This article was produced in partnership with Morningstar.

In a recent webinar, three experts from the research firm Morningstar sat down to discuss how financial advisors are deepening their relationships with clients by focusing on non-financial preferences.

These are the non-financial values and beliefs that illuminate where a client may want to invest – or not invest – beyond the usual considerations like risk and returns.

By gaining a richer understanding of a client’s non-financial preferences, an advisor can build a more personalised picture of their needs, create a more aligned portfolio, and perhaps bridge those tricky transitions in a client relationship like a generational wealth transfer, when 7 in 10 advisors see themselves replaced with another advisor.

Webinar host Jason Stipp, Director of Product Management at Morningstar, was joined by Thomas Aviles, Vice President, Business Development - Advisor Client Experience; and Ryan Murphy, Global Head of Behavioral Insights.

During the hour-long discussion, they focused on three key objectives: the need for personalisation, how advisors can learn more about their client’s needs and, finally, connecting what advisors learn to building a better portfolio.

Need for personalisation

The benefits of personalisation seem rather obvious. A better understanding of a client's non-financial preferences forges a stronger relationship and enables financial advisors to develop a portfolio that not only aligns risk and return for a client’s financial needs and objectives, it also resonates with the client on a personal level. Not to mention, it is considered best practice for IIROC licensed advisors to capture a client’s ESG preferences during the KYC process.

“Your client obviously wants to reach their financial goals, but they also have specific things that they want to avoid or own in their portfolio,” Stipp explains.

“A client with strong environmental values may prefer to invest in green energy companies, while another might want to avoid vice stocks. These are the non-financial considerations that would help further personalise a portfolio.”

Now, some advisors may see this and think, well, my clients don’t mention climate or renewables so this doesn’t affect me. But the need to personalise a portfolio goes beyond some of the more familiar considerations we see in the media. And sometimes clients don’t even know that such personalisation is even possible.

Aviles recalls a business trip to highlight what this means.

“I was working with a broker-dealer in Texas and I asked them, “Hey, do you have any ESG or sustainability initiatives?’

“They sort of laughed at me. They said, ‘no, this is Texas.’ And so I asked them if they had any clients of faith, and what if they asked for no investments in tobacco, stem cells or gambling stocks? Would they have the tools and the analytics to provide that insight?”

This example reveals that personalisation goes beyond addressing more publicised initiatives like ESG. Learning more about a client’s non-financial preferences can unearth very deep convictions, and help advisors avoid some awkward financial recommendations.

Learning about a client’s non-financial preferences

The first thing to realise is that non-financial preferences are secondary preferences. Fundamentally, a client’s primary goal is the usual mix of aligning risk and return to match a client’s tolerance and financial needs or goals. That’s the fulcrum of an advisor’s relationship with a client.

Although the secondary, non-financial preferences are a significant and growing factor in this relationship, the financial objectives come first.

“People become investors to reach their long-term financial goals, and of course that's what we need to focus on,” Murphy says. “But once that is squared away, then there are ways in which portfolios can be tilted or leaned according to particular values. Think about these things as tilts and leans, rather than having them take up all the air in the room.”

So once an advisor has prioritised the financial goals, and then understood the need to tilt or lean with the secondary non-financial goals, how do they go about capturing the preferences of their clients?

Here, Stipp points to Morningstar’s Advisor Workstation, the comprehensive investment planning tool that helps advisors select and manage their portfolios. Within Advisor Workstation, Morningstar has provided a set of themes that clients can select or ignore as part of a process to define their preferences.

However, here’s where things can get a bit tricky. A client may say they’re concerned about climate change for example, and this might cause a portfolio to lean away from energy companies. But of course at certain times energy companies will rally and portfolios with energy exposure may outperform those without it. The question is, to what extent is a client OK with such divergence, or in financial-speak, how much tracking error would they tolerate in service of their non-financial preference?

The key here is to be able to quantify the client’s concern, or non-financial preference, and balance it against their financial needs. Murphy, who specialises in investor behaviour, says this is where Advisor Workstation helps advisors capture a client’s preferences and gauge the level of commitment to these revealed preferences.

“It’s designed in a way that requires people to make trade-offs,” he says. “They don't just get to say, ‘I want this with no consequences – they have to make choices that are closer to how the real world works.

“Based on the pattern of their choices, we can infer what is important to them and how important it is relative to the other opportunities they have. And from that more sophisticated analysis, we generate precise quantified output that we can use in building portfolios for them.”

Connecting preferences to portfolios

We’ve addressed the need for personalisation, and how to achieve that personalisation by understanding and quantifying a client’s non-financial preferences. Now, it’s time to add the third and perhaps most complicated piece of the puzzle: aligning those preferences with an investment portfolio.

This is where Morningstar’s technology and data really come into play. On one hand, you have all of the client’s nuanced non-financial preferences across a wide range of ethical, environmental, and social issues. And on the other you have the targeted investments themselves, which come with their own incredibly complex landscape of financial metrics and possibilities.

Using Morningstar’s Advisor Workstation, Sustainalytics and other cutting-edge solutions, an advisor can begin connecting them together in a way that prioritizes achieving an optimal risk/return profile while secondarily addressing the client’s non-financial preferences according to their level of conviction.

“Here we bring the technology to the table – to look at a list of funds, the underlying attributes, and the client’s details,” Stipp explains. “Once you've done that, our optimizer goes to work.”

It’s an incredibly powerful technological solution. A single engine that takes an enormous amount of data from both the client and their investment targets, and then brings it all together in a tailored portfolio that addresses their financial and non-financial goals.