alluded to earlier, more and more companies are beginning to realize that ESG is financial and material items, and this is just another prudent layer of financial analysis. So you might even see some companies out there that don’t have a socially responsible offering that still applies in the ESG filter. I think demand is going to grow significantly in ESG, primarily driven by millennials. I don’t know if you’ve ever heard of the great wealth transfer, but essentially this is over the next several decades, there have been estimates all over the place, but roughly 60 or more than $60 trillion in wealth is going to transition from the older generations and the baby boomers to millennials. So they’re going to have all this capital that they want to invest.

Brendan Erne (27:00):
All the research has shown that millennials just as a group, have a higher propensity to align their values with things like the companies they work for, the brands that they buy products from, as well as the investments that they select in their portfolio. So I think that’s going to be a huge driving force for the industry going forward. And I also think there’s just going to be more activism. You’re going to start to see more specific companies excluded across portfolios across the country or included, that’s just the standard exclusionary and inclusionary filters, but also proxy battles. I don’t know if you saw the news recently, but something pretty unprecedented happened with Exxon about a week ago, where a very, very small activist investor with a very, very small fraction of ownership in Exxon successfully added new seats to the board specifically for the reason that Exxon is doing very little to prepare for a low carbon economy in the future.

Brendan Erne (27:55):
Now, this is just unprecedented that anyone’s been able to challenge a company like Exxon on such an issue, let alone such a small activist investor, but that just goes to show how much demand there is for this type of analysis and this type of change for companies to partake in. They got the likes of BlackRock and Vanguard and all the big institutional owners to get behind them and really drove a pivotal moment in Exxon’s history. So I think we’re going to see more and more of that kind of proxy fight as we move forward.

Robert Leonard (28:25):
When behavioral finance came around, it was this new segment of finance, this new segment of investing. And I don’t want to say we’re completely there, but we’re almost to a point where there really isn’t behavioral finance anymore. It’s just finance because we know that behavior is intertwined into finance and there shouldn’t be a separate category. It’s just finance. And I had a guest Daniel Crosby on the show, he’s a leading Ph.D., a behavioral scientist. He explained that concept to me and it totally made sense. Do you think we’re going to see that same kind of phenomenon with socially conscious investing? Do you think maybe SRI and ESG, just, I don’t want to say go away, but just more or less kind of fade because it’s just finance? All these companies are going to fit into this category in the next say 10 years, and now it’s just finance. It’s just investing.

Brendan Erne (29:13):
I absolutely believe that over time that that will happen. I think you’re already starting to see that take place in Europe where new laws and regulations are being put in place addressing these types of things. We’re starting to see it the SEC in our country start placing additional focus on it. I think it’s just growing to a point where there’s so much momentum behind it that I think it’s unstoppable at this point, but I do think to your point, yes, this is just prudent financial analysis. You have to take these factors into account. For companies, they have to take sustainability seriously, simply for the sustainability of their own future now that they know that it can improve their competitive edge. Of course, they have to address this. And so, yes, I believe this is going to be mainstream and just accepted as part of traditional investing in the future.

Robert Leonard (30:01):
When you started at Personal Capital back in 2011, it was just a small startup in a crammed tiny San Francisco office. Fast forward 10 years to today and Personal Capital is much, much bigger and you’ve survived all of those growing pains by leveraging technology to be a great problem solver. Talk to us a bit about how you’ve used technology in your career over the last decade.

Brendan Erne (30:26):
Yeah, it’s a great question. And a lot of places, to be honest. I mean, in the startup world, everything is about scale, right? And so we’re looking for whatever opportunity we can to scale an operation. I mean, I think our primary goal was to take services that are reserved for the ultra high net worth segment and make them widely available to average investors. And the only way you can really do that is by integrating technology into your process, so that it’s a combination of human hybrid with technology approach.

