#FASuccess Ep 419: Attracting Clients Who Want To Align Their Investments With Their Values With A Sustainable Investing Approach, With Peter Krull

Resources Featured In This Episode:

• Peter Krull: Website | LinkedIn
• Earth Equity Advisors Impact X-Ray – Download (PDF)
• Green Sage Sustainability Portfolio
• Sustainalytics
• MSCI ESG Ratings
• Bloomberg Green Daily
• Canary Media
• Morningstar Direct
• YourStake
• Calvert Impact Community Investment Notes
• Cradle to Cradle: Remaking the Way We Make Things by William McDonough
• US SIF
• Vert Asset Management
• Dollars & Change

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Full Transcript:

Michael: Welcome, Pete Krull, to the "Financial Advisor Success" podcast.

Pete: Thank you, Michael. It is an honor to be on the podcast.

Michael: I really appreciate you joining us today. I'm excited to dig into a discussion of, I guess, our industry has all these different labels of ESG, SRI, sustainable investing. I sort of think of it in the aggregate, and I guess you can correct me if I'm wrong in a few minutes, is ways that we can try to align our investments with our values, and where we want to see our capital go. It's kind of a fascinating thing. I feel like there's a, I don't know, I'll call it a "traditional view" that you invest your capital and make money. And if you want to do charitable and impact things, then take your profits and make some donations. And that the investing bucket was separate from the charity or values bucket.

And now the world, or at least a segment of investors, seem to very much be approaching that in a different way and saying, "No, my decision about where I put my investment dollars, where I allocate my capital, I want to allocate my capital in a way that sees certain businesses or certain things advance. And I want my capital to fund that as opposed to other companies or businesses or initiatives." And to me, it makes an interesting offering into the investment world for clients and opportunities for consumers. It creates just interesting and cool challenges from the advisory firm perspective about how you actually like operationalize and do this. And as I know, this is something you have lived for 20-plus years of your career. So I'm excited to just dig into what does this look like and how do you actually do this in practice with clients?

Pete: Yeah, I'm really excited too, because there's a lot of myths and I won't say disinformation, a lot of misinformation out there about what sustainable investing is…what are some of the differences between ESG and impact investing and sustainable investing. And so, yeah, I'm looking forward to sort of diving in the deep end and figuring it all out.

Michael: Very cool. Very cool. I think before we kick off, really start nerding out a little on the nuts and bolts of investing, just give us some background on your advisory firm as it exists today, so we just have some context for the business itself.

Pete: So I'll take you just back a little bit before that. So I started out with Merrill Lynch back in 1998 up in Roanoke, Virginia, and went through their training, learned the business. My degree is actually in communication. It's not in finance or business or anything like that. So I went through their training program. When it was time to to move on from Mother Merrill, I actually tried the bank channel for a very quick time and realized that that was definitely not for me, and hung up my shingle in 2004 as Krull & Company, which is sort of the predecessor to Earth Equity, and started it with the idea that sustainable investing, or at the time what we called socially responsible investing was what I wanted to do.

The Differences Between Socially Responsible, Sustainable, And ESG Investing [6:35]

Michael: We'll get more into it soon, but since you put it out there, can you help us with a little bit of the terms of sustainable investing, socially responsible investing, ESG investing? Can you parse some of these? Just because I want to make sure as we talk about this, we're using a common language book.

Pete: I think this is a great way to get started. So we'll start out with sort of the predecessor, which is socially responsible investing. And there's still a lot of aspects of what the Calverts of many years ago used to do where they focused a lot on exclusion. So trying to exclude certain industries from portfolios, at the same time trying to include industries that they were interested in. It might be clean energy or something like that. There was basically three legs. So there was inclusion, exclusion. There is shareholder advocacy. So using shareholder proxies and things like that to push companies for better practices, be it gender equality or transparency when it comes to political contributions or CO2 emissions, things like that. And the third leg was community investing, making sure that there was a portion that went into CRA [Community Reinvestment Act], CRA funds, or bonds or things like that. And so that was the original social responsible investing that I started doing back in '04.

Over the years, ESG has come into play and ESG is environmental, social, governance. And a lot of people think, and I think this is where some of that misinformation is, is that ESG measures the company's risk on the environment, on society, or on governance. When the reality is it's the other way around. What ESG measures is the risk on the company. And so that's a big difference, because if you're measuring the risk on the company, it's part of your fiduciary duty. It's part of your due diligence process. And so while it's not necessarily the focus of what we do, I want to make sure it's clear that people understand that it's not this sort of idea of ‘woke' investing as much as it's the idea of how can we reduce our risk? And so I'll give you an example.

Michael: Yeah. Can you explain that further?

Pete: Absolutely. I'll give you a couple of examples. So let's say, for example, you're a manufacturer and you have got a plant that is in Florida in the pathway of a hurricane, or hurricanes in general. That is going to be an environmental risk because of climate change, we're going to continue to have more intense storms, wetter storms like we've seen recently. And so you've got an environmental risk because of a location of one of your facilities. That is the kind of ESG risk that most institutional investors are looking at. Another example would be, say, for example, the Great Salt Lake. I want to say about two years ago, Brigham Young [University] came out with a report that basically said that the Great Salt Lake was in danger actually of drying up because of overuse, because of droughts, things like that. And so I believe it was S&P came and said, "Hey, we're going to reduce your environmental rating on your municipal bonds, both state or local bonds." And politicians, of course, were all up in arms about that. But there actually were studies that have gone gone on at BYU.

Michael: Because the idea being if Great Salt Lake really dries up, it can so adversely impact the local economy that if I'm a investor buying their municipal bonds, I've got to understand that there really may be an elevated level of risk in their ability to generate the tax revenues it takes to pay this back, because they face this economy risk because of the environmental factor.

Pete: Absolutely spot on, because from some of the numbers that I've looked at, the Great Salt Lake provides upwards of $2.5 billion a year in direct economic activity. But I grew up in Buffalo, so I know a little something about lake effect snow, but they have lake effect snow out there as well. And so that lake also helps to provide some of the beautiful powder that the ski resorts get. So if that lake dries up, then potentially you're going to also lose some of that powder, which is probably pulling in another $1.5 billion. So you've got a true material impact based on an environmental risk. And so that's when we talk about ESG, it's not because we want to see something happen because we're hugging a tree and we're wearing Birkenstocks. Yes, sometimes that's the case. But when it comes to ESG, that's not necessarily the case. There actually is a material aspect to it that can be traced back to droughts, can be traced back to many times climate change, or other environmental impacts.

Michael: I guess ditto for social, for governance. At the purest level, we have a company that doesn't have good governance and oversight protocols. At some point, that's literally a company fiduciary.

Pete: And I can think of, I don't know, Enron, right?

Michael: Right.

Pete: I mean, it's a perfect example of the G. I think the hardest is the social side of it. And I think that's where a lot of people have some issues with it, because it's harder to quantify. And we can quantify like I just did with Salt Lake. But when you look at the, let's say, benefits that come from a company that are socially linked, it's sometimes harder to actually do an if/then kind of question with it. And so I think that we have more and more data that's continuing to be collected and aggregated and analyzed. But in general, ESG is going to have a material link, again, if this happens, then that and here's what your risk is, that ultimately is a part of what I would call enhanced due diligence beyond just the numbers.

