Transitions

Magazine

Beyond Reproach
Ethics, Integrity and Trust
by David B. Loeper, CIMA®. CIMC®

ACTUALIZING A CLIENT'S

I
DEEPEST SOCIAL VALUES
n our role as financial advisors (financial actualizers?) some of the
greatest value we can deliver is helping clients to truly make a mate-
rial and meaningful difference in the social issues they personally
value. Such social issues are often deeply personal and emotional, with
clients having either extreme passion or outright disdain, depending on

Integrity and Trust s

the issue. Our role is not to judge what a client is passionate about, in-
stead it is to help them truly understand how to accomplish and actualize
that goal to make a meaningful difference.
Take for example a client with $10 million in assets. He has extreme disdain
for oil companies. More than 20 years ago he flew to Prince William Sound to
help save the wildlife threatened by the Exxon Valdez spill. Now, his younger
brother who is a shrimp fisherman in the gulf has been effectively put out of
business by the massive BP oil spill.
The typical way the financial industry deals with such personal goals is to simply exclude stocks of oil com-
panies from the portfolio. But, is this really the BEST way to make a material and meaningful difference,
or is it merely a means of psychologically appeasing our client? If there was a more effective way for our
client to make a difference against oil companies, considering his deep seated passion, shouldn’t we truly
help him actualize his goals? sEthics,
Does Eliminating Offensive Companies from the Portfolio Achieve the Client’s Goal?
The allocation model for this client’s Wealthcare plan targets 53% domestic stocks, 7% foreign stocks,
37% government bonds and 3% cash (our balanced allocation). The largest market capitalization domestic
stock is Exxon Mobil, representing 2.45% of the total domestic equity market. With his $10 million bal-
anced portfolio fully indexed, this means he would own about 2,000 shares of Exxon Mobil that cost around
$130,000. This represents 0.007% of the average daily trading volume of Exxon. The typical bid/ask spread
for Exxon is about a penny. Though unlikely, let’s say his one 2,000 share trade (or lack thereof) impacts the
stock price by a full penny a share at the moment of the trade. The net impact of a penny a share on 2,000
shares is about $20, or less than the cost of filling his Prius with one tank of gas. Is this the meaningful