Brendan Erne (30:59):
And I think we did this in a few different ways. I mean, one, we just had a virtual advisor force. So rather than be this company that has to have a brick and mortar office in every single city around the country, we decided we’re going to centralize this and use more virtual meetings. So the advent of technology is really beneficial there and provided a lot of efficiencies. And by doing that, it’s lowered our costs. Gives us the ability to lower the costs for our customers. So again, I think you’re going to see more and more of that in the industry as we move forward.

Brendan Erne (31:31):
The other things, I mean, these are just simple things that are so antiquated in the financial services industry, like just account opening, where you need to fill out all these forms by hand in the presence of an advisor then has to mail them to here or there. Whereas we use technology to do that all digitally. And so we’ve just made a seamless kind of way to open an account. And even some of the portfolio management tasks like rebalancing and tax optimization, we help automate those. And so again, we’re trying to remove some of the, I guess, kind of routine daily processes and automate those.

Brendan Erne (32:03):
And then I think another one of the biggest ones that we did was really, we made someone’s financial life dynamic in real time. And what I mean by that is, I don’t know if you’ve ever used our financial dashboard, but it essentially… Yeah, it’s a platform where you can aggregate all your financial accounts and by doing so we can actually see everything in our client’s financial life, real time. In the traditional model, you would go to an advisor and spend all this time, discussing everything that’s happening in your life. Maybe you don’t even remember it correctly or the different values of your accounts correctly and then they input it into a system and they give you a financial plan that says, “Okay, this is what we need to do moving forward.” And then the second you walk out the door, essentially, that plan is partially out of date. It just gets more out of date over time. And then you just have to repeat this, like once a year, you’d meet with your advisor and go through this whole laborious process to do this.

Brendan Erne (32:54):
But with our financial dashboard, that’s a great piece of technology where, again, we see those changes in people’s financial lives [in real-time. So if somebody has an inheritance or is one year closer to retirement or whatever the case is, that provides an alert and we can immediately just prompt them, “Okay. It might make sense to become more conservative in your strategy.” Where we remove that whole process of having to go through an entire information gathering and reevaluate someone’s goals. And so that’s been a really cutting edge piece of technology that’s provided a lot of help for us and our clients.

Robert Leonard (33:27):
One of the things I find interesting about this conversation, about SRI and the evolution of financial markets is this underlying idea or force of individual investor’s power. If we think about it, the rise of socially conscious investing is largely driven by individual investors demanding easier access to those types of companies. I mean, you even mentioned it, you guys kind of essentially built this or decided to offer this because you saw so many people wanting it. So I think this is just another example. We saw GameStop. We saw Dogecoin. I mean, there are so many different things where individual investors are just driving change in the financial markets. Do you think we’re getting to a point where individual investors hold too much power? Is it possible that we get to a point where that is the case?

Brendan Erne (34:15):
Interesting question. I would have to say, I think that may be less of a risk, at least from a systemic market standpoint, that poses a form of systemic risk only because when you look at the individual investor space, yes, I think there’s growing power amongst individual investors, particularly with, you have enough trading apps that have made complex investing really, really easy and gamified it and all of that. But at the same time, I think it’s important to note that institutions still make up roughly 80% of equity capitalization out there and so the vast majority is still in the hands of large pension funds, foundations, retirement plans, those types of companies that are not the ones driving the type of speculation that you see in GameStop and Dogecoin and those types of things.

Brendan Erne (35:05):
And so I think there’s more stability behind the scenes than you’re thinking. I mean, I don’t think investors, like they did with GameStop could do that to a larger company that didn’t have the type of short selling against it. So I think there were some unique opportunities and that was a very interesting thing that happened, but as a whole, I don’t know if that presents a systemic risk to markets moving forward.

Robert Leonard (35:26):
You mentioned how there are apps and programs that are kind of gamifying the stock market and just providing increased access, I guess you could say. Is this a good thing for investors or have things become too easy and that old saying of you can have too much of a good thing has become true?