Michael: So then what is sustainable investing relative to these two?

Pete: So my definition of sustainable investing, and there are going to be multiples of this, but I'm fairly certain that this is probably close to some others. So I look at sustainable investing as more of a bottom-up process. And so when I'm putting one of our sustainable portfolios together, I'm trying to look into the future, just like we typically do with any kind of growth investing, and ask the question, "What are the companies, what are the sectors, what are the industries that are going to be leaders in this new economy, in an economy that is cleaner, that is more resource efficient, that is more resilient, and that is more equitable?" And try to build that portfolio from the ground up.

So a lot of the ESG portfolios that we see that might be coming from some of the big mutual fund or ETF companies, a lot of times what they're doing is they're taking a traditional index, they're going to layer on some of those ESG metrics, those risk metrics, and then they're going to make allocation adjustments based on that risk. So, for example, if they see that there's a greater risk with, say, Exxon Mobile, they're going to lower that allocation from what it is from the traditional index. I typically call that a ‘less bad' portfolio as opposed to being sustainable. It's just less bad. There's nothing wrong with it. It's not a fully sustainable portfolio. Whereas sustainable is going to be more built from the bottom up, "What do I want to have in this portfolio? Well, I want to have clean energy. I want to have electrification in general of the economy. I want to have green building technology," etc.

Michael: So if I'm kind of understanding or thinking about the sequence, so my SRI approach is...I'm sure I'm oversimplifying a little, but let's take an index and let's just literally exclude bad things, whatever we want to define as bad, because different clients want different preferences. But an SRI framing is I'm going to take my index, I'm going to exclude the bad things, and I may also be a little bit more activist with the good things that I've got. So I'm voting shareholder proxies. I'm more engaged there. ESG might be less of a, "I own the index, and subtract things," and a little bit more of, "I own the index, but I start applying some alternative weights because I'm de-risking on environmental or social or governance factors that I've got concerns about relative to the particular company. And just even if I start with a diversified index, by the time I start applying different weights, I'm making some relative bets, relative decisions. And these are the risk lenses essentially that I'm using." In a sustainable investing world, I'm not really starting with an index that I'm adjusting. I'm starting with a future state of what I think the world looks like, and some of what it takes to get from here to there in a future state with the lens of a future state that is sustaining itself, and not depleting resources of the globe. And so I'm building a more bottom-up stock by stock portfolio with that as one of the lenses of my stock selection.

Pete: Absolutely. That's a great synopsis.

Michael: And so relative to that dimension, you started in the ESG world and shifted, evolved. I don't know what the right verb is, but moved to the sustainable investing.

Pete: I started in the socially responsible world. Sort of skipped over the ESG world a little bit, even though I understand it and incorporate it a little bit in some of my analysis, but really jumped straight into the sustainable investing side of it. And here's the thing, Michael, is that when we talk to clients, clients want to feel like they're being part of the solution. They want to feel like, "You know what? Yes, I own this particular EV, or I own this particular company that is really transitioning their real estate into green real estate or LEED certified real estate," or whatever it is. I don't really hear from clients, "Oh, I'm really glad that we reduced our ExxonMobil percentage by 25 basis points." And so that's part of the reason why I spend a lot of time talking about that difference between ESG and sustainable investing.

When I talk to advisors, I'm like, "Okay, guys, you've got a couple of choices. You can buy the ESG index because a client asked you to. But what happens when that client reads through, if they read through, the semiannual or the annual report and they start looking at what the holdings are and they pick up the phone and ask, 'Why do I own this particular fossil fuel company? Why do I own McDonald's? What's sustainable about McDonald's?'" Whatever it is. And so I think that's the risk we have without being fully educated on what is the difference between ESG, and what is the difference between a sustainable portfolio. At the end of the day, picking up the hood and looking to see what that particular fund, or SMA [Separately Managed Account], or whatever vehicle you're using, what's under the hood is ultimately what matters.

Michael: So for someone like me who doesn't have background of the space, should I think of these as choices on the spectrum? Just kind of 3 different ways that you can exercise an investment approach, and you sort of choose on the spectrum. Is this more like a functional evolution in the space itself? "We used to do it this way, then we evolved it this way, and now it's mostly done this way." And this is shifting best practices. How do I think about the space as it exists today?

Pete: I think the functional evolution is probably the best way because we don't see as much of the socially responsible from our original definition as much anymore. We really see just the two. We see ESG, which sort of has the bulk of it, because at the end of day, it's the easiest. Let's just pull some of this data from MSCI or Sustainability Analytics, or whomever you're getting your data from. Let's layer it over. Hey, here's your ESG portfolio. Doing a bottom-up sustainable portfolio takes a lot more work, takes a lot more effort. But I think, at the end of the day, it's ultimately what the clients want.

Michael: And I'm envisioning just from the pure investment management perspective, my nerdy investment analysis hat comes on, in practice, an ESG-based portfolio, I'm also likely to track fairly closely to some underlying index. Presumably going to have some shifts because of differences between what I own and what the pure index is. But I probably don't have the largest of tracking error. I'm sure there's some investment nerds out there who can actually figure out how to make a more ESG-neutral portfolio, and then adjust the weights to replicate, minimize the tracking error, and try to replicate the index just with certain different weightings on ESG factors. Whereas if I'm building a whole standalone portfolio from the bottom up in some new emerging sectors of the economy, I'm just going to have a completely different investment sequence, or at least I may have a completely different investment sequence.

Pete: Yeah, you're spot on with that. And that's one thing that we talk a lot about is you're not going to get low tracking error with a true sustainable portfolio, because it's really hard to index where the economy is going by looking in the rearview mirror.

Michael: Well, I say the literal nature of backward looking index construction basically would, I think, make it impossible for you to get low tracking error building a forward-looking portfolio with a backward-based indexing process.

Pete: At the same time, when you look at our GreenSage sustainability portfolio, I still do my best to try and I'm not going to say mimic what the S&P's sector allocation is, but the only thing you'll see missing in that portfolio is fossil fuels, is the energy sector. They're almost always going to be technology heavy, even though relative to the S&P, it's pretty close to what the S&P's technology allocation is. But you'll see more industrials. One of the things that people don't necessarily understand is things like solar, wind, and some of these technologies don't fall under the energy sector. They fall typically under either technology or industrials. And so sometimes it makes it hard to try and match up any kind of semblance of trying to hit a particular index just simply because the definitions aren't very good.

What Earth Equity Advisors Looks Like Today [21:46]

Michael: So I want to come back in a moment to digging a little further in how do you literally implement this? But now that we've got the context, and kind of your evolution from SRI to sustainable investing, what does the advisory firm itself look like? I mean, who is the team? How many clients? Who do you serve? Can you give us some detail on that?

Pete: Absolutely. So, again, we've been around 20 years, and we're based in Asheville, North Carolina. And so our team is, right now we have myself plus 2 other advisors as well as 2 client service associates. And we basically have 2 lines of business. So we have the advisory business where we're working 1-on-1 with individual clients and some select institutions, nonprofits, things like that. And then we have a second line of business, which is our asset management business or SMA business, where we sort of come in as, "We're the expert in sustainable investing so you as a financial advisor don't have to be."

Michael: And that's a B2B thing for you. That's working with other advisory firms at that point. You're not necessarily selling into institutional channels. You're out to other advisors.

