Goals, Challenges, and Investment Behavior

BET founder Robert L. Johnson Calls for New Focus on Wealth Creation in the Black Community; Urges Race-Recognition Remedies to Address Wealth Gap. June 18, 2012.

Excerpt from Press Release:

[Johnson] called for a renewed national discussion on the growing wealth gap which he referred to as a “wealth gap Tsunami threatening African Americans”.

Johnson cited a recent study conducted by the Pew Research Center, which concluded “The wealth gap between white and African American families has more than quadrupled over the course of a generation; the racial wealth gap increased by $75,000, from $20,000 to $95,000; the median wealth of white households is 20 times that of black households; and at least 35% of African Americans have no assets”.

In response to this compelling national crisis, Johnson stated that, “We must admit the harsh reality of a history of institutionalized racism and economic discrimination against African Americans is the primary cause of wealth disparity between Black and white Americans” and “we must be willing to talk about race recognition remedies at the highest levels of government as well as between Black and white Americans.”

The State Of Black Wealth In America. Lynnette Khalfani-Cox. Ebony. [The Black Wealth Issue] August 2011


Even before the recession hit, Black Americans trailed Whites significantly in building wealth, primarily because of the historical impact of racism, oppression and political policies.

Take property ownership, for instance. It’s well known that having land, real estate and other forms of property help create wealth. Throughout much of U.S. history, federal and state governments have provided so-called “wealth starter kits” to Whites, according to the Insight Center for Community Economic Development, a national research firm that promotes financial stability in economically challenged communities.

In a 2009 report from the center titled Laying the Foundation for National Prosperity: The Imperative of Closing the Racial Wealth Gap, researchers noted that “governments have given gifts of land, education, government-backed mortgages and farm loans, a social safety net, and business subsidies to White families, sometimes exclusively and usually disproportionately.”

The same governments that boosted White wealth took land from people of color, denied them education and erected barriers to home and business ownership, the report states, noting that segregation and Jim Crow laws pushed many African-Americans “to the margins of the economy, where many remain stuck today.”

Fortunately, statistics don’t tell the whole story. Some of us have managed to choose wisely, hang on to our assets and even boost our wealth.

Fear of getting overextended during the housing boom was one factor that kept 56-year-old Yvonne Parker from pursuing a costly mortgage….

…Some of us are building wealth by launching our own companies. Robert L. Wallace is a case in point.
He grew up poor in the projects in Baltimore, one of eight children living in a one-bedroom apartment. By the time he became a young man, “I got tired of being poor,” Wallace says. “I wasn’t knocking Mom and Dad, but I saw very clearly the contrast between the quality of life among Blacks and Whites.”

It was being tired of poverty, Wallace says, that drove him to ultimately become an engineer, author and entrepreneur.

Wallace is the founder, president and CEO of BITHGROUP Technologies, an information technology services firm in Baltimore. Among the 27 million businesses in the United States. Wallace’s firm is among the 1.9 million of those companies, or 7 percent, that are owned by Blacks.

Says Wallace, who has written numerous books, including Black Wealth: Your Road to Small Business Success (John Wiley & Sons): “Economic power is the ability to control your economic destiny.”

THE TASK OF building wealth in our families and communities is daunting but not insurmountable.
Below are key strategies to get you going….

The African American Financial Experience. April 2011. 
Results of a Prudential Financial survey conducted in November 2010

…The study underscores growing affluence in the African American community and the importance of financial planning to achieve financial security. But while African Americans are looking for assistance and advice, 78 percent feel financial services companies have not effectively engaged the African American community and, as a result, most do not use or have access to financial advisors…

In the African American community, financial goals are not just about increasing personal affluence or planning for a secure retirement. The survey found that African Americans are more likely than the general population to cite charitable donations as an important goal (68 percent vs. 55 percent), or to rate issues like educating children about debt avoidance and providing college tuition as very important to them.

When it comes to retirement readiness, the study found that only two in 10 African Americans believe that they are on track to meet their planning and savings goals for retirement, and nearly twice as many say they are way behind or haven’t even started. In fact, the study found that 60 percent of African Americans surveyed have less than $50,000 in company retirement plans and only 23 percent have more than $100,000.

While most Americans expect company-sponsored retirement plans to be the primary source of retirement income, African Americans are slightly less likely than the general population to put money into these plans on a regular basis. And they are three times more likely to tap into their 401(k) or similar plans to meet immediate financial needs.

“African Americans are looking to their employers for information, advice, and tools to help bolster their savings and better plan for their financial goals,” said Sharon C. Taylor, senior vice president of human resources at Prudential. “Clearly, companies need to do more if they are going to help African Americans achieve financial security, both as individuals and in the workplace.”