Brendan Erne (35:44):
I am all about greater transparency and greater access. I think in some of the things that we’ve seen recently, what we’ve lacked is that transparency and so I think gamifying the markets and allowing investors to go leverage up on margin without really knowing exactly what they were doing, I mean, that presents some risks to the individual investor. And so I think investors do need to be careful, but no, the ability to access capital markets and invest with ease. I mean, that’s the whole goal here, right? Because it used to be such a complicated process and you’d have to go through all of these hoops to get there. And these middlemen are the ones that drove up costs in the industry. And so by eliminating all those middlemen, you can lower costs for the investor. And honestly, I think that’s the evolution that we’ve seen over time of financial markets is just, I think greater… has provided investors with just more opportunities for success, I think than they had in the past.

Brendan Erne (36:41):
So what I mean by that is that not only is easier to invest but more information is widely disseminated to investors. There’s been, I think, a greater proliferation, as I mentioned earlier of registered investment advisors versus broker-dealers. So people are beginning to recognize the difference between the two and who’s a fiduciary, who’s not by doing that they can make smarter choices with what they invest in. I also think there’s been a greater transition to passive management over time, which I think is the better way to go about achieving wealth growth over time, relative to active management and higher cost strategies.

Brendan Erne (37:16):
And again, this is all just manifested itself and just lower costs for investors. And I think if you go back and look at certain studies on investing over time, the cost is one of the primary drags on returns, and the higher the cost, the worst investors do to the extent that we can lower those through greater access to capital markets, cheaper access to capital markets, better information. That’s a good thing in my mind.

Robert Leonard (37:39):
Has this increased access made it more difficult for investors to invest for the long term? I know it’s great. And I agree that it’s great for people to have easier access to get invested. But now, because we can just open our phone and sell a position, it makes it harder for a lot of people to hold to the long term, which is often, and Warren Buffett totes this as one of the largest impacts of his success and just any individual investor success. Has that made it more difficult in your opinion for investors to hold to the long term?

Brendan Erne (38:08):
Probably it does. Unfortunately when you’re doing it yourself or, and you’ve gamified investment, if you’re using that kind of platform to do the majority of your investing, it inherently promotes speculation, kind of short-termism and I think that that can drag on people’s portfolios and their returns over time, because I think all the research shows that… I mean, if the professionals can’t even do it consistently over time, how can just the average individual investor, they just don’t have access to the same kind of resources. And so, yeah, I mean, and it’s why I encourage people to work with advisors where possible. You just have to ask the right questions with the advisor that you choose to make sure that they are a fiduciary, look for low cost registered investment advisors or advisors that aren’t compensated based on what they’re selling you, but working with a professional can be a great way to kind of get around those mental, I don’t know, biases, so to speak towards short-termism just because you have someone speaking in your ear and trying to provide that rational voice, guiding you towards retirement.

Robert Leonard (39:07):
If someone listening to the show today is brand new to SRI or ESG, or just investing in general, where do they start if they want to get involved in SRI and ESG investing? How can they get involved in the right way?

Brendan Erne (39:23):
So this goes back to my comment earlier about kind of the, do it yourself or versus professional management. So I think those are the two approaches that you can take. I mean, if you’re a do-it-yourself and you truly are, you enjoy doing the reading, you enjoy doing the research and you have the time to do so. And so I think the best way to go about that is to look for low-cost options. First of all, the benefits of a do-it-yourself approach, it is very easy. You can find low-cost options out there that don’t cost a lot of money and they’re just easy. You can buy one fund and you’re automatically invested.

Brendan Erne (39:54):
But as we alluded to earlier, they come with pitfalls such as lack of diversification, and then you have to supplement with other aspects of the portfolio, but I think Morningstar is a good resource to go to because you can go in and you can filter based on sustainability portfolios or funds, and you can see what’s available. You can see the fees that are involved, look for lower-cost options. They even have sustainability ratings on specific funds and so that might be a way to go about it. But as a whole, I think there’s just a lot of information floating around here, and obviously, I’m a little bias working for an advisor, registered investment advisor that focuses on this, but my preference is to work with a professional. And there are a few reasons for this.