Pete: Yeah. So, for example, Michael, you've got a client. They come to you and say, "Hey, I want to do sustainable investing." You're like, "This is not my expertise. I'm going to bring Pete in on this. Pete will come in and get on a Zoom, if necessary, with your client, do some education." And then you would use one or multiple of our models that fit the particular risk characteristics of that client. The other thing that we have...we haven't officially launched it yet, but we're also working on a CIT [Collective Investment Trust] to be used in retirement plans, because there's a big need for true sustainable investments that are in 401(k)s and other retirement plans. We can get into some of the demographics at any time you want to about where the demand is for sustainable investing. But know that it certainly is within the working age population.

Michael: So what is the overall asset base then that you're managing to this? How does it break out across the lines of business?

Pete: The vast majority of it is in on the advisory side, because that's really sort of where our roots come from.

Michael: So meaning individual clients you manage, not out to other advisers.

Pete: Exactly. So the majority of it is with that side, I'm going to say. So we manage in the neighborhood of $200 million. And so the majority of it is going to be with the advisory side. We are actively growing the asset management side because we've found that sort of the model that we've created where the ‘let us be your expert.' Advisors like that, because I can tell you this, if I get on a Zoom with you and your prospective sustainable client, you're probably going to get that account because I've been doing this long enough. And the opportunity to sort of walk them through, walk them down the path of, "Hey, here's what sustainable investing is. Here's how we do it. We understand that you want to be part of the solution. We're going to help you do that."

Michael: And how many clients is it, do you know, in the core advisory practice side?

Pete: I want to say it's somewhere in the neighborhood of 250 to 300, somewhere in that range.

Michael: I can just kind of do math of clients and assets. I mean, you're working with a lot of mass-affluent-dollar-style households. This isn't a heavily institutional or you're working with zillionaires, working with ultra-high-net-worth clients.

Pete: Although I will say, over the last probably...since about 2020, actually, our average client AUM has been steadily increasing.

Michael: Is that a shift in demographics? Is that a shift in preferences? What do you attribute the change to?

Pete: We'll go back to 2020. And we saw some of our biggest growth in 2020. And obviously, that was during the pandemic. And so I think what started happening is people actually had time on their hands to look and see what their statement was. And they had time to actually look and say, "Oh, here's what I own. And I didn't realize I own this, and I want to go a different direction." So we saw a really nice uptick in prospects coming through in 2020. In terms of size, we raised our minimums. We raised our minimums from $100,000 to $250,000. And right now, if we haven't now, but we're soon going to be raising it to $500,000. So that's been a component of higher ticket or higher AUM clients coming through. And we're just getting more exposure. I do a lot of media. And so I think we're being seen more.

How Earth Equity Advisors Implements Sustainable Portfolios [26:59]

Michael: So now take us back to how this gets implemented in practice. I'm just really curious to know what the portfolio construction process looks like when you say, "We're going to build these these bottom-up portfolios with a sustainable investing lens." How does that actually get done and executed?

Pete: So we have 2 sort of buckets, if you will. And I'll go through both of them. So one of them is an individual stock portfolio. And one of them are diversified mutual funding ETF portfolios, just sort of a conservative, moderate, aggressive way to do it. So the individual stock model, if you will, called Green Sage Sustainability Portfolio, started out in 2012, right at the end of 2012. A friend and client said, "Hey, I want to own a basket of sustainable stocks. Can you do it for me?" And at the time, it wasn't anything that we really had done before. And so I said, "Let me think about it."

Michael: Because you were still mostly SRI-based at the time. You were screening out bad things.

Pete: We were mostly doing mutual funds, and there weren't ETFs really that much at that time. So we were only doing mutual fund portfolios. And so his organic coffee shop was called Green Sage. And so I basically named it after his coffee shop. And everybody's been happy ever since. But the idea was to create a basket of sustainable stocks. And I think the first version we made had 30 companies in it. The latest version has 72 companies in it. So to take you through the mechanics of how I manage this portfolio is, first of all, I rebalance and reconstitute it twice a year. So we're coming up December 1st is when we do one of the rebals, and June 1st is when we do the second. Through the year, I maintain a list of what I call our Green Sage universe. And those are companies that sort of fit what we're looking for in terms of industries that I think are going to be part of the new economy or this continuing to evolve next economy.

And so through the year, and especially right now, when I'm actually going through the process, I'm combing through the list. Right now, there's 700 and change companies that are listed in there, reviewing, making sure that they do have some form of sustainability, be it a product, a service, or a company ethic to them, and that they fit some of the industries we think are moving us forward. And I will start with a very, very large spreadsheet, which is kept in Morningstar Direct. So I'm able to create a spreadsheet that's got all the data I want. And it starts with fundamental data. So we never lose sight of the fact that at the bottom of this, it's still investing. We still have to make sure that our fundamentals are strong. But then we also add other aspects to it. We add Sustainalytics ratings or MSCI ratings. We add into it what percentage of their revenue comes from things that we both want and don't want. So if you're a utility, how much are you generating your electric, say, from fossil fuels versus how much are you generating from clean sources, and try to really break companies down and then rate them based on what those absolute numbers are.

I'll also take a look at everything from what [Wall] Street opinion is. We'll bring street opinion in and create a composite score. So at the end of the day, what I want to do is I want to create 3 scores. I want to create a fundamental score. I want to create an ESG score. So I'm pulling that data. And then I want to create a Street opinion score. And then from them, I'll create a composite. And then I will start to break this down into different industries. What are those industries? And I can name most of them off for you here just really briefly. Natural and organic products and services, green finance, insurance, and community investments, clean energy, water distribution, filtration and efficiency, recycling and circular economy, energy efficiency, grid modernization, smart metering, sustainable real estate and green building tech, green transportation, information technology, big data, semiconductors, things like that, battery tech, cutting edge biotechnology and resilience. So these are the main themes that I'm trying to keep. At the end of the day, my goal is to hit these different themes while at the same time, making sure that I have as close as possible, a sector allocation or sector diversification that you're going to find in any big index. That was a lot that I just went through.

Michael: Yeah. I'm kind of processing through. So we start, we're building a list of potential companies. So I guess the most base level, where are you even sourcing a list of companies? I mean, is that a database? Is that a search query? Is it some kind of investment research tool? Is that sort of looking out to the world because you are plugged in the space, and see emerging companies? Where does that list come from?

Pete: All of the above, but really mainly two areas. Number one is that I have a lot of data feeds that come in on what's going on in sustainability. So I'll see news coming out that says, "This company is doing this particular thing or they're coming up with this new product or service." I'll take a look at it. And if it fits one of the definition of the industries I'm looking at, then we'll put it into the universe. The other is, I'm not trying to reinvent the wheel, so there's a lot of other really good investment managers out there. And I'll take a look and see what else other advisors are...or not advisors, but investment managers are putting into their mutual funds or ETFs. And so I'm trying to take good ideas that I come up with, but also good ideas that other folks have as well.

Michael: So what are some of those data feeds or sources that you look to? What's actually a good relevant source in your world?

Pete: Bloomberg is a really, really good source for...I think it's called the "Bloomberg Green" newsletter is exceptional. Another one is Canary. They've got a really good clean energy news feed. I'm trying to think if there's any others that I read. Those are the two that I read the most often, and they both come out daily. So there's always something new in my inbox when I get in the office in the morning.

