Advisors Must Embrace ESG or Risk Losing Clients, a Top Merrill Advisor Says

Q&A December 07, 2022 at 05:12 PM

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Environmental, social and governance investing is controversial, with many advisors simply dismissing the funds as underperforming investments. Meantime, ESG investing is growing at a rapid clip: Some expect these assets to climb to $1 trillion by 2030.

Raj Sharma, a top Merrill Lynch private wealth advisor whose group has $6 billion in assets under management, argues that "advisors who fail to understand and embrace the ESG paradigm risk losing market share and clients," in an interview with ThinkAdvisor.

Though ESG "seems like a trend today, it will be ubiquitous tomorrow," he forecasts.

ESG "resonates" with millennial and Generation Z values. "Advisors need to understand ESG so that if they have a client with a strong interest in investing according to their value system, they're ready for it," Sharma adds.

The founder of The Sharma Group has been with Merrill for more than 35 years, starting at the firm in 1987, seven years after he emigrated to the U.S. from his native India.

Over the decades, he has built, in the words of Andy Sieg, Merrill Lynch president, "a phenomenally successful advisory business."

A member of Barron's Hall of Fame and one of Forbes' Top 100 Wealth Advisors, Sharma heads a team of 18 in Boston that works mainly with entrepreneurs, or, as he calls them, "wealth creators." His minimum is $10 million.

The financial advisor captures his longtime advisory experience and philosophy in his new book, "The Purposeful Wealth Advisor: How to Build a Rewarding Career While Helping Clients Achieve Their Dreams" (Amplify – Dec. 6, 2022), for which Sieg wrote the foreword.

The practical guide, enhanced by Sharma's personal spin, takes readers through everything from establishing a unique brand to incubating new clients to getting through crises to reasons for advisor failure.

In the interview, he opines: "This is a lucrative business, but it's got to be driven by a larger mission … Purpose is about really having an impact on people, enriching your clients' lives, providing them with peace of mind and allaying fears and concerns."

He started out in India in sales, marketing and finance. Arriving in the U.S. to pursue a career in media, he picked up a second master's degree — from Emerson College — and worked in film and video production.

He changed courses to become a financial advisor when his own broker told him it was a profession for which he was well suited.

ThinkAdvisor recently interviewed Sharma, speaking by phone from his home office in suburban Boston.

He busts the "myth" that to do well in the business, financial advisors must be aggressive salespeople. His style has always been different:

"If you present yourself as a resource, people are far more comfortable than if you're trying to sell them something. You don't have to be the proverbial car salesman to close a sale," he says.

Here are highlights of our conversation:

THINKADVISOR: "Advisors who fail to embrace the ESG paradigm risk losing market share. Today ESG might be a trend, but tomorrow it will be a tsunami," you write. Why?

RAJ SHARMA: ESG is very similar to financial planning in the 1990s: It seems like a trend today, but it will be ubiquitous tomorrow.

Many of the so-called stockbrokers in the '90s who embraced financial planning became successful, and financial planning became a very important cornerstone of the business.

To be successful in the ESG space, advisors need to understand what ESG is so that if you have a client who has a strong interest in investing according to their value system, you're ready for it.

It's a generational change. The millennials and Generation Z are very different from the baby boomers or people who are older than that.

They're much more progressive in their thinking. ESG resonates with their values.

Are your current clients expressing much interest in ESG?

They very much are. That's coming from the next generation. They'll say, "What's your ESG strategy?" and, "Tell me about the ESG platform at Merrill Lynch."

"Family dynamics is the emerging new frontier for advisors," you write. Please explain.

Family dynamics is understanding the [entire] family and crafting a set of strategies to make sure it's strong and independent.

Many wealthy parents say, "I'm not going to tell my children [how much money we have] because they may lose the desire to compete and become too comfortable."

But if you're a wealthy parent and your ultimate goal is to make sure your kids like each other [after your death], don't keep them from knowing about your wealth.

The best families we work with are very transparent with their children about their wealth and strategies. It binds everybody together and prevents future misunderstanding that one kid is favored, for example.

You write that "great advisors must be rainmakers," but you also say financial advisors needn't be aggressive salespeople. Please explain.

A rainmaker is someone who's not afraid to prospect — to reach out to new people. I've always felt that if you present yourself as a resource, people are far more comfortable than if you're trying to sell them something.

If you talk about best practices and the things you address with your clients — how you take care of things for them and give examples of your firm as a resource, people will find your message compelling and will sign on as clients.

You don't have to try to call them 10 times and be persistent in a salesman kind of way.

If you can convey a strong value proposition and a message that resonates, you don't have to be the proverbial car salesman trying to close a sale.

Having a larger purpose is "the North Star that shapes [the advisor's] identity and brand," you write. Why is purpose so important and powerful?

