http://www.jrfinancialservices.com/

This transcript has not been edited for grammar, spelling, or punctuation.

Wildly successful fund manager, Peter Lynch once said, "know what you own and know why you own it". In today's world, it's really easy to feel helpless about the many things going on around us. Yet, one of the most powerful agents for action is always money. And if you have it, you have a tool for making a change that impacts both you and your community.

This tool is socially responsible investing, and it is an investing strategy that aims to generate both social change and financial returns for an investor.

In today's episode, I talk with John Rohrhoff from JR financial services about socially responsible investing, what it is, things to think about, and how to get started.

This is the smart planning 1 0 1 podcast from Honolulu, Hawaii, Aloha everyone, I'm Nicole Wipp, and I'm your host.

Once again, today, I'd like to welcome John Rohrhoff. Who's the founder of Jr financial services. Before moving to the financial services industry, john studied engineering at the University of Michigan and business management at Lawrence technological university. After graduation, John worked for a short period of time for an international trade consulting company, wanting to change and having a desire to help others. He then moved on to the financial services industry in 2008, after working for another company, he founded Jr financial services in 2010.

I also think it's really important that you know, that John is the president of the Riley Catherine foundation. He started it in 2015 with his wife, Katie in memory of their twin daughter, which they lost in 2009. This foundation is amazing and it raises money to help pay for funeral and burial expenses, as well as providing emotional and grief support for families who have lost a child. So John is the type of person that is about being a part of the community and social responsible and I just could not be more happy to have him here today.,

Thank you, Nicole. It's great to be here.

All right. So let's dive right into it. Why are people interested or why should they be interested in sustainable investing?

Great question, Nicole. One of the biggest topics that I have seen recently and reading different periodicals and listening to podcasts, or just in our society in general, as people are wanting more and more to have their personal values aligned with anything they do in life. And that includes their investments. And that's what I've been hearing a lot of, and people want to make sure they're making a difference and making a positive impact on society.

And there's nothing more powerful to do that with than money, right?

Absolutely. It stemmed from young people and their beliefs. And it's worked it's way up into an entire segment of society where it makes a difference where people want to have an impact.

So, I've looked at this and it appears that sustainable investing is called many different things. So can you just tell us some of the things that, you know when we're talking about sustainable investing and if somebody is looking into it, what they might see other than those words?

Yes. So a lot of the terms you'll hear are like you mentioned sustainable investing, ESG investing, which stands for environmental, social, and governance, impact investing, or socially responsible investing all those terms lead back to the same thing.

Okay. So there's a lot of different issues and you just mentioned ESG. So the first one environmental issues, what kinds of environmental issues are we looking at here? What are people thinking about when they're thinking about environment?

In a nutshell, it has anything to do with the environment and the impact of the environment. So people want to see no pollution or no oil, low energy usage, how much waste or pollution is a company putting out in their environmental world? What kind of natural resource conservation are people using? How do companies treat animals? What kind of land do companies own? Do they own contaminated land? Do they create contaminated land? How do they get rid of hazardous waste? How do they comply with environmental regulations? How do they manage emissions? Their carbon footprint, anything to do with the environment is what an environmental issue.

Yeah. And so that's a really wide range of things, right? That feels very big in and of itself, but then we also have social issues. So what are some of the social issues that people are concerned about right now?

Yes. This is a big one in our world today. And this could go to working conditions for employees. What political organizations, the company affiliates itself with?

Do they do volunteer work or donate to charities? What communities do they operate in and what kind of impact do they have on these communities? What does their product do, or how do people use their products? Some people are concerned that a product could be causing harm to the environment or other people or others are just opposed to the type of product.

For instance, gambling is propped up here across the United States in many states. And how does this affect people? What kind of suppliers do they use? And how are the employees treated overall? Many different issues in terms of social that could come down to anything.

And then the third one governance issues. That one is probably the one that might feel the most murky to people about what is governance or what are governance issues. So can you explain that one to us?

Absolutely. And this is definitely where the first two are clearly identifiable by the name this one could do with many different issues, including executive pay.

How much are the high-level executives making? Is that more than other companies? Is it too much? What kind of company leadership is it and what do those people do and how are they known in society? What type of accounting methods are used? Have these companies ever been audited or had any issues with their accounting methods?

What are the stockholders think and do, and how do those people operate? Other things could be illegal practices. Like I mentioned, gambling in certain states is illegal, but not illegal and others or just any conflicts of interest between board members, political affiliations industries are lobbying.

Yeah. And those conflicts of interest. That's an interesting one to me because I felt like in the news recently, every single day, we're seeing more and more conflict of interest issues that are popping up both in the government, but also in the private sector that people are like, wait a minute. And it's interesting because it's like, things are becoming more transparent. So I can see that people are really starting to realize that these are things that they might care about or that they might not have before.