Michael: And so the primary goal is sourcing emerging new companies, essentially from news feeds, news data, announcements of new emerging initiatives.

Pete: Or old stodgy companies that are trying to make the shift, make the transition. Yeah, it can be anything.

Michael: So then the next lens becomes, "Let's take one step further on this list I've been pulling together, and really evaluate do they have some form of sustainability." So I'm understanding a little bit more of the sometimes it's products, sometimes it's service, sometimes it's a company ethic because I'm trying to get to a range of sectors to get to a certain level of diversification overall. So taking a too narrow version of you have to literally be making a certain kind of sustainable product or product with a sustainable process, you're going to end out narrowing your eligible industries and sectors narrower than maybe you want to from a pure portfolio perspective. So some companies may qualify by virtue of products, some companies may qualify by virtue of service, some companies may qualify by virtue of company leadership, how they're running the organization, because we're trying to, I guess, bring a sustainable lens across a range of sectors that will express that differently.

Pete: At the end of the day, I don't want this particular portfolio to be what somebody would call thematic. I still want it to be a core portfolio that incorporates as many sectors of the economy as it possibly can. And so that's why I try to cast a wide net. At the end of the day, the only thing that we won't put in is fossil fuel, because according to the science, they are the ones that are causing our existential crisis when it comes to climate change. And so for us, it's pretty cut and dried. No fossil fuels. But let's take a look and see what's the other side of that. Where are the opportunities to both counter some of that negative impact, and also deal with that impact that we're starting to encounter right now.

Michael: So that's a really helpful framing for me that you're not trying to build this as...I was going to say just again, I think that sounds more negative than I mean it, but not just a thematic portfolio, because when I think of that from a client perspective, now I'm going down the road of, "We have your core portfolio over here, and here is your new emerging company, sustainable investing thematic holding that we're going to do for X percent of your portfolio." And I'm sure there's a place for that and the subset of advisors that do it that way. But your goal is to be core, not a thematic allocation. So you're starting with, "I have to be broadly sector diversified to at least be in the general neighborhood of a standard core index in the first place, like the S&P 500. But we're going more bottom-up company based than simply taking the index and putting some ESG or other filters on it."

Pete: Yeah, absolutely. And the thing I like about this is, when I lay out the allocation, typically what I'm shooting for is 50% large cap, 30% mid and 20% small. So right off the bat, just by having half of the portfolio in large caps, it's typically going to reduce your volatility. So, for example, if you looked at, say, FAN or TAN, which FAN is the wind energy ETF, TAN is the solar. I mean, those are truly just thematic. They're focused on one narrow band of a sustainable investment ethic, if you will. Typically you're going to have a lot of smaller companies, a lot of companies that may not quite hit the large cap definition. And so I don't want that to be our portfolio because I don't want something that is going to be so volatile that a client is going to want to get out of it anytime there's a downturn in growth investing.

I want to have something that when I look at what our distribution is in terms of all the different metrics from domesticity, so U.S. versus international, from market cap size to do they even have a dividend? I want to have companies in here that have a dividend. And so, again, I want this to be as core as it can possibly be with just knowing that you're...there's a couple of things. You're not going to have fossil fuels, for the folks who are seeking us out, that's not a problem. In fact, they're seeking us out for that very specifically. But you also have to realize that sustainable investing is typically going to fall on the growth side of the investment spectrum versus the value side. Say, for example, in 2021, 2022, when we shifted from a growth to a value bias, sustainable investing underperformed, and you saw a lot of headlines from people who were like, "Oh, sustainable investing or ESG investing doesn't perform." What they missed when they were covering it is that we shifted to a value bias. And it's harder to populate a sustainable portfolio with value companies because you've got things like coal mining, or you've got things like some of the big banks, and you've got things like fossil fuels that typically are more value-oriented investments.

Michael: In part, because the economy is shifting other ways, and so they're not invested into his growth stocks.

Pete: Exactly, exactly. And so that's just a clarification point, that if you're investing this way, you have to be investing for the long term. And I know this is one of the statistics I saw. Gosh, I wish I could tell you exactly where I saw it. But it basically said that sustainable investors tend to be stickier because they are looking at the long term. They understand that this is a long-term societal transition. And so they understand it's going to be volatile in the near term sometimes, but that they've got their eye on the ball. That's going to be 5, 10, 20 years down the road.

Incorporating Fundamentals Into The Company Selection Process [40:12]

Michael: So we have the company list. First, we just screen for do they pass some check of sustainability with some flexibility to the lens because we're trying to get a certain breadth of sector and capitalization diversification. So it's just not going to show up the same rate as, at least to my knowledge, there are no mega large cap solar energy companies. It's just not big enough and around long enough yet. So then you get, it sounds like, to your scoring. So fundamentals, am I just thinking pretty traditional...

Pete: Traditional fundamentals.

Michael: What are your metrics of choice at that point? I mean, are you a PE [Price-to-Earnings] ratio and PEG [Price/Earnings-to-Growth] ratio kind of firm? What do you look at?

Pete: PE, PEG, Price to sales, price to cash. We're looking at ROIC [Return On Invested Capital], ROA [Return On Assets], ROE [Return On Equity]. What's nice is that Morningstar Direct will spit out anything I want. So if I want to put a whole bunch of fundamental metrics in, because I think that's that's a really, really important part, obviously, of the process, because it is, then I can do that. So typically, what I'll do is I will rank them two ways. I will rank them absolute based on the comp versus typically the S&P 500, but I'll typically use 3. I'll typically use the S&P 500, I will use developed markets, and I will use, I think, small cap. I'm just setting up my spreadsheet right now to go through the review this month. And then I will also use a relative. So how do they perform versus the index, but how do they perform versus each other? And so those are both scores that I will incorporate into the process, because I think as I eliminate companies from the list, it will change the relative score every single time I delete a company from the file. I think ultimately it makes a better portfolio because I'm slowly eliminating out the bottom dwellers, if you will.

Michael: By the time you even start applying the scoring and beginning to filter, have you already mapped out which sectors the companies are in, which capitalizations they're in? I'm sort of envisioning this Morningstar style box ask thing where you've got a grid of boxes and a certain number of companies in each box, and as you start eliminating, you have to make sure you don't accidentally eliminate all the companies in a particular box.

Pete: I don't usually have a problem with market cap. I will mostly focus on industry. So the first thing I will do is I will create a consistent industry amongst companies, because what I'm getting from Morningstar isn't...it's about I'll say 80% accurate. But I want to have my own classification. So I will go through. Well, first thing I'll do is I will get rid of stuff that might have a low average daily volume. So I want to make sure that they're at least trading enough so that way we've got liquidity. I'll make sure that they're at least $100 million in market cap. I'll make sure that their price per share is at least $2. So from right there, I can pretty much eliminate 100 companies or so. Before I even start going through this arduous process of re-naming each of the industries, I've already cut off 15% of my list, which is nice.

Michael: So fundamentals. We're trying to make sure we've got a range across the industries. We've got both absolute rankings that may just knock out some particularly not good looking ones, and relative rankings so that if we've got basically a category box that's too big and crowded, we've got a relative rankings measure to figure out who might not make the list.