If you think of being a financial advisor as just another job to make a living, I don't believe you can have a big impact.

Purpose is larger than just your ambitions. It's about really having an impact on people, enriching your clients' lives, providing them with peace of mind and allaying fears and concerns.

This is a lucrative business, but it's got to be driven by a larger mission and a sense of purpose.

You write that growth should always be a priority. You raised your minimum to $10 million, and that resulted in dramatic growth. Please discuss.

I wanted to limit the number of clients I had because I was afraid I'd be stretched too thin and not be able to care for any one of them in a very comprehensive fashion and give them full attention.

So by raising your minimum, you're also narrowing your potential universe of clients.

But one of the things that good advisors have to do is not take on an unlimited number of clients but ensure that they have the time and energy to pay attention to their existing ones.

Why do you recommend having a "Client Bill of Rights"?

Clients should know what they can expect from your team. This needs to be a set of expectations, including an investment policy summary, financial plan, transparent and fair pricing model and a high-touch approach to service.

It gives clients a sense of comfort that they're dealing with professionals.

It's in the whole spirit of being transparent and fair, and it's also a competitive advantage. You're saying, this is what you can expect from us if you join us. I think it sends a very powerful message that you can [execute it all].

Tell me about your firm's "11 Dimensions."

These are the various aspects you can touch in a client's life, like investment management, asset management, liability management, estate planning, trust planning, tax management, legacy planning, philanthropy [and more].

I've built expertise within our team of 18 in a variety of function areas. So I'm like the conductor of the orchestra.

You write about the importance of reinvesting 20% of your profits. Does that include paying the salaries of some of your support staff and financial planners?

Yes. I have consistently done that because I'm running a business, and if I don't reinvest in my business — with people and tools — I won't be able to grow.

This certainly has worked very well for us.

[Advisory] is a very entrepreneurial business in many ways, but you have to invest first before you can reap the rewards.

Once you accomplish a certain level of business, your firm will [likely] say, "We're willing to pick up that person's [salary].

You consider a bear market, such as the one we're in now, an opportunity to buy. But you also write, "Don't time the market." How do those two approaches differ?

We [assess] every client based on their age, objectives, number of years they're away from retirement and their goals.

We don't believe that market timing is the way to go. We don't try to time the market per se, but [investors may change] from, say, value to growth, large cap to small cap, domestic to international. That's done based on the strategy we're using.

What's a specific situation?

Maybe you have too much safe money — in bonds, say — and we don't believe you need all that. So maybe we can take advantage of the market and add [equities, for instance] to your portfolio.

For new clients, a bear market is a wonderful opportunity to get things on sale.

I'm strongly of the view that even in this market, once you pass the period of uncertainty — that is, once inflation starts to abate — the markets will find their footing and that we'll do well.

Please describe your bucket approach to investing.

We use four buckets. The first is traditional fixed income for your lifestyle needs, depending on whether you're retired or working. You need a certain amount of money, which we call capital preservation.

The second bucket is much more income money, which can be municipal bonds, corporate bonds or other types of income products.

So this is income regardless of what happens to the market. The value is independent of the equity market.

The third bucket we call our equity total return bucket, which is investing in domestic or global stocks, small cap, large cap, international [among others].

The fourth bucket has alternatives to equity and bonds. This can be real estate, private equity, commodities.

What do you think should be done to increase financial advisor diversity? Merrill Lynch has only 4.5% Black financial advisors and only 21% female advisors, you write. That's somewhat under the average industry proportions.

I [recommend] a funnel approach. It has to start with financial [education] in schools. In inner-city schools, for example, financial literacy isn't taught.

These kids should be exposed to the corporate sector with internships and co-op programs so they understand the range of careers available to them.

For many years, there were misconceptions about the field — that to be a financial advisor, you had to have a rich uncle or have [many] contacts.

I built my business on my sheer persistence and grit, working hard and presenting my case. [Others] can do that [too].

Many firms say they have diversity and inclusion programs in place. So why isn't more progress being made?

It's one thing to talk about it and another to actually do it. It has to start from the high school level or earlier through internships and job placement.

Try to give that opportunity to as many people as possible.

It would be great to see more women and more [racial and socio-economic] diversity in the industry. It makes the business stronger.

What can be done to "jump-start a struggling advisory if you feel stuck," as you put it in your book?

A lot of advisors find they're not able to grow. But just by working hard, you cannot expect different results.

The first thing I would do is reassess where you are in terms of your strengths and weaknesses and who you're trying to attract as your clients and if there's a mismatch. For example, you're trying to attract corporate executives but don't have the right skill sets for the team.

You need to think, what are my targets, who am I trying to serve? Does my team have the right skill sets? What is my investment philosophy? Does it fit into the needs of the target sector?

Reassessing and thinking like a consultant and asking yourself some very tough questions would be a good place to start.

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