Wealth Firms Lag Client Buzz over Microloans

Written by Patrick Fisher September 2, 2010 0 comment

Article published on September 2, 2010
By Tom Stabile

Budding client demand for microfinance and other “impact investments” has yet to translate into products at big brokerages and private banks. A few advisors, managers and consultants are serving up limited fare to the hungriest clients, but few wealth management firms have scratched the surface of what observers say is fertile ground.

A big stumbling block at this early juncture is that while microfinance itself – the offering of very small, short-term loans to entrepreneurs in under-developed regions – is a well-established poverty-fighting concept, it is still novel as an investment where clients buy securities that ultimately fund these loans, expecting a return. Microfinance is one of various examples of impact or “mission-based” investments that usually promise a quantifiable social benefit in exchange for a “sub-market” investment return.

The newness of these investing options is “an understandable barrier,” says Amit Bouri, director of strategy and development for the Global Impact Investing Network, a nonprofit trying to build the sector’s infrastructure. “The early focus was on pioneer high-net-worth and institutional investors who could handle early adopter risk and the high transaction and administrative costs,” Bouri says.

For now, participation from private banks and brokerages is scant, in part because many of today’s impact investments don’t fit into their current platforms. “The amount of money to build [new] platforms is prohibitive,” says Taylor Jordan, managing director of San Francisco’s Imprint Capital Advisors.

And though innovative platforms such as PayPal’s MicroPlace offer direct access to microfinance investments, they also don’t fit into the standard brokerage business model. “Most larger institutions aren’t incentivized to go out on a limb on this yet – they need a higher client demand threshold before it makes economic sense to them,” Jordan adds.

Clients do seem interested, however. The recent “Money for Good” report – compiled by several groups led by San Francisco’s Hope Consulting – polled 4,000 individuals, including 2,000 with annual income above $300,000, and found nearly 50% expressing interest in impact investing.

The survey found 12% of those with incomes higher than $1 million saying they would slot more than $100,000 to impact investments, along with 6% of those earning $750,000 to $1 million. About a third of all respondents with more than $500,000 in income said they would invest $10,000 to $100,000. The report said those levels contributed to an estimated total “market opportunity” for impact investments of more than $120 billion.

“There is a great opportunity for the wealth management firms and private banks to step up and fill this void,” Bouri says. “There is a significant opportunity for the first movers.”

It’s also an opening for asset managers, and Bouri says boutiques should lead the way.

Still, far more professionals are versed in philanthropic advice than impact investing, says Debra Wetherby, CEO of San Francisco’s Wetherby Asset Management, an independent advisor with $3.3 billion in assets. “It’s still pretty early,” she adds.

Indeed, three of the four market-leading wirehouses – Morgan Stanley Smith Barney, Merrill Lynch, and Wells Fargo Advisors – did not have representatives available to comment on microfinance investing. Only UBS Wealth Management Americas officials addressed the topic.

Not surprisingly, little distribution infrastructure exists. One Morgan Stanley Smith Barney advisor who requested anonymity says there are virtually no microfinance investing options through standard platforms at the brokerage, leaving interested advisors to “do the work themselves.” But the advisor says it’s understandable because today’s microfinance options aren’t suited for wirehouse due diligence requirements.

The advisor also says the products must be ready for inflows from the brokerage’s 18,000 advisors. “You can raise pretty serious money, so you have to be able to say what you are going to do with all of it,” the advisor says.

And then there is the thorny question of how advisors would be compensated. “Until you can find a model that can pay the distributor and compensate the advisor for adding an allocation to the sector, it would be done on a very ad hoc basis, and there would be very little growth,” the advisor says.

But until firms build platforms and infrastructure, most advisors will have trouble educating themselves and clients about these investing options, Bouri says.

A few players are trying to break the mold. One is the MicroPlace online brokerage platform. It offers investments in interest-paying notes issued by six different intermediaries that lend the capital to microfinance institutions, which in turn extend loans to micro-entrepreneurs in under-developed regions. The platform is straightforward, letting users invest as little as $20 through their PayPal accounts while offering flexibility to choose among multiple returns and payout terms, or across a slate of 45 microfinance projects in 35 countries.

But MicroPlace hasn’t found the path to advisors, in part because many brokerage firms haven’t focused on the infrastructure issues, says Ashwini Narayanan, its general manager. “We just hired someone to help us work with the advisor market,” she adds. “We’ll evolve to figure out how to use that distribution channel.”

Imprint and a few other firms are working on another front as due diligence consultants specializing in impact investments. Imprint has served institutional clients for several years, but Jordan says it recently signed on Wetherby as its first wealth management client. “We do see it as a promising market,” he adds.

UBS has spent time looking at providers such as MicroPlace, but has yet to find a clean fit, especially to handle scale, says Mark Sloss, CIO for the wirehouse’s wealth management advice and platforms unit.

“We’re at a place now where we’re seeing a push and a pull – our clients are asking for this and our advisors are asking for it, but you’re hearing about the microcredit funds being stressed even with current levels of interest and capital,” Sloss says.

UBS offers impact investing to clients through “community investment” fixed income notes from the Calvert Funds that are customized to target social benefits, Sloss says.

Advisors intent on pursuing microfinance investing are doing most of the legwork themselves, says Matt Talbot, partner at Seattle’s Bristlecone Advisors, a multi-family office with about $800 million in assets.

“We have been [sparked] by a handful of our clients asking for this type of service from us,” Talbot adds. It has led the firm to bolster internal manager research for the specialty.

Wetherby, too, says client interest spurred her firm’s decision to hire Imprint.

Credible research is important in a market where product development is young. Talbot says while “the universe is far more robust than five or 10 years ago,” it’s too early to create a diversified portfolio of impact investing products.

Bouri says impact investing products still have to clear two hurdles as a group – greater standardization that can lower transaction costs, and tailoring of available products to conventional practices such as providing track records and fitting into asset classes.

Today, most impact investing products are in private equity form, with some mutual funds and hedge funds emerging. One recent launch is Dublin-based Ronoc’s new private equity microfinance fund, and BlueOrchard has been raising capital for another large microfinance lending private equity fund. Another outfit, Contact Fund, is trying to attract advisors to its interest-paying investment notes that fund microloans to community development nonprofit organizations within New York’s five boroughs. Yet another option is a new impact investing fund of funds from Sarona Asset Management.

But for now, connecting these investments to advisors remains a distant goal. The customized notes at UBS require extensive client education, but are popular, says Bill Sutton, head of philanthropic services.

“When they see it, they get it,” he says.