Pete: Yep. And a lot of the data that we get is populated, but sometimes it isn't because companies might be just simply too small to have a lot of the data in there, especially when it comes to some of the ESG data. There's so many companies and there's only so much bandwidth, I think, for some of these data providers. So you're going to find that some of them don't have it. And so let's say, for example, it's a small company that does solar tracking, the kind of things that will move the solar panels relative to where the sun is. It might be a $200 million company, but it falls way too small on the scale for these companies to actually go through and do an analysis on. And so I know what the company is doing. I'm not going to eliminate it because I don't have a bunch of ESG data on it. So I'm going to have to sort of fill in the gaps there as best I can.

Using ESG And Wall Street Analyst Ratings To Further Narrow The Investment Universe [45:10]

Michael: So then the next piece, it sounds like, in the scoring is ESG ratings. So I think you said Sustainlytics or MSCI writing. So I guess even for those who aren't familiar, can you I guess share what those rating services are and how they're different?

Pete: Sustainlytics has been around for quite a while. They were acquired by Morningstar, gosh, 5, 6 years ago, I think something like that. So we've got data, and they give a company an environmental score, a social score, and a governance score, and then they'll add the 3 up and give them an overall score. So that's one of the things we'll look at. And those are based on some of their proprietary metrics. So I can't necessarily get into specifically what they're looking at. But everything is relative to everything else in there, and relative to indexes. But they've got a lot of other data as well. Everything from controversy…so they score controversies, and they're pulling a lot of that data, I assume, from AI and from news feeds where companies are being...they're in trouble for not paying employees adequately or having an environmental spill of some sort in a manufacturing plant or something like that.

I've also got all their carbon emissions. That's something we typically don't use because a manufacturer, this is a relativity thing, a manufacturer is going to be very different than, say, a company that is providing data services or something like that. And so while it's good as a guide, it's not something that I can really integrate into the score. I'll also look at what percentage of the company is in carbon solutions. So I can see how...not the percentage of the company, but percentage of revenue is in carbon solutions. And I can score, say, it's 50% to 100%, that's a much higher score than a company that's say, 0% to 5%. And so I can create a score based on that. Again, percentage of revenue. We also will typically look at, because this is the only demographic data that we can find, but we'll look at percentage of female executives and percentage of female directors as well.

Michael: Wait, and then the difference between Sustainlytics and MSCI, or what you use for each?

Pete: MSCI, we're taking sort of their core score. They've got one score that I have, whereas Sustainlytics, I've got a whole bunch of granular data that I can really integrate into the analysis.

Michael: And so how do you ultimately score these? I mean, when you're talking about these many different factors, do you just end up creating your own score weightings that expresses just your investment views about how you think these factors should be weighted?

Pete: I typically will make them even with each other. Once I decide which factors I'm going to use, I will typically just make them plus 1, minus 1 kind of a thing. In some cases, it will be a scale, for example, percentage of revenue based on tobacco or weapons or whatever it is. But for the most part, I'm just trying to do a plus 1, minus 1. And then from there, I'll come up with a score based on, I want to say typically 15 different metrics.

Michael: And so in theory, companies get scored anywhere from plus 15 to minus 15, and you get a relative weighting that you can then map back to, "Do I still have my sector diversification? Do I still have my market cap diversification?"

Pete: Right. And sometimes I'm creating 2 scores. Sometimes I'm creating a score that's relative to the remaining companies, and I'm also creating a score that's relative to the index. Because they might be different. Because I can pull the data for each one of these for an index as well.

Michael: Then you said the third domain here that you're trying to score around is street opinion. So what does that mean?

Pete: So what it means is I'm able to pull data from, say, Schwab or from Thompson Reuters, or from a number of different agencies, data aggregators, I guess, that are scoring companies. And so I will typically have 5 or 6 different feeds from that. And not every company is going to be rated, especially the smaller companies. So again, we have to try and work around that a little bit. But if I see that there's a whole bunch of 5 stars from Morningstar and some of these others, then I know that the street likes it. And so I think what using these 3 different scoring techniques does is it gives us 3 very different angles, because I certainly don't have the answer to everything. And it's nice to have other analysts' opinions on what companies are.

Michael: So street opinion in this context is, proverbial, the Wall Street analyst street that put out the various large firms that put out their ratings of companies based on their analysts evaluating the company. So that's the street opinion group is finding analyst ratings with, I'm assuming, all the usual challenges that there's lots of analyst ratings for the big companies, and not so many for the small ones.

Pete: Exactly. Exactly. And so, I mean, because a lot of smaller companies don't have them, and I've got to have a 20% allocation to small companies, it actually makes that a little easier because, again, they may not have the breadth of analysis that you're going to find from a Thermo Fisher Scientific or a Trane Technologies or something like that.

Michael: And so you're making scores across fundamentals, ESG, and the overall street opinions, like other analysts' scores of these companies. Are those also evenly weighted? Is that a third, a third, a third across those?

Pete: Yeah, because what I'll have to do is, because there's different metrics or different numbers of metrics, I will go through, and I will create a factor that makes it a third, a third, a third. So at the end of the day, you're getting a portfolio that is a sustainable portfolio that uses ESG metrics, but that is not an ESG portfolio.

Michael: Right, because I didn't start with an index and adjust weights and subtract. I started with a bottom-up list of companies that fit a sustainable investing lens by product service or company ethic and governance that fits one of the list of the industries that ties to the new economy future, and we build our way up from there.

Pete: Exactly.

Michael: I guess I'm just trying to envision. Ultimately, then you get a list of companies that each have a score, and now you can just start kind of reading from the top down in each sector of each size allocation until you get the right number of companies and the right number of sector and market cap boxes to fill the portfolio.

Pete: I'll start eliminating the low-hanging fruit, the companies that just don't score well.

Michael: Well, I guess sometimes you're just going to get through all this, like, "You have a negative 15 out of 15." You're probably not going to make the list of anything…

Pete: Exactly. But at the end of the day, when I get down to say 150 companies, and I have a target of 70 or 75 or somewhere in that range as my final number, then I think you need to start looking at other things in terms of what their impact is, what is their product or service, what is the ethic of the company. Because at this time, not all, but the vast majority of the companies have scored really well. So they're all within a range of each other. Because you don't want to have a whole bunch of companies in one particular industry, you want to continue to maintain diversification. Then you really start sort of, if you will, crafting the portfolio at that point. So it goes from being, I think, the science of portfolio creation when I'm neck deep in this 50,000-cell spreadsheet to, "Okay, we've done all the analysis. Now, let's craft it in a way that is based on my experience for having done this for 20 years, and understanding as much as I can about where this next economy or where this clean economy is going. And how do we make the best portfolio we can based on both the science and the experience?"

Michael: Why a target of 70 to 75 companies?

Pete: So for a long time, I tried to keep it at around 50. And I just found that there are so many companies that I want to have that are cutting edge, that are really making an impact, that that is really the number that I settled on that it wasn't too many. So it wasn't onerous in terms of trying to manage it. But at the same time, it wasn't too few that I didn't get adequate diversification. And at the same time, because I'm skewing this to 50% to large cap, in many cases, some holdings are getting 2% to 2.5% allocation to it. So companies can have an impact, individual companies can have an impact on the performance of the portfolio. But at the same time, it is still diversified and spread out enough that nothing is going to have a major negative impact at the same time.

