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Adviser Profile: Lee Coates of Ethical Investors

Adviser Profile: Lee Coates of Ethical Investors

While Lee Coates of Ethical Investors has enjoyed being seen as somewhat of an outsider, he has reaped the rewards of being a specialist in green investment.

Director of Cheltenham-based Ethical Investors Lee Coates has built something of an ethical investment empire, boasting a very substantial £225 million assets under advice, multiple business offshoots (including an overseas fund) and personal accolades to boot, including an OBE.

The advice business has been carefully cultivated over the past 26 years and keen percussionist Coates has been banging the drum for ethical investment in a bid to move it into the mainstream.

While he has enjoyed being seen as somewhat of an outsider, an anti-establishment figure of sorts, and has reaped the rewards of being a specialist in this area, he believes the time is ripe for ethical investing to become normal in the advice profession.

His latest clarion call is a challenge to professional bodies to create a specialist ethical qualification for advisers. ‘There should be a qualification for ethical investing just as there is for long-term care,’ he says. ‘To advise on it, you should be able to demonstrate knowledge of the subject. I would be happy to write [a syllabus] for the Chartered Insurance Institute, for example.’

Energetic on ethics

Over the years, Coates’ enthusiasm has led to him becoming a board member of the UK Sustainable Investment and Finance Association (UKsif), a steering group member for the Ethical Investment Association, and chair of the Ecumenical Council for Corporate Responsibility (ECCR).

Meanwhile, he has been developing Ethical Investors, which now has 1,400 active clients. He also has a research business branch, Ethical Screening, which is now almost as profitable as the advice business. More recently, he even found the time to start an Australian fund for vegan investors. He has yet more exciting plans for the advice business and beyond.

One of the first moves that helped Ethical Investors get off the ground in 1989 was negotiating a free advert in the Campaign for Nuclear Disarmament’s (CND) magazine. The response showed Coates that there was strong demand for a firm that based itself around the concept of ethics.

The firm also started a profit-sharing charity scheme and CND was one of the first benefactors. Since then it has aimed to donate half all its profits to worthy causes, which has amounted to around £550,000 so far.

The firm continued to grow by advertising to people with a wide range of ethical concerns. Coates categorises these concerns broadly as people, animals and the environment.

BUSINESS FIGURES

Ethical momentum

He rails against the idea that ethical investment is a luxury, an investment option clients would only turn to once their finances had been secured using mainstream funds. In fact he argues that market crises such as the credit crunch have boosted client numbers. Far from being put off, he says there is increasing public dissatisfaction with perceived unethical practices in banks and other large companies.

‘We have seen more people come to us having decided that being "safe" and "mainstream" [has led to the attitudes that caused the credit crunch],’ he says.

Coates has been busy ripping up the rule book in more ways than one, as his ethical proposition has also sidestepped traditional norms of advice marketing. He no longer focuses on advertising, he says, because he is attracting clients who are searching for ethical investment advice online, even those who already have an adviser.

‘Our biggest source of new clients is those who were advised by someone else but found us on Google,’ he says.

The retail distribution review (RDR) has had a similar effect on Ethical Investors as on other advice firms by pushing it upmarket, though Coates says this was not a deliberate strategy at the time. ‘We published our fees on the website and [lower value] enquiries dried up. Instead we got more bigger cases, boosting funds under advice,’ he says.

He thinks some people baulked at the idea of having to pay for something they previously thought was free whereas higher net-worth clients are accustomed to paying fees for advice. This might be good for the firm’s profits but it discourages the less wealthy from accessing advice, he says.

The amount given to charity reflects the healthy profits the firm has generated over the years. Ethical Investors kept costs low from the start by having face-to-face meetings only if the clients wanted them. Coates says many clients are happy to do the whole process by post and telephone; more than half the firm’s clients have never seen an adviser in the flesh.