Absolutely, people, these days do care about how people are treated and many different issues. And that stems like you see the list that we just laid out is an enormous list. And that's one of the biggest issues that I see, is these issues could make one person feel one way and another person feel differently. So how are these ESG issues playing out across each individual or group of individuals?

So that's a great point. So how do we look at doing that? Like how do individuals or groups, or I don't know, how does that all work? Can you explain that to us?

Yeah, absolutely. So what I'm going to do is first, I'm going to talk about how an individual would take this up and use ESG and make their own personal investing plan. And then I'm also going to talk about. Some of the problems or issues that come up when you do that. And then finally, I want to chat about how I attack this issue as an advisor, having multiple clients, like you mentioned, you have clients who feel one way that are opposing viewpoints. And when we have multiple clients, how do we take an issue and stand on one side or the other? So what I did as an advisor to implement this practice.

So I'm going to start with, as an individual. Clearly, what an individual can do is only make investments into specific investments or companies or stocks that they believe in, and that they have done the research and understand that the companies that they're choosing to invest in make a difference.

Now, the problem here is that. Someone is going to have to do the research to figure out what companies are doing, what things to know, what they want to invest in unless they keep it very limited. That's very hard because how are we as individuals going to evaluate one single company and then do that over and over with all these investment choices and companies that are out there.

So that's the biggest problem we have is how do we narrow down what companies are ESG friendly or socially responsible compared to other companies? And we could just narrow it down by industry and say, anyone in the oil and gas industry is bad, but there's people who believe both sides of that equation.

So it's hard as an individual. To put in the time and effort to evaluate this criteria, which comes down to the there's no universal standard or screening process on what is ESG friendly. One set of circumstances may apply to one person and one may apply to another.

Yeah. I don't know how there could be a universal standard because the values that could go into this type of investing are as infinite as there are the number of people on this planet. Everybody holds their values as a very personal and individual thing, and they're not always my values. Aren't yours, aren't your next person's there. So it isn't there could be a common set of criteria.

Exactly. And what my industry has done to help us out is they have come up with some. Some standards and screening processes to give us companies that meet these standards and screening processes, but they're very general. So going by who passes these lists is not on an individual level. It's more going to be on the research company saying that these companies are quote-unquote doing the right things and following what they consider ESG rules.

So what we have to do is just understand that when we make an ESG investment, it's generally not going to be on an individual level. It's gonna come down from a screening processes from companies that are doing this work.

So what are you doing then that helps your clients on this?

Great question, so what I've done is I have created ESG only models to go along with my traditional models. So as an advisor, I have different models for clients to use that ended up getting tailored to the specific client depending on circumstances. And these models are done by risk tolerance. So what I've done is I've created some ESG only models to go along with these non-ESG models, let's call them. And what I do in these ESG models is I use only funds that have an ESG mandate and their perspectives. What that means is these specific funds say that they will only invest in companies that meet whatever standards the fund has come up with to pass the ESG mandate.

Now, again it's broad and we have no universal standard for measuring this, but if it's in the prospectus that this fond will only invest in these certain companies with this mandate, then I will allow that to be used. And then the second thing I do is I have another screen. So there is a ratings company called Morningstar, which in my world is probably the biggest ratings company coming from financial management companies.

And they have a sustainability score, and this is a score of zero to five on how sustainable or ESG these funds are. And to make it into this ESG model, it must have a five-star rating for Morningstar to pass my screening process. So essentially I've made the fund itself, have a mandate. And a second ratings company, give it a five-star rating saying that what they are doing is ESG friendly.

So an outside cause Morningstar is going to be an independent evaluator of that on behalf of the industry as a whole, not the company to saying it and playing somewhat lip service sometimes, right? Sometimes they're just paying lip service to these ideals and not actually implementing into them.

Correct. And it's again, we're using the universal standards and, but it's half to pass two screening processes because it's impossible for me as an advisor to know every individual client their values and what companies they want to invest in. But. I also find it's my duty to give them the option if they want to use ESG only to find a solution for them.

And then you say you evaluate based on that client's individual risk tolerance on top of it.

Yeah.

Yeah, because this morning, I was looking at my portfolio in anticipation of this interview and it's been a hard week in the market and I was just thinking you have to have a lot of tolerance to be in the positions that I'm in and yet not a lot of people are going to share that like somebody might've opened my portfolio this morning if it was theirs and had a complete meltdown. It's one of those things that risk tolerance thing, but I'm okay. I'm gonna let it go. But I can imagine that a lot of people feel very differently than me.

Yes. And you speak of a very, yes. Market is down in the past few weeks and that's why risk tolerance is big. And we have to use that as a measurer and expectation because if you are taking risks, you have been doing very well the past year, but the last couple of weeks, the market has been down and the risky assets haven't done so well.