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Transitions
Magazine
and material impact he is passionately trying to achieve?
Would there be a more effective way of actualizing his
goal? If he is truly passionate and deeply emotional on
this issue, wouldn’t he want to have the biggest impact
he could?
What does it cost to avoid owning Exxon? Generally,
socially responsible funds are going to cost a lot more
than the 7 basis point expense ratio of Vanguard’s Total
Domestic Equity ETF or Fidelity’s 10 basis point cost
for their retail Total Domestic Equity Fund. Say it costs
50 basis points more on this client’s $10 million, which
means the client is paying an additional $50,000 a year.
Is the client really paying $50,000 annually to have a one-
time $20 impact on Exxon? No, Exxon is just the largest
company. Many other offensive companies will be in the
index fund albeit in far smaller proportions but with po-
tentially larger per share impacts on the stock price.
Chevron, for example, is the next largest oil company
in the index with a weighting of 1.17%. The $62,000 of
Chevron he’d beneficially own through the fund would
be about 800 shares, and with only 12 million shares
traded daily, in theory that trade could impact the price
by two cents … at least in theory. That’s a $16 impact.
By the time you get past the largest 25 positions (Exxon
and Chevron are the only oil companies in the top 25)
all positions are less than 0.66% of the portfolio. The
bottom line is that to have a market value impact in one
year to make up for the additional $50,000 every year in
expense going to a socially responsible money manager
(who may be driving around in a Hummer) you would
have to avoid buying AT LEAST 2,500 companies.
There aren’t that many publicly traded oil companies.
So instead of psychologically appeasing a client by in-
creasing his expenses, which accomplishes very little of
what he is deeply passionate about, why not add a goal
to his Wealthcare plan to make charitable donations that
are specifically targeted to our client’s passionate goal?
All other things being equal, instead of paying $50,000
20 July 2010
Ethics, Integrity and Trust
to fund manager he could make donations of $50,000 a
year to a direct charitable/educational effort on the is-
sues he is so passionate about. Wouldn’t $50,000 a year
in donations to Greenpeace or the Sierra Club have a
greater impact than the $20 or $16 of stock price impact
he’d have by not owning Exxon or Chevron?
Bringing Emotions to Life to Make a Difference
There are a lot of personal and emotional issues involved
in this reality. It is our job as advisors (or actualizers) to
educate clients about the reality behind the misconcep-
tions. Those misconceptions get in the way of achieving
the very goals they are passionate about, but this pro-
vides an opportunity for you to add significant value.
For example, there are a lot of clients who mistakenly
believe that when they purchase stock, the company gets
the money. Of course, in the case of an IPO that is true,
but IPOs generally aren’t in index funds. In reality, the
proceeds from a stock purchase go to the previous hold-
er of the stock. Thus, the proceeds from the purchase of
BP made in an index fund might very well be going to
the Greenpeace Foundation that may have held it based
on BPs “Beyond Petroleum” alternative fuel ad cam-
paign… until the recent spill. Conversely, the proceeds
from the extra purchase of Whole Foods (the organic/
health food grocery chain) that is over-weighted in the
socially responsible portfolio to make up for the missing
oil companies might go directly to BP’s pension. The re-
ality is that where your purchase proceeds ultimately go
is completely unknowable, so this is not a means of ac-
complishing your deepest most valued social goals.
Some clients feel as though owning a stock, or deciding not
to own it, is a “vote” for or against a company. The stock
market though is not an election, it is an auction. While mil-
lions of people all “voting with their dollars” by not buying
a stock might add up with each $20 impact they’d have, it
still doesn’t add up to something very significant and, more
importantly, would have much less impact than they could
otherwise have in actualizing a targeted charitable goal.
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 Ethics, Integrity and Trust
Some clients can’t stand the notion of “profiting” from
what some of these evil companies do in the form of
the dividends they receive or in price appreciation. Here
again though, with the addition of a meaningful chari-
table goal to the Wealthcare plan targeted to the client’s
passion, one could view it as the client is taking the prof-
its from those companies and redirecting those company
profits to a charity that is on a mission to clean the com-
pany up. Isn’t this better than paying a money manager
a bunch of fees to avoid buying certain stocks? Why not
use those ill- gotten profits of such offensive companies
to get those companies to clean up their act? Would you
rather those “ill-gotten” profits on those shares go to an
uncaring indifferent money monger? Think about it.
There are a number of other issues where emotions get
in the way of reason, and get in the way of achieving
the goals a client values. For example, if you just can’t
stomach owning the stock of some of these companies
(and using the profits they generate to clean them up)
where do you draw the line? What about all of the other
companies that profit from the oil company’s business?
The oil company buys all kinds of services. So, are you
going to eliminate from the portfolio the hotel chain that
hosts annual meetings for some oil companies? Clearly
some of the hotel chain’s profits are coming from oil.
How about the tractor company that profits from selling
oil companies bull dozers? What about the office supply
store the oil company uses? What about the waste and
recycling program company that services the oil com-
pany’s offices?
This ‘voting with your dollars’ thing appeases an emo-
tion but, in reality, accomplishes little else. If it is okay
to have some of these other non-oil companies in your
portfolio that profit from the oil company’s business, how
much is too much? And, even if you could draw the line
at, say, no more than 2.45% of a company’s business, how
could you even uncover how much it really is?
Finally, what about the additional uncertainty being
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introduced by not being as diversified? Additional un-
certainty will impact the confidence level of what a cli-
ent’s Wealthcare plan can incorporate in goals. So even
if there is no additional expense to construct a socially
responsible portfolio, the added uncertainty could cost
our client significantly in the goals that would otherwise
be funded. (For a 50 year plan with a balanced alloca-
tion, increasing the standard deviation by just 1% due
to the lesser amount of diversification would cost this
client $40,000 a year in distributions he could otherwise
make.) When combined with the certainty of avoiding
additional expense, our client could confidently fund
$90,000 a year in donations for his cause when com-
pared to a socially responsible portfolio.
Despite Reality, I Just Can’t Do It
What if, after educating a client about these realities,
he still insists on a socially responsible portfolio de-
spite it doing very little to actualize the goal he val-
ues? Here is where this ties to ethics. If you represent
that you help clients make the most of their life, their
goals and what they personally value, are you willing
to accept an advisory fee from a client knowing that
you aren’t able to deliver the value you represent?
Is appeasing an emotion with an illusion the ethical
thing to do? Go back to our New Year’s resolution
and remind yourself of how that is a contradiction to
building a practice that is beyond reproach.
uuu
David B. Loeper is the CEO of Finance-
ware, Inc. which does business as Wealth-
care Capital Management. An SEC Reg-
istered Investment Adviser with nearly 25
years experience, Loeper has appeared on
CNBC and has been a featured contributor
on Bloomberg TV and CNN.  Loeper joined
Wheat First Securities as vice president of
investment consulting in 1988, where he
21
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Magazine
Ethics, Integrity and Trust

served for 10 years. He was promoted to managing director

of investment consulting, and then eventually to managing di-
rector of strategic planning for the retail brokerage division.
He left his position at Wheat First Securities in 1999 to found
Financeware. Active in industry associations throughout his
career, Loeper has been a member of the Investment Man-
agement Consultants Association (IMCA) for over 20 years,
serving on the advisory council for more than 5 years, most
recently as chairman. Loeper was also appointed by the gov-
ernor of Virginia to serve on the Investment Advisory Com-
mittee of the nearly $30 billion Virginia Retirement System.
He received his CIMA® designation in 1990 by completing a
program offered through Wharton Business School, in con-
junction with IMCA.
Drawing on years of experience in financial services includ-
ing serving as a fiduciary for all types of ERISA plans, Loep-
er has authored numerous whitepapers and books including
the top selling book, Stop the 401k Rip-off! as well as The
Four Pillars of Retirement Plans, Stop the Retirement Rip-
off and Stop the Investing Rip-off

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