How Diversity in the Financial Planning Industry Can Build Wealth Among African Americans

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Widespread financial discrimination, deception, and lending bias all related to structural racism have contributed to financial inequities faced by African Americans. Black Americans of all incomes are much less likely to own a home today because of racial inequities in intergenerational wealth, credit and lending discrimination. Yet homeownership is a leading factor in building wealth.

Many black families were disproportionately impacted by the 2008 housing crisis, having been targeted by subprime lenders and losing their homes. The subprime mortgage industry steered black borrowers towards high-cost loans, resulting in five times more over-priced loans compared to white communities (Gerardi and Willen 2009). Financial institutions continue to target African Americans for products and services that are higher-priced, further reinforcing distrust.

National research on financial practices suggests that financial institutions need to work harder to build trust and open up services for America’s black communities.

As a result of their negative experiences, African Americans prefer to navigate financial decisions through relationships, valuing “respect, trust, safety, security and a sense of belonging” (Sawady and Tescher, 2008). However, these informal networks often lack the expertise of formal financial institutions; according to the Center for Financial Planning Board (CFP), less than 3.5% of all the 80,000 certified financial planners in the United States are black or Latino. 

To put it another way, there are just 1,200 African American CFP Financial Planning professionals in the entire US.

The Importance of African American Wealth Advisers

Justin McCurdy, who is black, is an Executive Director at Manhattan West Asset Management, a notably diverse wealth management firm within a predominantly white sector. McCurdy’s passion to educate and empower communities locked out of financial institutions initially attracted him to the financial planning industry. When asked why more African Americans should enter Financial Management, he replied:

“It’s my belief that the more African-American advisors there are, the more educated the black community will be about finance. This will only lead to more wealth accumulation and preservation within the community.”

In an interview with Black Enterprise, McCurdy attributed to the low numbers of wealth advisors of colour to many African-American children not having the opportunity to see successful Financial Advisors of colour. It’s difficult for them to envision themselves taking that career path. McCurdy wants the next generation to see wealth management as a viable career opportunity for all sectors of the community.

Meeting the needs of increasingly diverse consumers

Last year, the CFP surveyed 2,276 financial planning stakeholders including planners, employers and consumers to find out how to create a more diverse financial planning profession.

The survey uncovered three trends widely seen as contributing to the current situation:

  • Economic inequality and cultural norms for people of colour, resulting in less personal or family experience with long-term financial planning, leading to lower levels of confidence that one will be accepted in the profession.

  • Firms’ hiring and onboarding practices, with an emphasis on bringing in candidates who already have a strong network of potential clients.

  • Clients’ implicit biases: Consumers’ unconscious preferences for working with professionals who have similar backgrounds.

56 percent of respondents agreed that a formal mentoring program was necessary to boost diversity in the financial planning profession.

Survey results show polarised perceptions

The study also found strong disparities between what African American and non-African American CFPs thought were the reasons behind fewer people of colour in the Financial Planning sector.

  • 27% of black CFPs cited companies’ reluctance to hire or promote people of colour as the broad reason.

  • By contrast, 58% of non-African American or Latino CFPs claimed people of colour are reluctant to pursue jobs in the industry.

Compared to all the survey respondents, black financial planning professional respondents ranked:

  • Prejudice from firms

  • Firms’ beliefs about clients and ethnicity

  • Firms’ assumptions about lack of cultural fit

  • Fewer opportunities

…as higher than average when asked about causes for the underrepresentation of people of colour in financial planning.

The importance of mentoring

In a 2017 publication, Creating a Culture of Mentorship Heidrick & Struggles surveyed more than 1,000 professionals in North America to discover why mentoring is critical in supporting, developing and retaining talented people.

Their findings show companies that offer effective mentoring have a competitive edge in the fight for talent. Potential employees are attracted to development opportunities represented by mentoring programs. Organisations can unlock the potential of mentorship to attract, develop, and retain a diverse workforce.

For African Americans, seeing themselves represented in an organisation will encourage them to apply.

The significance of wealth managers of colour

The financial planning industry needs to change its compensation practices to attract African American talent. Currently, many firms only take on new clients who are ready to invest a minimum of $250,000. In 2016, white families had a median net worth of $171,000, compared with $17,600 for black and $20,700 for Latino families.

Financial planning firms also assess new recruits on the potential of their networks and their sphere of influence: a sizeable obstacle to many people of colour whose networks earn less than the US national median.

According to James Brewer, the future of the financial planning industry “is to bring in less wealthy people with potentially decent income,” to better reflect the customers they serve. Most Americans have incomes between $50,000 and $100,000.

Diversity among financial planners will also yield more professionals equipped to understand the unique needs and fears of clients from a similar background, building trust and respect with communities that have been marginalised from financial services.

A tech-enabled mentoring platform

A lack of visible role models, networks and mentoring programs for people of colour in financial planning reinforces underrepresentation in the industry. When the industry attracts, recruits and retains planners who represent the diverse needs of their customers, they can build stronger connections with marginalised communities.

For financial planning organisations seeking more inclusive hiring, promotion and retention processes, a formal mentoring structure aided by technology can match employees with mentors and guide them towards their goals. Mentoring programs give underrepresented groups access to senior-level executives, who in turn are able to see the potential of junior staff.

WERKIN’s tech-enabled mentoring platform uses algorithms to impartially match mentors and mentees. The software enables leaders to set goals and schedule regular meetings until learning objectives are achieved. Team leaders can also assign stretch assignments based on development needs rather than ‘who the mentor knows’.

The Center for Financial Planning identified formal mentoring programs as the number one strategy to help attract and develop talent among black Americans in the financial planning sector. WERKIN is an effective mentoring platform that can help diversify the industry by impartially matching relevant mentors. WERKIN’s technology can help accelerate career development for underrepresented groups in the financial planning sector, addressing structural inequities in financial security at large.