CV: LEE COATES, OBE

CAREER

1989-present Ethical Investors, director

1989-present Ethical Screening, director

1987-1989 Friends Provident, life inspector

1983-1987 Abbey Life, life and pensions administrator

1982-1983 Midland Bank, bank clerk

PROFESSIONAL MEMBERSHIPS/QUALIFICATIONS

Chartered Insurance Practitioner (ACII, Life)

ISO 22222

Higher standards, lower costs

Coates has held the ISO 22222, the individual best practice standard for financial planners awarded by Standards International, for five years.

‘That is one of the best things any IFA can do: having someone independent trawl through the files to understand what you do,’ he says.

Ethical Investors, which is based in Cheltenham town centre, has recently cut costs further by scanning or discarding the mass of legacy client files it held, having reduced total client numbers by nearly 1,000 over the past two years. Further cost savings have been achieved by relocating from a four-storey Georgian townhouse to a converted warehouse.

However, costs have still fluctuated in recent years as a result of big investments in IT, for example. Nevertheless, the firm has been profitable enough to be able to reduce ongoing fees from 0.75% to 0.6%.

‘That was because we keep getting paid too much,’ says Coates, who takes a small salary and dividends. ‘In some years, we put 70% or 80% of profits into charity.’

Paid too much? Typically advisers charge an ongoing fee of 1%, and presumably keep their hard-earned profits.

‘Unless they are offering something spectacularly different and special, it seems far too high,’ says Coates. ‘Good systems, good staff and a fair pricing policy make far more sense.’

His own fee reduction will lead to lower income this year but all those cost savings, especially the office move, will help to maintain healthy profits, he says.

Legacy challenge

One challenge the firm has been facing is how to deal with its large number of legacy clients. Coates says by the end of the year the firm aims to remove most non-active clients or move them onto a non-advised, online service, which he is developing.

‘We will say to clients with £25,000 that we can no longer afford to advise them on an ongoing basis, but for 0.4% they can sit on our online service,’ he says. ‘They will get access to model portfolios, the minutes of committee meetings, risk profiles and ethical questionnaires.

‘It hasn’t gone live yet because the problem I am working out is how best to deliver helpful, usable information on ethical choices via an ethical questionnaire without the result looking like advice. This is easy for risk issues but more complicated for ethical values.’

Outspoken critic

Coates is an outspoken critic of advisers who either continue to ignore ethical questions in the advice process or give them lip service only.

‘Why not ask the questions?’ he says. ‘Otherwise, your personal prejudices and fears wrap up to do a bad job for your clients.’

All too often, he says, advisers talk about ethical investments with clients merely to cover their backs, with no real interest in exploring the subject and no real understanding of what a good ethical investment looks like.

He says even respected professionals have told him they ask clients ‘the ethical question’ in the advice process to avoid complaints later, then deliberately steer them away from such investments. They can do this by telling the client they are there to make money not give to charity, he says.

But he says ethical funds often perform better than non-ethical active funds, and he believes this is because of the extra discipline required [see box]. However, he says there are poorly performing ethical funds as well as good ones, so a robust selection process is still necessary.

Choosing the best funds for ethics, risk control and performance

Ethical fund choice and sophistication have developed considerably in the past 20 years and Ethical Investors has adapted its investment proposition over the years to reflect this.

‘Previously we weren’t able to do much asset allocation; we just had to buy an ethical fund and sit on it,’ says Coates. ‘Now we have an investment review committee that sits quarterly and can choose the best funds for ethics, risk control and performance.’‘

The firm previously had 50 model portfolios, to reflect myriad combinations of ethical and risk needs. However, it reduced the number to 12 in January. If necessary, the portfolios can be tweaked depending on the client’s needs, says Coates.

‘For example, property has ethical issues, such as building on greenbelt or the type of company it leases to. Are you happy if it is a defence company or an abattoir, for example?’ he says.

The company uses its sister research firm, Ethical Screening, to select funds on moral criteria.

‘Following that, we base the main criteria on performance and getting to know the manager,’ says Coates.

Beating the competition

The Ethical Investors Growth portfolio dramatically outperformed the Adviser Fund Index (AFI) in 2013, slightly underperformed it in 2014 and has matched it in the year to date.