Brendan Erne (40:34):
Yes, it might cost a little more than going out and buying a passively managed ESG, ETF, but at the same time, it gives you the opportunity to own individual stocks by doing that that makes things like tax optimization easier. You can better customize your portfolio if there are any companies that don’t align with your values and you want them removed. There are just benefits of working with a professional that aren’t available in the do-it-yourself world. That’d be my choice. You can Google ESG managers. And if you’re working with somebody already, I would say ask them, that’s the endpoint that I want to make is just ask, like if you’re working with a professional, they have to have some form of socially responsible or ESG offering at this point. And if they don’t, that’s probably a red flag because really this has gained enough momentum where everybody should have an offering in this space. Again, peel the wrapper back and make sure you’re looking at everything that you’re investing in, that it does align with your values and that they’re not compensated based on what they’re selling you.

Robert Leonard (41:29):
Which books about investing do you enjoy that you’d recommend listeners of the show check out after this episode?

Brendan Erne (41:37):
Well, I think one of the better books out there as far as just investing, in general, is from Jack Bogle, that’s The Little Book of Common Sense Investing. And I forget what year he wrote that, but it really champions the idea. And for those unaware, Jack Bogle started Vanguard, so very, very famous. Of course, he passed away a couple of years ago, but the book just really highlights the power of broad diversification and low costs and that you can achieve the most optimal kind of wealth growth over time by focusing on those core tenants of a portfolio. So I liked that aspect of the book and that’s really a core philosophy of my company as well, but I think there are also shortcomings that people don’t really realize in the passive investing space as well, that they’re not considering.

Brendan Erne (42:23):
And that’s mainly that a lot of the passive funds out there are market cap-weighted. What I mean by that is that the largest companies in the market make up the largest percentage of that fund. That’s based on the size of the company and that’s a little flawed in the sense that just because a company is large, that doesn’t necessarily mean it should have an outsized portion of your portfolio. And there have been numerous studies on this and the studies have shown that once these companies become the largest in the market, they tend not to be moving forward, meaning they tend to underperform on a forward-looking basis. And market cap weight is just an inherent way to buy high by what’s already gone up and sell low, kind of avoid what’s undervalued in the market. So it’s a systematic way to kind of do the opposite of what an investor is supposed to do, which is buy low and sell high.

Brendan Erne (43:09):
So I do fully agree with passive investing, not trying to actively pick stocks and low costs, but I do think there are flaws. So I just point that out, but this is a great foundational book for anyone getting started in investing. And then when it comes to the ESG and socially responsible aspect to it, this isn’t a book, but actually a website. I would steer people towards Bloomberg. I don’t know if you’ve ever read Bloomberg, but they have what’s called the Bloomberg Green section and it focuses purely on all sustainability within kind of the corporate world, within the investing world, how it impacts companies. And so that’s a great resource to go and just kind of read what’s the most kind of up-to-date trends and things that are happening in this space.

Robert Leonard (43:51):
I will put a link to both of those resources in the show notes for anybody that’s interested in checking those out. Brendan, thanks for joining me on the show today. Where can people listening, connect with you?

Brendan Erne (44:05):
Yeah. personalcapital.com. I mean, that’s where you can go to find out… I mean, I’m on obviously LinkedIn, but our website does a good job of highlighting all the areas that we focus on, all the core tenants of our investment philosophy, which I’ve hopefully, I’ve been able to voice over this podcast. But yeah, I mean, it has all the information on our social responsible offering, personalcapital.com.

Robert Leonard (44:26):
I will put a link to personalcapital.com in the show notes below as well. And I’ll also put a link to some other ESG and SRI-related resources. We had Carrie Rich on the show a few months back, she’s a hedge fund manager or VC, I should say, who leads an ESG focused VC, which was an interesting spin on this conversation to get as well. So I’ll put a link to that in the resources below for anybody that’s interested. Brendan, thanks so much for your time and appreciate you joining me.

Brendan Erne (44:55):
Fantastic. Thank you, Robert. Appreciate it.

Robert Leonard (46:56):
All right, guys. That’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro (47:02):
Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.