The biggest challenge for the Sustainable, Responsible, Impact (SRI) investor is avoiding excessive fees. High fees have plagued the entire SRI industry and have, unfortunately, left many to forgo the pursuit of any values alignment in one’s portfolio.
Most investors don’t know that they pay excessive fees because they don’t even know what to look for. If you’re buying a fund, start by making sure that it’s a no-load fund. The markets are too volatile to have a commissioned sales person get 5% before you’ve even put your money to work in the markets.
The next thing you need to understand is the expense ratio. The expense ratio is the ongoing fees charged by the fund and, while it comes out daily, it’s measured as an annual percentage fee (e.g., 0.5%).
If you plan to invest in a US Stock fund, there’s no reason to pay more than 0.65% in fees. If you’re investing the assets in a large family foundation or a university endowment, you won’t have any problem finding funds that charge less than this benchmark. But if you don’t have access to institutional pricing, fees can take a big bite out of your returns.
If you go to the US Sustainable Investment Forum (USSIF) mutual fund member list, you’ll only find a small number for funds that achieve this reasonable cost threshold. One example is the TIAA-CREF Social Choice Equity fund which has a 0.44% fee for the retail share class and only requires a $2,500.00 minimum investment. By keeping its fees competitive, this TIAA-CREF fund has only slightly underperformed the cost-less benchmark over its ten-year history.
All of the other funds on this list that meet the 0.65% criteria are institutional funds and require a much larger starting investment, often as high as $1 million. The remainder of the US Stock funds available on this list to retail investors have an average expense of 1.06% and even go as high as the 1.68% for the Praxis Small Company A fund. As I alluded to earlier, there’s a lot of expensive garbage in SRI investing and the stink has contaminated the general perception of the industry as financially irresponsible.
Another US stock fund with reasonable fees is the Vanguard FTSE Social Index fund (VFTSX), which charges 0.25% for its entry level “investor shares.” Two Exchange Traded Funds (ETFs) that meet the fee benchmark are the iShares MSCI USA ESG Select ETF (KLD) and the iShares MSCI KLD Social 400 (DSI), both of which charge 0.5%. New lost cost ETFs that seek sustainable profits will be added every year.
Until recently, investors needed very large nest eggs to access low cost ESG options in the foreign markets. Now, BlackRock offers the iShares MSCI EAFE ESG Select ETF (ESGD) which covers developed markets and offers a very reasonable 0.4% expense ratio. The iShares MSCI EM ESG Select ETF (ESGE) which covers emerging markets is priced at 0.45%.
Some in the industry will argue that high fees are necessary to offer a high level of shareholder advocacy. By this, they believe that their efforts petitioning the board and executive team to make improvements mean needing to spend your retirement dollars. Most of these organizations don’t have the scale to be anything but an annoying fly. (In Part 2 of this series, I’ll share some ways to csider joining the efforts of others that don’t require excessive fees.)
Jack Bogle, founder of Vanguard Funds, illustrates the importance of watching fees with his Relentless Rules of Humble Arithmetic. Here’s the equation he offers:
Total Stock Market Returns − Total Fees from Finance Industry = Average Investor Return
If the total market of stocks for and bonds are expected to yield 7% on average (from a balanced portfolio) and total fees from the finance industry equals 2%, this leaves 5% as the average net return. This humble arithmetic concludes that the more extracted in fees, the less remains as a reward for the risk undertaken by investors.
Simply reducing your fees by 1% over a 35-year career can add an additional 20% to your total retirement savings. This means that if your goal is to accumulate $1 million, an extra 1% in fees can cause you to fall $200,000 short.
In conclusion, keep your US stock fees at or below 0.65% and you’ll have a found a solution that passes the first principle of SRI investing. International fund fees may be a bit higher and fixed income fees should be a bit lower. Your portfolio seeking a more sustainable future should also have fees that are sustainable to your own nest egg.