Impact investing is all the rage these days. Even Goldman Sachs – the "great vampire squid" of the financial world – has formally entered the field with its recent acquisition of Imprint Capital Advisors. Imprint is a San Francisco company whose founding purpose was to provide professional research and due diligence service to investors seeking to align their investments with their values. It’s no mystery as to why Goldman Sachs would enter the world of impact investing: there’s gold in them thar hills and Goldman wants to stake its claim.
So, why would Imprint sell to Goldman Sachs? The stated purpose is to elevate and scale the business so that more people can engage in impact investing and more good can be done in the world. The real reason probably has more to do with the challenges and downright hassles of running a research-intensive business in which services are tailored to client needs and attention must be paid to relationships. It takes a certain kind of person and a certain kind of commitment to keep doing things this way when there is an alternative staring them in the face and apparently there for the asking—sell to Goldman Sachs, scale up the business, standardize research and offerings, make millions.
The recurring theme is that it’s just too hard and too expensive to do research and due diligence for individual clients with individual specifications, particularly when it’s so easy and so lucrative to gather assets and manage them according to a proprietary methodology. This holds true even if the proprietary methodology turns out to be nothing particularly unique, which is almost always the case.
The investment management industry has done a masterful job of convincing clients that they should pay high fees for average performance. Despite years and reams of research evidence to the contrary, there is a persistent and naïve hope that this time will be different, that this manager will be the next Warren Buffett. And clients generally are willing to pay for this long shot. They are also willing to pay consultants and wealth advisors asset-based fees to oversee these managers, thereby layering fees upon fees. It’s true that these fees are not always transparent or obvious to clients, because they are automatically deducted and don’t require the client to actually write a check or authorize each payment. All of this adds up to a comfortable arrangement for both advisors and clients (at least when the market is doing well).
On the other hand, when it comes to dealing with private investments and unique situations that actually require dedicated time and expertise from advisors, there tends to be a lot of price sensitivity and resistance on the part of clients. This is counterintuitive but prevalent. It begs the question of how advisors can provide important services that are not easily leveraged from one client to another.
At the heart of this conundrum lies our collective pursuit of maximum risk-adjusted returns. On the client side, if investors think they are getting above-market returns net of fees, most of them will be disappointed. Seeking outperformance—and paying for the unlikely possibility—is almost bound to fail.
Meanwhile, many advisors who tout their commitments to community investing, sustainable companies, and social responsibility persist in using conventional Wall Street analytical tools and methodology. Their hope is that this will lead them to the best available investments with the highest risk-adjusted return potential. They spend big chunks of money evaluating the landscape of available opportunities, attempting to measure risk, and using twentieth-century modeling tools to project the future in a strikingly different new century.
There is much money and hand wringing to be saved if we can let go of our dream of finding, in advance, the investment that will prove in retrospect to have been the most profitable. Clients can stop paying fees upon fees for a slim and fleeting chance of beating the market. And advisors can start being more transparent about the nature of their services and more straightforward about setting reasonable expectations.
There are other reasons to give up on seeking those investments that are expected to provide the highest risk-adjusted returns. Many of us know in our hearts that our economic and financial systems are unfair, exploitative, and destructive. To the extent we expect to maximize returns on our money—even while “doing good”—we are exacerbating inequality and ecological breakdown. It is not our god-given right to make money on money. To the extent we want or need to do that, let’s at least share the returns with others who have contributed—employees, customers, suppliers, community, the planet.
Circling back to the challenges of providing customized research and analysis at affordable prices, we find that if we aren’t always seeking the highest “risk-adjusted returns”, it becomes a lot easier and less expensive to do our research. We don’t have to spend time and money making sure we’re getting the best deal. And the truth is nobody knows in advance what the best deal really is.
In fact, we can stop thinking in terms of “deals” altogether if we give up on the drive to outperform. Instead, we can think in terms of mutually beneficial relationships. When we shift to viewing investing as engaging in relationships, we can then focus on developing our own decision-making frameworks to determine how we can recognize and support those relationships with our money.
I have no expectation that we are going to change the way Goldman Sachs operates. I don't hold hope that institutional investors (pension plans, foundations, and large asset managers) will lead the way. It’s up to independent individual investors to stand for the kinds of financial relationships we know are good and right. I know that we can hold ourselves to a different set of principles, that we can turn away from the dominant system, and that we can support each other in these pursuits.