Michael: So you go through this whole process to create the list, and then you're effectively doing this every 6 months to reconstitute the list. So is there any preference given for companies that are already in the portfolio on the list, or are they just in the master list at the top of the stack of 700? And they just get to go fresh through the scoring system every time?

Pete: That's the first column I create. When I download the spreadsheet from Morningstar Direct is I create the current column. So what is already there? Because I don't necessarily want to be doing 100% turnover. I'm really trying to make it less than 40% turnover in any particular period, because...

Michael: Part of why I was wondering, just this level of at least potential reconstitution, we can just start kicking off some capital gains exposure, potentially not even long term, which creates other client challenges, if it's not a tax-deferred account.

Pete: Yeah, exactly. And so I do want to give preference to the companies that are already in there, because I've already gone through this process 6 months ago. So unless something major has changed, odds are that I'm going to want to keep them in there.

Michael: In practice, how many companies end out rotating and not making the cut?

Pete: Usually about 20% to 30%. Sometimes it's because they've really performed well. And it's time to take our gains on them. And sometimes it's because sort of the bottom dropped out. And we've seen both sides happen with companies, when you're managing individual stocks, you do your best to try to find the ones that you think are going to be the best performers that are going to have the biggest impact at the same time. But this is not an exact science, as we obviously all know.

Michael: How has the scoring system changed over time? I've got to imagine this is iterative for you just as you find new data feeds, new ways to look at and evaluate companies.

Pete: Just more data. There's more and more data that is available now than there was even just 5 years ago. And so that's the biggest change is that I've got more potential metrics that I can score a company on, especially in the ESG space. Obviously we've always been able to pull the fundamental data. I've also got some better access to some street opinions as well. I'm a believer that the more data you have, the better investment manager you can be. And that's why it sort of surprises me when people don't necessarily accept that even a limited amount of ESG data is a bad thing, because I think that any amount of data that you can have that will both reduce your risk and create more opportunity is a good thing.

Michael: It sounds like, in practice, the primary data source for you is Morningstar Direct and Sustainalytics, as they keep adding more data points, you get more data to play in this with them.

Pete: Absolutely. Absolutely.

Michael: So do you look at other data services? Have you experimented with them? I know there are other companies that have tried to come into the space in more and new and different, and proclaimed to be better data around this. So as someone that lives and breathes the space, I'm curious how you look at other new data providers, or if there are others that are on your radar screen as more or less promising.

Pete: I mean, I probably get 1 email a day about, "Hey, we're the next big thing in ESG data." So yeah, I get a lot of that where they want to sell that kind of data. The other provider that we use is a company called YourStake. And I like YourStake. I use it a little bit in this analysis, but I mostly use YourStake when I have got a prospect. So for example, I'll get a prospect that'll come in and they'll give us their statement, and we'll input what their holdings are into YourStake. And from YourStake, I can compare what their current portfolio looks like relative to one of our portfolios. It's a really good comparison tool for clients who want to see, "Hey, what can my portfolio look like versus what it's in now?" And a lot of times you'll find that it's in some version of the S&P 500. So for us, it's really easy to run this comparison. And for clients who truly want a sustainable portfolio, you can really show them that difference between what you have and what you could have.

Michael: And so I guess functionally YourStake becomes almost like a proposal generation tool as much as analytics portfolio construction tool. Here's a way to score "how good our portfolio is" versus the one that you're bringing to the table, but I'm not necessarily scoring on, "Here's my Sharpe Ratio and your Sharpe Ratio." I'm scoring on, "Here's how your portfolio aligns to sustainability. And here's how ours aligns to sustainability. And ideally the scores speak for themselves. If that's important for you, I'd be happy to show you how we get started."

Pete: And while you were talking, I looked it up real quick. So it's health, environment, human rights, equal opportunity, and accountability. So those are the 5 metrics that they use. And I would say 85% of the time will be doing better than what their current portfolio is.

Michael: From the investment end, you kind of noted, "We're trying to make sure we've got reasonable sector diversification," I guess, both for a general principle diversification, so you're not too terribly off from where an S&P 500 might end up likewise on market cap diversification. So do you literally measure tracking error?

Pete: I'm generally cognizant of it. I think it's too hard…like I said earlier, it's too hard to try and really hit on that specific sector diversification that any arbitrary index might have. But I know that I want to have as much diversification as possible. And so that's why I'm trying to go through every single one of these different industries and pick at least one or two or three companies, depending on what the opportunities are and where I think this next economy is going.

Combining Equity, Fixed Income, And Alts Strategies To Create Portfolios For Clients [1:02:19]

Michael: Are these all-equity portfolios or do you have some similar lenses on the debt fixed income side?

Pete: This is all equity. The only time that we get in on the debt side is in our diversified fund portfolios where I'll use funds or ETFs for bonds. Now what I will often do, however, is when we put it...we use Riskalyze for our risk profile with clients. And so we will typically...let's say you've got somebody who falls into the 60, we'll use a combination typically of 3 different investments with that client. We will use some of the individual stock portfolio. That's going to be the most aggressive of all of them. We will use a mix of one of our, let's say our balanced fund portfolio. And then a lot of times we'll use things like Calvert impact notes, which are an impact investment that is put out by the Calvert Foundation. They have competitive rates, not super-long-term maturities, but they are very focused on what their impact is. A lot of times it's low income housing. Sometimes it's things like microlending in the third world or in places where micro lending is really, really impactful. And so for clients who really want to feel sort of that step beyond, "Hey, I own First Solar." That's a really good way to sort of amp up their impact while at the same time, counterbalancing that the Green Sage, individual stock aggressiveness.

Michael: And I think you had said you have multiple models. Is that multiple balanced fund models, or they're different levels of aggressiveness in Green Sage itself?

Pete: Green Sage is always 100% equity. But there are 4 fund/ETF models. There's a conservative, there's a moderate or a balanced, there's an aggressive, and then there's a, what I call global equity, basically all equity fund or portfolio. And those are a mix of mutual funds and ETFs that I've screened. And now they're never going to be as pure as Green Sage is because they don't exist. So a lot of these are going to be not necessarily ESG metrics because they're ESG funds. But they're going to be sort of actively managed funds that use ESG as a risk management tool while at the same time also including some sustainability and resilience components, if I can find them.

Michael: That helps as I'm kind of envisioning. So as clients, most clients that come in don't literally want or need a 100% equity portfolio. Individual client construction is typically going to end up being some combination of an allocation to Green Sage for as much of the equity sleeve as I can fill their counterbalanced with some allocation to the fund ETF models that are mixtures of equity and fixed. And so I can kind of pour from both those buckets to get to a total stock bond allocation I want. And if I need to shore up the fixed income a little bit further, I've also got Calvert impact notes. If I want to more directly mix, like Green Sage and Calvert.

Pete: When I'm constructing the fund portfolios, I really break it down into 4 areas, if you will. So I've got your traditional equity specs, if you will, large cap, mid cap, small cap, internationally emerging markets. Those are just the basics, if you will. But I compliment those with typically a couple of themes that I think are important. And so the things that I currently am complimenting them with is I use an energy transition ETF. So that's focused on clean energy. I use a healthcare or biotech mutual fund, because I think that that's one of our biggest opportunities as well going forward. And I use a water ETF because again, those are themes that I can add, say, I think right now, the allocation in most of the portfolios is about 7% to 10% where I've got it focused on that particular theme.