Coates believes a good ethical manager’s extra screening discipline gives Ethical Investors’ portfolios a more robust risk profile and often better performance too.

‘The portfolio performance against the AFI backs this up,’ he says. ‘Also in UK equities for example, look at Audrey Ryan, manager of Kames Ethical Equity, over most periods. It is one of the most ethically restrictive funds but still the majority of non-ethical managers can’t beat her.’

According to Citywire Discovery, Citywire AAA-rated Ryan is in the top decile for 10-year and third decile for five-year risk-adjusted returns in the UK All Companies sector.

Portfolio total expense ratios are around 1.6%, including adviser and platform charges.

For investments of more than £500,000, the firm tends to use discretionary fund managers (DFMs). This involves a more in-depth screen of individual stocks to fit the client’s ethical beliefs. The DFM then invests in those stocks while making sure the portfolio fits the client’s risk parameters and wider needs.

DFMs that Ethical Investors uses include Rathbone Greenbank, Vestra, Quilter Cheviot and UBS. ‘The important factor is that we have a longstanding relationship with individuals in those DFMs, not with the institution,’ says Coates.

Performance*

*Data net of fund charges. Dividends reinvested

  • ACTIVE FUNDS: 99%
  • PASSIVE FUNDS: 1%

Vegan pension fund

Coates’ personal interests in animal welfare and his entrepreneurial flair have led him to go global with his ethical investment projects. For example, he set up an Australian vegan pension fund called Cruelty Free Super.

‘We visited Australia for my wife’s 50th birthday and I realised there was a massive gap in the market because of compulsory pensions and the fact that 1% of Australians are vegans,’ he says.

He set up the fund from scratch and markets it only on social media. The fund has 600 members, investing nearly AU$15 million (£7.6 million). More than 70% are women under 35, which bodes well for the future of the fund, though it has been onerous for Coates to run because of the distance and time difference.

He hopes to expand the fund concept globally, despite it making his work-life balance extremely challenging. It has even led to him offloading most of his advice clients to others at the firm. Having done this, he now manages to fit most of his work into five days.

Coates is looking for a full-time paraplanner and wants to keep growing Ethical Investors but recognises it might require a transformation.

‘If anyone approached us about a merger, I would have the conversation, but it depends who they are and their motivation,’ he says.

He says he would also be interested in talking to investors about adding capital to the business in a way that would free him from daily responsibilities. This would allow him to focus on strategy, PR and marketing.

‘Another thing we haven’t done yet is professional connections,’ he says. ‘There is a massive market. We just need the 1% of their suitable clients, but once we find them there is little competition.’

Personal passion

Coates is passionate: he is moved from anguish to anger over issues such as environmental damage and animal cruelty.

‘I have always hated bullies,’ he says. ‘[As a child] I knocked a kid out with a chair once because he was bullying [other] kids. I got so angry and I tackled him. Ethical investment is about anti-bullying.’

He says he has seen the results of climate change first-hand. ‘For my 50th birthday, I joined an expedition to the Arctic on a Russian scientific vessel. Most days I cried because my five grandchildren aren’t going to see it. If everyone’s attitude is "that it is someone else’s problem", what will my grandchildren have? We have economic and conflict migration now but [that is nothing compared with what will happen] when climate change migration starts.’

He says the best moment of his career was receiving an OBE for services to ethical business and finance – though some clients challenged him over accepting it, arguing it undermined his anti-establishment credentials.

‘It was a career highlight, not just for the day but for everything it stood for,’ he says. ‘Some clients hoped I would turn it down as it would make me part of the establishment. But I want to be part of making the industry more mainstream and you can’t be more mainstream than the head of Ethical Investors getting an OBE.’

Five tops tips

  • Always be transparent and open.
  • Educate clients on financial issues so they are better informed, can make better decisions and became better clients.
  • A client’s values take precedence over an adviser’s.
  • Focus on delivering the best advice for clients, not the best profit for the firm.
  • Life is not all about work.

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