The study also found:

  • While 82 percent of African Americans believe maintaining their current lifestyle in retirement is critical, only one-third feel confident they will be able to accomplish this. In addition, 83 percent place critical importance on not becoming a financial burden on loved ones, but just one in 10 is confident of being able to achieve that goal.
  • African Americans say their most important future financial needs include building wealth portfolios and retirement nest eggs as well as transferring wealth to their heirs.
  • African American decision makers tend to be more independent learners when it comes to finances, relying on books, financial websites, financial seminars and conferences, and their employers for information. They also show a high interest in learning about financial issues through faith-based organizations.
  • African American women are driving financial decisions in their households. Of the African American women surveyed, 72 percent indicated that they are the primary financial decision-makers in their households and do not share financial decision-making equally. This compares with 69 percent of African American men, and 54 percent of the general population.
  • African Americans are nearly twice as likely to have a dream of starting a small business as those in the general population (35 percent vs. 19 percent), and view starting their own small business as a path to financial freedom. However, more than half of those with an interest in starting a small business say a lack of capital has been the primary hurdle to getting started.

The Washington Post’s nationally syndicated personal finance columnist, Michelle Singletary’s insightful take on the Prudential study:

To attract black investors, financial firms need to do better job. Michelle SingletaryThe Washington Post. June 15, 2011

I frequently find myself in a debate with a dear friend about the slew of surveys concerning the financial behavior of African Americans.

When the companies release their findings, which often show blacks lagging in savings and investment holdings, the question he’s left with is: Are the results because of race, class or poor marketing?

The most recent look at black financial habits comes from Prudential Financial, which released “The African American Financial Experience,” a survey that is part of the company’s research on multicultural markets.

Prudential found the same thing other financial companies have reported — that although a majority of African Americans want advice on saving and planning for retirement, many say they don’t know or can’t find a professional they can trust.

“Much of the hesitation seems to come from a lack of knowledge,” Prudential writes in its survey report. “Our survey revealed that the lower the level of knowledge respondents had about complex financial products, the lower the level of ownership of these products, the fewer adviser relationships, and the lower the level of industry trust.”

I can’t understand why financial professionals don’t get that it’s the complexity of the products they are selling that is befuddling people. Consumers are right to respond the way they do. You should not invest in something you don’t understand.

But African Americans are compromising their ability to meet their financial goals when they shy away from other products such as long-term care insurance and annuities, Prudential and other companies contend.

Then simplify the products and, more importantly, own up to the fact that the mistrust people have with the industry is not without merit.

“There is a long-standing perception that the financial industry has fallen short in terms of reaching and serving the African American community,” Prudential says.

That’s not a perception. Many financial services companies have taken advantage of consumers, including African Americans. We only have to look to the recent financial crisis to find evidence of deception and predatory lending practices. African Americans and Hispanics were disproportionately steered into higher-priced loans despite the fact that many — based on their income and credit profile — would have qualified for the best-priced terms.

AARP found in a recent investor survey that an overwhelming majority of 401(k) plan participants are largely unaware of the fees they pay to their plan providers. When asked, 71 percent of participants said they didn’t think they paid any fees.

“Fees are often hard to read and understand even when you know you are paying them,” said Jean Setzfand, AARP director of financial security. To help participants, AARP has created a fee calculator at aarp.org/401kfees.

When African Americans understand a financial product, they use it. Their ownership of traditional products such as life insurance and savings accounts is slightly higher than that of the general population.

Makes sense to me. With a simple savings account, you put your money in the bank and the institution promises a certain interest rate (as pitiful as it might be). It’s a risk-free product. With term life insurance, you make premium payments and, if you die during the covered period, the insurance makes a payout to your beneficiaries.

Like my friend, I’ve grown weary of the black investor surveys that make comparisons without commitments. This time, at least, Prudential’s survey was constructive not because of its obvious findings but because the company is challenging itself and its competitors to acknowledge their part in why African Americans aren’t turning to them for advice.

Why is the African American market underdeveloped? It’s not because we don’t want their products or are too ignorant to understand their importance. It’s because sales and marketing people haven’t made the effort to cultivate and understand this market.

“This survey did a nice job laying out something we didn’t realize,” said Mark Hug, chief marketing officer for Prudential Individual Life Insurance. “You will hear the financial services industry say we are reaching out to communities, but the proof is in the perception of the community. If the community doesn’t perceive you’ve reached them, then you haven’t.”

Okay, so do a better job of explaining your fees. Come into the community to teach first before you try to sell. Nearly half of African Americans in the Prudential survey said they are interested in learning about investments through a faith-based organization. And if that happens, the faith-based organizations need to do their due diligence to make sure their people aren’t being taken advantage of.

Financial planning is essential. But African Americans are no different from other investors. They want financial peace and will invest and save better when companies earn their trust.

A perspective on this issue from 1998–shows what has – or has not – changed:

See also these articles on the Prudential study: 

Tavis Smiley/Nationwide Survey Says Blacks Should Be More Proactive With Their Finances. Matthew Scott. BlackVoices. March 4, 2009