The Emerging Retirement Wave

Bridging The Financial Color Gap

How advisors can play a proactive role in education and empowerment

by Timi Joy Jorgensen, PhD

Ms. Jorgensen is Assistant Professor and Director of Financial Literacy at The American College of Financial Services. Visit theamericancollege.edu.

Studies have shown long-standing and substantial wealth disparities exist across different racial and ethnic groups, which have only been exacerbated by the impact and lasting effects of COVID-19. According to the 2019 Survey of Consumer Finances, the typical white family has eight times the wealth of the typical Black family and five times the wealth of the typical Hispanic family.

To close this gap, the financial advisory community needs to take a proactive approach to providing adequate financial education and empowering communities of color to ensure they are preparing for their financial futures to and through retirement. There is no better time to start this than the present, especially amid COVID-induced market volatility and rising concerns around inflation.

The Pandemic And Social Unrest Has Further Deepened Financial Disparities Across Racial Lines

Recent research from leading annuity and life insurance provider F&G found that 62% of Black Americans and 74% of Hispanic Americans are disproportionately worried about their retirement income as a result of COVID-19, according to data polled of American investors with at least $10,000 in investable assets. F&G’s Risk Tolerance Tracker revealed that only 57% of White Americans said the same.

In addition, the research found that 43% of Black American investors reported they “strongly agree” that the events of the first six months of COVID-19, paired with social unrest and market volatility, have made them less likely to take financial risks. Only 29% of White Americans said the same, emphasizing the extent to which COVID-19 and social unrest have exacerbated financial disparities across different racial and ethic groups.

Financial Education Gap Increasing Among Communities Of Color

In addition to demonstrating how the global public health crisis has intensified financial divides along racial lines, F&G’s data underscored the widening financial education gap among communities of color. The research found that Black and Hispanic American investors are disproportionately worried about their retirement income and are interested in exploring new products to secure their financial futures, but they don’t know what is available.

Similarly, the use of a financial advisor also varies significantly across racial lines. The American College of Financial Services surveyed pre-retirees and retirees for its 2020 Retirement Income Literacy Survey, finding that 59% of whites have an ongoing relationship with a financial advisor while only 48% of Black Americans and 47% of Hispanic Americans said the same.

Advisors have an important role in bridging this education gap and enhancing clients’ understanding around which financial product(s) can help create a financial safety net tailored to their needs. For example, The College discovered that Black Americans place more importance on having guaranteed income in retirement (83%), in comparison to 76% of Hispanic Americans and 68% of White Americans. By understanding these differences across demographic groups and initiating thoughtful conversations with their clients, financial advisors can position themselves to meet their client’s financial and retirement planning needs.

Tackling Financial Disparity Gaps For Communities Of Color

62% of Black Americans and 74% of Hispanic Americans are disproportionately worried about their retirement income as a result of COVID-19, according to data polled of American investors with at least $10,000 in investable assets...

To close the disparity gap among Black and Hispanic American investors, advisors must be sure to check their inherent biases at the door to initiate meaningful change for their clients.

Amid heightened market volatility, financial advisors must thoroughly examine whether their inherent biases, such as potential assumptions around a client’s loss aversion and overconfidence, may restrict the toolkits they use. Financial advisors also have an opportunity to leverage financial empathy as an entry point to communities of color to build trust and begin to develop outcome-based solutions which address their key concerns.

For example, one of the ways the advisory community can foster this trust is by asking clients to walk them through the entirety of their finance experiences and then validating the difficult decisions that clients have had to make. This acknowledgement will make it easier to begin the education conversation, as needed, with clients on topics such as budgeting, investing in the stock market and saving for retirement.

Furthermore, the validation will help clients transparently evaluate other options they might consider taking advantage of in the future. Additionally, the process can help build trust between clients and advisors – so clients may be more likely to seek counsel if and when a similar financial situation arises.

Avoiding Advisor Blind Spots To Better Serve Risk-Averse Clients

Chris Blunt, CEO of F&G notes, “Advisors must rigorously examine their own individual blind spots, especially amid unprecedented market conditions and rising inflation. Many financial advisors haven’t lived through a phase of increasing inflation before. As a result, it is prudent to assess their product offerings, reevaluate whether they can bear up against rising interest rates over time and adjust as needed.”

As the pandemic continues to spur market volatility, financial advisors must focus on their approach to providing client counsel and developing investment strategies. One way the financial advisory community can achieve this is by viewing client relationships as partnerships.

Financial advisors can build partnerships with their clients by proactively sharing their rationale throughout the investment process, rather than simply reporting the end result of an investment decision. This collaborative, participative approach helps to foster client trust and address the education gap, which makes clients more likely to listen to their financial advisors’ counsel.

Another way that financial advisors can make clients more receptive to their counsel is through ongoing education about how to manage investor risk. Financial advisors must empathize with the fact that each client’s capacity to tolerate risk will differ, especially as inflation continues to steadily rise and tailor their approach to each individual client.

For example, The College’s Retirement Income Literacy Survey found that 77% of Black Americans who have a current advisor relationship noted that an important advisor trait was the capacity to educate them about strategies to protect against investment risk. Only 63% of Hispanic Americans and 57% of White Americans said the same. This data underscores the importance of advisors proactively initiating conversations with peer advisors to educate themselves about emerging technologies and tools so they can provide relevant counsel to clients.

Financial Advisors Can Bridge The Education Gap With Financial Empathy

To address the most pressing concerns facing communities of color, advisors must focus on building and nurturing a strong relationship with their clients. Ask questions and listen to their unique needs. Establishing a high level of trust with your clients requires financial empathy – and this approach is the best way to begin closing the education gap. Whether clients are focused on securing retirement income, increasing their confidence in the market or simply becoming a more involved (and knowledgeable) planner of their own financial future, advisors must partner with clients to develop meaningful, outcome-based solutions.

 

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