Michael: You might have 7% to 10% of each of those 3?

Pete: No, a total of 10 [percent] for them. Because that complements what unfortunately is sort of more of an ESG portfolio, but this really brings the sustainability side into play with it. So those are 2 parts. The third, of course, is fixed income. And I try to use funds that are focused on green bonds or climate bonds and things like that whenever I can find them. And the fourth is, even though we really can't find many alts that are focused on sustainability, I am a strong believer that non-correlateds are important to any fund portfolio, just simply from a diversification and a non-correlation perspective.

Michael: What would alts be in your world? I'm assuming traditional private equity does not feel like it's going to necessarily fit a lot of your lenses.

Pete: No. And since we're having to do liquid alts, that does limit that somewhat, but we'll use a global macro kind of strategy. I've used long-short strategy in there. It's probably the hardest part to allocate because I understand and I know that it has to be there, but I also know that from a sustainability perspective, it runs counter to a lot of what we're trying to do on the other side. But at the end of the day, we're fiduciaries. We need to make as balanced and as well rounded portfolio as we can. And so that's what I always explain to clients is, this is the part that when we start to see volatility many times, this is what is going to stabilize your portfolio.

Michael: I'm struck by this description as well. When I look at some of the discussion in the marketplace today around, I guess I'll kind of broadly use that label, aligning your investments with your values.

Pete: That's our trademark.

Michael: Oh, fantastic. When I look in that direction, I feel like there's been a whole separate crop of companies that have built around this with sort of the chassis of direct indexing. I mean, a few providers will go so far as, "Go through this questionnaire intake form to express your values. And then we'll build an individual portfolio for you that fits these values. It's like either SRI subtraction or ESG weighting approach, but we'll use tech and make it your values, and do it at the individual stock level." And every client ends out with their own utterly personalized version of this. And I'm struck that your framework is not that, that at the end of the day, you're trying to apply your best expert opinion and view about how to allocate a capital in a sustainable way. I mean, there's client customization because you have to mix how much Green Sage and how much other stuff, because we're not putting 100% equity portfolios for clients. Green Sage is Green Sage, and they buy X dollars or X percentage of Green Sage, but you're not customizing the actual mix of stocks for clients. You pick your best and everybody gets your best because that's literally your best research.

Pete: Your direct index is only as good as your universe is. And so if your universe for your direct index is the S&P 500, you're probably never going to have a truly sustainable portfolio because a lot of the companies that we put into Green Sage aren't ever going to show up there. And so that's, I think one of the limitations. If you can do a direct index based on the All-Cap World Index from MSCI or something like that, you might be able to build something similar, but I think from my perspective, if I'm going to an advisor knowing that my priorities are sustainability, climate change, and resilience, then that's all the input I know. And those are the clients that are coming to us are the ones that that's what we care about.

And there are social issues that people are worried about or care about. They are so much harder to build a portfolio around that because the metrics simply aren't there to build a diversified portfolio. The only area that I've truly seen where we have the data for is when it comes to environmental, social issues, resilience issues, clean energy, things like that. We integrate gender as much as we can into Green Sage, but again, there is not a ton of data. There may be data from other index providers or other data providers that show, say, racial or sexual orientation data. Sustainalytics doesn't have it. If I had it, I might incorporate it in there. But at the end of the day, we are who we say we are. We're going to focus on sustainability, resilience, etc.

Michael: And is there a goal or a desire to build a track record around this? Do you think about having and publishing performance data around this? I guess for Green Sage at its core, is that a thing or is that not really a factor? Because again, your clients aren't coming to you for, "Tell me about the Sharpe Ratio of your 10-year track record," coming for a sustainable investing lens.

Pete: We are audited on Green Sage every year. It's not GIPS [Global Investment Performance Standards], but it is an audit by a GIPS firm. So I do have that data. Obviously there's always compliance issues with sharing performance numbers and things like that, but we do report to Morningstar. And so, the data is out there and available, and anytime anybody is interested in a fact sheet kind of thing, they just have to request it from us.

What Surprised Pete The Most About The Evolution Of Sustainable Investing [1:13:29]

Michael: So as you've gone down this track, and just all the evolution iterations over the 20-plus years of doing this, what surprised you the most of building a business around sustainable investing?

Pete: That's such a great question. I think the biggest thing that has surprised me is people's reactions to it. And you typically won't find people who are neutral. It's either, "Oh, I think that's a great idea," or, "Oh, my gosh, that's horrible. How can you do that?" And I think that's probably a little bit of human nature, but for me, that's surprising because I look at it as it's a passion for me. I feel sometimes that we're swimming upstream a little bit relative to the investment industry as a whole. But as we've seen asset flows, constantly over the past couple decades, just slowly creeping up and up and up in every form from ESG to sustainable investing to impact, however it's broken down, it's becoming a bigger and bigger part of the investment industry. And yes, we've run into some headwinds again, because there's been some political resistance and there's been some misunderstood performance during that growth versus value period. We still are continuing to see demand on our end here as a firm. And when I look at some of the data that is coming from Morningstar, generally the AUM for our sustainable investing industry is continuing to trend upward.

Michael: Why do you think it's so polarizing? I'm just fascinated that that sort of statement, people really aren't neutral, they love it or hate it, right? Like, that's a great idea or that's horrible.

Pete: I think polarization occurs just from a lack of understanding at the end of the day. I think that it was an easy political target because there are companies that have focused on some social issues that are judged controversial by them. But at the end of the day, what ESG is, it's just another way to grade risk on a company. It's not, like I said at the beginning of when we started talking, it's not the company's impact on the world around it. It's the impact of the world on the company. And that is at the end of the day, what we are charged with is measuring out what our risks are versus our performance and opportunities are.

The Low Point On Pete's Journey [1:16:25]

Michael: So what was the low point for you on this journey of building the firm?

Pete: I think the low point was even before I started this firm, when I was at Merrill Lynch and was unhappy there and jumped over to the bank financial space, and just couldn't make that work. And I really sort of was at a crossroads. And it was about that time that I was dating my wife. My highly intelligent wife who has PhDs in microbiology and molecular genetics. And we were having conversations about sustainability and resilience and environmentalism and things like that. And I also had a chance to spend an afternoon with a gentleman named Bill McDonough. And Bill at the time was considered sort of the preeminent green architect in the world. He was building cities in China that were fully sustainable. And he had a book that he had written called "Cradle to Cradle," which was about circular economies and the idea of eliminating waste from our product cycles. And so I spent some time with Bill. Melissa and I talked about this. And I said, "I think I can make a go with this." And so I went from really struggling to sort of find a path to finding a niche that really was aligned with who I was. I mean, I grew up spending time in the outdoors, spending time really appreciating nature. And so for me, even though at the time I hadn't realized it, this was a perfect route for me to go. And I've never looked back over the last 20 years.

Michael: How long did it take for it to get going, just for you to get momentum of some clients and some assets? Because it sounds like it was rough already getting started as it is for most of us in the early years.

Pete: Well, I was lucky in that I was able to bring a few assets over that were my original Merrill Lynch clients. And so they're the ones who really sort of bolstered me to be able to hang that shingle up.

