RIA structure exempt from state filings

An RIA structure exempt from state filings

Ethic is a registered investment advisor (RIA) with an internet exception and focused on ethical investments. Hence the name. Perhaps such a structure can be used to invest in other products like P2P lending ? Because Ethic provides advice through the internet they are exempted from traditional state filings. They use their technical platform to […]

An RIA structure exempt from state filings

Ethic is a registered investment advisor (RIA) with an internet exception and focused on ethical investments. Hence the name. Perhaps such a structure can be used to invest in other products like P2P lending ?

Because Ethic provides advice through the internet they are exempted from traditional state filings. They use their technical platform to execute the entire process. Being a RIA has major advantages for a fintech.

Though robo-advisors are entering the mainstream, many clients would still not be comfortable trusting their money with an automated internet only entity. RIA gives them a currency with the investor and they also do not have to file license state by state, which can be exhausting both in terms of times and money for a young start-up. To avail this advantage, it is necessary to be exclusively online (with only 15 non-internet clients allowed), the advice must be personalized for the client and it must keep record keeping for 5 years for the exemption.

How it works

Assets are held by their custodian / brokerage partner, TD Ameritrade, which is one of the largest multinational financial institutions in the world. Ethic Inc. is a member of SIPC, which protects Ethic Inc. accounts up to $500,000.Their custodian TD Ameritrade sends account statements periodically as well so that customer stays informed. Ethic, for now, is running an invitation-only testing beta, to remove the glitches from the website and the platform. So, for now, they don’t have any AUM, but they are aiming in the region of a half to one billion dollars to become profitable in the long run.

Ethic invests in…

A diversified portfolio is developed using algorithm allocation based on the risk profile of the client. These factors include return expectation of the customer, investment amount, their age etc. They build an intelligent portfolio of carefully selected investments by exhaustively examining environmental, social, and governance (ESG) practices. They create well-diversified investment portfolios primarily using exchange traded funds (ETFs) and mutual funds. Many stocks and bonds are part of these investment funds. They analyze and curate investments using three key criteria:

  1. Ethical standards;
  2. Financial performance; and
  3. Investment fees

Their ethical standards analysis uses best-practice environmental, social and governance (ESG) screening. They use a combination of positive and negative screening. That is, they look at companies performing well on leading ESG benchmarks (positive), and excluding companies in damaging industries (negative). In particular, they exclude companies operating in the tobacco, weapons, gambling and fossil fuel industries. They use quantitative techniques which are used by asset managers to do financial analysis. Their analysis mainly focuses on maximizing net return as compared to the amount of risk the portfolio is absorbing.

Fee structure

Their stringent fee standards ensure the client is charged minimal investment fees. Minimizing fees are the simplest way to improve portfolio performance. They do not select listed investments that have front-load fees, back-load fees, per transaction fees and redemption fees. They also strive to reduce all fund operating fees, which are charged by third parties. Ethic has a typical robo-advisor business model. No hidden fees, no upfront fees, no deferred fees, and no commissions and they are able to keep the management fees low because they implement market leading technology. Currently, they are not charging anything directly to the client but instead ask its clients to pay what they would like for the service. The market fee for such services ranges from 1.0 to 1.5%. Ethic recommends only 0.5% for its services.

Why Ethic ?

As people become aware of social issues like the environment, equality, social responsibility, they want their money to be invested in companies which are socially and ethically responsible (also known as sustainable investments). In the USA, sustainable, responsible and impact investing (SRI) has grown substantially over the past decade. The total US-domiciled assets under management using SRI strategies expanded from $3.74 trillion at the start of 2012 to $6.57 trillion at the start of 2014, an increase of 76 percent. These assets now account for more than one out of every six dollars under professional management in the United States. About 20% of all investment capital is reported to be sustainable capital. Principles for Responsible Investing Initiative- a program supported by the United Nations have 1380 signatories managing $59 trillion in investments. WeAreEthic(Ethic) is a fintech born with a mission to automate the process of investing responsibly without incurring a financial trade-off.

Company history

Ethic is based out of San Francisco, California and is a brain child of Jay Lipman, Douglas Scott, and Johnny Mair, who have spent years advising and managing money for some of the most sophisticated investors in the world. Douglas Scott brings in a wealth of investment experience; his previous work includes being an investment banker at Deutsche Bank and real estate investor at The McNaughton Group. Josh Lipman has previously worked at Deutsche Bank and Lakshmi Capital. Johnny Mair takes care of the product development; his previous work experience included stints at ImageBrief, Sapient, Credible. Effortless sustainable investing was the idea behind Ethic. Ethic counts its mission as bringing “sustainable impact investing mainstream through technology, data science, and design”. They implement strategies to create a customized portfolio of responsible, low-cost investments based on the client’s financial goals and personal values.

Next steps

Eventually, Ethic wants to create its own ETF and distribute it to 3rd parties. This will help it become a universal standard for sustainable and ethical investing. Their automated approach is “Set and Forget” which simply means that they want the customer to set the goals before they invest and then forget about them. Their algorithm allocates the portfolio accordingly and they analytically monitor your portfolio and rebalance if individual investment drifts too far from optimal allocation. Rebalancing too frequently can have an impact on a client’s tax returns, so the founders have restricted the rebalancing to once a year at maximum.

It has been proven that the companies that take care of their workforce, empower their shareholders, and also respect the environment, are more profitable than their less sustainable counterparts. Sustainable investment is $6.6 trillion market alone in the US and $21.4 trillion markets globally; Ethic is trying to be the first provider to match the demand by providing a high-quality product and create a strong millennial focused brand in the process.

Author: Heena Dhir and George Popescu

George Popescu