And who knows what will happen from there, but that's right. So that's like always an important part of an investment strategy. And that's also, I think the reason I'm bringing it up at this point is also where an advisor can be very helpful to somebody because you are going to have a better handle on. The risk level of any portfolio or a managed fund is going to have compared to what an average person's going to have. I would think.

Absolutely that should have a huge impact on your plan and your portfolio. The other second minor thing I've done with ESG is when I'm evaluating funds. Now, if I am choosing between two different funds and I can't choose, I will lean towards ESG as the tiebreaker. So if a fund is ESG friendly, I will choose that one over the non-ESG friendly fond. If all else is equal.

Oh, that's really interesting. So you've talked about some of the problems or issues on this already in individual versus group implementation. Everybody's different and that there's no universal standards, but what about fees and costs? Like how does that play into all of this?

Great question, Nicole, one of the trade-offs that you get when you want to do. ESG investing is that I mentioned there is screening processes and companies that are doing screening processes involved in any time we're adding more layers of involvement and research.

We're going to have an increased cost associated with that. So in general, what you'll see is these ESG funds will have a higher cost to them versus the non-ESG funds. And it all just makes sense in that you're going to pay more because more people are doing research. So it's going to cost a little more, but that doesn't mean that performance will be better or worse.

All it says is that it might cost a little more to put the, in this research. So that has to be a trade-off that you're willing to sacrifice when you're deciding whether to switch your current investments to an ESG only model. And another trade-off that you have to think about. Is there a tax consequence when we're buying and selling investments?

If we decide, Hey today, I'm switching all my models from non-ESG to ESG only models. I'm going to have to sell certain mutual funds or investments, and I'm going to own taxes on some things. So there are trade-offs here when we decide what we're going to do. And what I've seen is some clients will say, ah, it's not worth it.

And others will say, Hey, I want to do that right now. I don't care if I have to pay extra fees and costs or have tax consequences. It just depends back on the individual person or family who's making the decision.

And to that end, that's a very interesting point. And I and the bottom line driver of that of course is going to be the depth of your passion for the subject, right?

Like the clients I'm sure that say to you, I don't care are the clients that are like, I am passionate about this. I need to live my life in this way. And it doesn't matter if it's going to cost me a little bit of money. Other clients may not have that depth of passion. And so they're like, oh, I don't want to, I don't want to rock my financial boat that much.

Absolutely. And again, it all depends on the person and I've heard it both ways. There's also there's middle ground that you could take. I've had some clients wavering on what to do. And I just said, Hey, why don't we move all new money coming into an ESG strategy and leave everything else where it's at?

Or why don't we slowly do this over time, to limit the tax hit or the fee costs increase, and come up with a strategy with that person that lets them do it at their level? It might not be an immediate I'm switching from a to B. There might be a little, we're still involved a little bit in a and moving to B. So it all depends on the person, but it can be done in many different ways.

So it's not a zero-sum game. It's not all or nothing. We can divide things in a way that makes sense for our portfolio or our families, our financial situation, and our values, all at the same time?

You are a hundred percent correct. And that's how I've taken it as an advisor. Like I mentioned earlier, if there's a tiebreaker, I'll move it to the ESG friendly fund and I'll offer the ESG models. So there's some middle ground here. It's not a clear-cut a, or B answer. It really depends on the individual person and what kind of commitment they want to make.

Wow. That's really great. I'm so glad that we had this conversation about this today, John, because it just is becoming more and more prevalent, more important. The thoughts around it for everybody, I think more and more people are just waking up to this as something that they want to do and yet how to do it.

What are your first steps? All of that I think is white as murky for a lot of people. And I really think you've given us a lot of great information today. I really appreciate it.

Thank you, Nicole. It was great to be on and it's great to talk to people about this subject that has been popping up a lot in the industry. And thanks for having me today.

Well, everyone, I hope that you found that interview to be as interesting as I did. John is just so knowledgeable about these things. And I think really broke it down for us today. About what to be thinking about when it comes to sustainable, or value investing. If you're looking to connect with John, the best way to do it is via his website, which is Jrfinancialservices.com. He can be found. All of his links has contact all of that, is there on his website.

Do you have a question you want answered on this podcast? An idea for a podcast episode. Or would you be a great guest for our podcast? I would love to connect with you. Visit smartplanning101.com/connect and make sure to subscribe.

Thank you for listening everyone.

This podcast is not intended to be, nor should it be construed as specific legal, financial, or investment advice.

It is for general informational purposes only. For advice specific to your situation, please consult with a qualified advisor.

Jr financial services securities offered through Tax investment services member of FINRA. SIPC. Investment advisory services offered through Avantax advisory services, insurance services offered through an Avantax affiliated insurance agency.