Michael: Do you remember how much that was?

Pete: That was about $10 mil. And back in the day, that was, what, 2004, I'll take that. So that was enough to sustain me and bring enough revenue in. And, again, my degree is in communication. So I understand marketing and I understand getting out there and communicating our value proposition and finding who my demographic is. I think that's one of the great things about being in a niche as an advisor is the better you can define yourself, your niche, who you want to work with, how you want to work with them. I think that that expands your opportunities more than it actually narrows them because you don't have to compete with the generalist anymore.

Michael: Can you, I guess, expand on that further? It expands your opportunities, not narrows them.

Pete: Yeah. I think it expands them because if I'm a generalist, what do I have to do to differentiate myself from any other generalist who might be a CFP or have some other designation. It's really, really hard to do so. And so you can't really define who your market is. But once you start to actually say, "Hey, I'm going to work with doctors, or I'm going to work with sustainable clients, or I'm going to work with whomever it is," you can easily say, "So my demographic is from here to here. Here's the number of people I have in the areas that I'm trying to prospect or I'm trying to work." And so I think it expands your opportunity because you actually know what your opportunity is. When you're a generalist and when you're really just focused on doing general planning or general financial advising, there's no way for you to say, "Here's who my prospects are," because everybody's your prospect, which means you're everybody...that those people are also everybody else's prospect who also is a generalist.

What Pete Wishes He Had Known Earlier In His Career [1:20:28]

Michael: So what else do you know now you wish you knew 20 years ago as you were starting down this path?

Pete: One of the things that I'm proudest of is that I come into work day after day, put one foot in front of the other. So a little backstory is that my parents were in their mid-40s when they had me. So I was raised by older parents who were part of the greatest generation. And they were people who never made a lot of money. They were people who were savers, but they worked hard. And I think one of the things that I got from them is my work ethic. And again, I'm very good at just putting my head down and every day, just coming in and doing my thing and learning and continuing to hone how I do things.

I think that what I know now that I didn't know then when I started was that you can do a better job of putting a good day's work in if you're more aware of some of where your errors are and some of where the things that aren't working, as opposed to just trying to bull through something and say, "Oh, I know this is going to work." I think the biggest error that we probably had as a business is we tried to start up a robo advisor several years ago. I think it seems like almost all of them have gone away now, but we felt like we had something really good. We had created a system using our Green Sage universe. And we worked with a provider who was able to actually take client information and create almost direct indexes. And it wasn't really direct index, but it was very similar to it. And we were excited about that. We could never quite make it work. There was always a technical glitch or there was some other problem, but we kept pouring money into it and trying to make it work until we finally were like, "This isn't working. And we've wasted a quarter of a million dollars, whatever it was, getting into it." I think that being able to see the writing on the wall in that particular instance, or even just learning when it's probably better to take a step back and stop trying to bully your way through this, and let's be a little bit more strategic about it.

Michael: So in retrospect, what would you, or could you have done differently in how you went about it?

Pete: Just being more aware. I think the more aware we are about how we interact with the world, about how we interact with our profession is probably the one of the more important things we can do, because when we are just putting our head down and using pure work ethic as a driving force, we aren't always making the right decisions. And so being able to take a step back and understand a sense of relativity is, "Where am I relative to where I was 6 months ago, where I was a year ago, 2 years," whatever, and see what's worked, what hasn't worked, as opposed to just every day going in and doing the same old thing. Obviously it got us to where we are, but we might've gotten to where we were faster had I sort of taken that break and step back.

Pete's Advice For Advisors Interested In Sustainable Investing [1:23:46]

Michael: Any other advice you would give advisors that are maybe looking to come further into the sustainable investing realm from here and don't have the background yet, but want to go deeper?

Pete: Take some time and read about it. I will sort of plug, I've got a book coming out next year from Wiley that is going to be for financial advisors on sustainable investing. A lot of what we've talked today, Michael, is going to be in there, how I've put portfolios together, how to market, how to create a practice that is focused on sustainable investing. So, again, that'll be available sometime in 2025. But if you are interested in it, there are a lot of resources out there. The Sustainable Investment Forum is our trade group. They have got a ton of information on their website. They give webinars on a regular basis. Our colleagues over at Vert Funds, they do webinars regularly on how to transition your practice to a sustainable practice, or how you can put together sustainable portfolios, things like that. So there's a lot of opportunities out there.

What's Next For Pete On His Advisor Journey [1:24:59]

Michael: So what comes next for you from this journey?

Pete: What comes next for me? So, obviously, we sold the firm to Prime Capital Financial back in 2022. We sold it for a couple of reasons. We sold it because we wanted to be able to create scale, and we weren't able to do it with just the 5 or 6 of us at the time. And so that's been a really, really good relationship for us. Prime wanted to have a sustainable investment arm and that's what we became for them. So for me, it's just continuing to create scale. I want to see us have advisors in strategic cities, cities where we will have sort of an advantage, cities that tend to be more progressive, New York, Denver, Southern California, places like that. So that's really one of the things that I'm focusing on over the next year or so is trying to find folks that really want to help us grow, that want to help us scale our sustainable products, make a bigger impact. That's one of the big things, maybe not for me personally, but for us as a firm is to create that scale.

For me, I'm going to continue doing what I'm doing, which is sort of being a thought leader. And I write on a regular basis. So you'll see things that I put out there on sustainable investing. I talk about greenwashing a lot. I know that's something that we haven't spent much time talking about today. I host a podcast called "Dollars and Change: The Experts Guide to Sustainable and Responsible Investing," where I have leaders in the sustainable investing industry on on a regular basis. So I've got a whole lot going on. And really, pretty much just keeping up those engagements.

What Success Means To Pete [1:26:57]

Michael: Very cool. Very cool. So as we come to the end, this is a podcast about success. And just one of the themes that comes up is the word success means very, very different things to different people. Sometimes it changes for us as we go through stages of life. And so you've built this very successful business now, several hundred million dollars under management, and now scaling up to the next level under the Prime Capital umbrella. So the business seems to be in a good place. How do you define success for yourself at this point?

Pete: One of the things that I did when I sold the firm is I bought a cabin, and the cabin is about 2 and a half hours west of us here in Asheville. It's on a lake. I can tell you that when I am sitting either on the dock or on the boat with a fishing line, with a fishing pole in my hand, and enjoying the amazing views out there or spending time with family and friends, of course my wife and cat out there, that's success to me. Being able to feel like I've worked really hard, I've had an impact because I truly believe what we do is impactful. And then be able to sort of step aside and turn off, if you will, and enjoy the lake, the breeze, fishing. That is what success is to me. I don't have to have a Porsche. I don't have to have some of the things that are a lot of times associated with success, the material goods. Cooking some burgers or hot dogs out on the grill out there, and just sitting back with a local Asheville beer and relaxing, that's ultimately success for me.

Michael: Very cool. I love it. I love it. Thank you so much for joining us, Pete, on the "Financial Advisor Success" podcast.

Pete: Michael, it has been a pleasure and an honor. And I've obviously lost my voice as I've been talking so much here.

Michael: All good. We've talked it through.

Pete: You've definitely talked me out. That's for sure.

Michael: Awesome. Well, thank you so much.

Pete: Thank you.