New Study Links Lack of Advisor Diversity to Racism

Financial Advisors


There is nothing new about the continuing lack of diversity in the financial advisory business, and there is extensive industry and academic research showing just how severe the representation gap remains.

As analyzes like this tend to show, traditional approaches to recruiting and retaining diverse talent continue to fall far short of the goals companies set, and even the best-intentioned organizations It continues to fail to adequately attract and assimilate diverse talent, especially in senior leadership. level.

However, as discussed in an upcoming report to be published in the Financial Planning Review of the Board of Certified Financial Planners Standards, how does racial-based discrimination as a social issue affect advisory industry representatives? Very little research has been done to examine the question of whether it has adverse effects.

According to the paper, “Racial Hostility and the Underrepresentation of Black Financial Advisors,” it is the unconscious mindset that comes from within the advisory industry that prevents the industry from achieving anything like proper representation of Black Americans. It’s not just bigotry and outright racism. Rather, increased racism in a particular region or market is also directly related to increased underrepresentation of Black advisors.

Analysis by a team of four researchers, including Jeffrey DiBartolomeo, Derek Tharpe, and Elizabeth Parkes-Stam from the University of Southern Maine, and Michael Kotakota, a research staff member of the CFP Commission. summarized.

Researchers estimate that about 10% of financial advisors are black, compared to 13.4% of the US population. Their results suggest that market-level racial hostility toward blacks is negatively associated with representativeness of black advisors.

Specifically, the difference in representation was 0.9 percentage points when comparing the markets with the highest and lowest levels of racial hostility tracked based on proxies generated by analyzing internet search traffic activity. is estimated to be

The authors explain that for an average market with an estimated 11.4% Black advisors, an increase of 0.9 percentage points means a 7.9% increase in the proportion of Black advisors.

The difficulty of measuring racial attitudes

According to the authors, despite industry-wide concerns over lack of diversity, there is still a need for reliable estimates of Black American representation in financial advisors.

Meanwhile, the Bureau of Labor Statistics estimated that about 6.9% of personal financial advisors were black in 2020, compared to 13.4% of the U.S. population. In another analysis compiled by Data USA, the estimates are even lower, between 4.7% and 6.7%, the authors note.

The new report therefore seeks to provide refined estimates based on race and ethnicity estimates for all client-facing financial advisors in the United States, by which researchers employs a classification algorithm that provides a unique race and ethnicity estimate for each individual licensed by Identify advisor industries based on name, gender, and location.

“We then apply this to datasets enriched by commercial vendors to include job classifications so that we can estimate industry demographics for those specifically identified as client-facing financial advisors,” the researchers said. explains. “We then look for correlations with actual Black financial advisor representation by examining correlations between Black financial advisor representation and local racial attitudes.”

As the authors acknowledge, measuring racial attitudes can be difficult because consumers are reluctant to share their racial preferences and prejudices in consumer research. This study used Google search data to investigate whether racism against blacks is prevalent in the region and whether it is associated with the underrepresentation of black advisors in the US market.

As a baseline, the researchers hypothesized that local racism, reflected in Google search volumes for anti-black racial adjectives, may have a negative impact on the representation of black advisors in the U.S. market. rice field.

Factors Affecting the Percentage of Black Advisors

Of the more than 640,000 securities license holders, more than 237,000 (about 37%) hold positions that include “advisors,” according to a new paper.

Of these 237,000 advisors, approximately 80% are male and 20% are female. As previously mentioned, the algorithm used in the new analysis estimates that at the individual level, 10.1% of his financial advisors are black, which is higher than figures produced by his BLS or Data USA. is also significantly higher.

Based on this baseline finding, the researchers found that both the percentage of black households in a particular neighborhood and racial hostility toward blacks were strongly associated with the percentage of black advisors in that neighborhood. It suggests that

According to researchers, each percentage point increase in the percentage of black households in a given market increases the percentage of black advisors by approximately 1.03 and 1.05 percentage points.

“The coefficient estimates for general affluence and black affluence are positive and negative, respectively, but neither is statistically significant,” the authors note. “But the Animus is negatively associated with representatives of the Black Advisory.”

The results show that moving from the least hostile community to the least hostile could increase the proportion of Black advisors by 0.9 percentage points.

As the researchers emphasize, hostility toward black Americans is not randomly distributed across America, and this fact is directly taken into account in the analysis.

“Considering the spatial correlation of the dependent variable and the error term does not quantitatively change the core result,” they explain.

Market and societal level issues

According to the authors, the new study provides compelling evidence to help shed light on the ongoing underrepresentation of black Americans in the financial industry. As the authors also point out, the apparent lack of representation is driven by factors both within and outside the industry’s control.

“While this analysis cannot speak of local racial hostility and interracial causality, [Black people] Given the underrepresentation of black advisors, both managerial discrimination (institutional practices within the organization) and consumer discrimination (impacts outside the organization) are potential mediators that require further consideration. We believe that,” the authors conclude.

In contrast to previous research studies that found no evidence of self-reported consumer discrimination, the results of a new analysis using a ‘silent measure’ of local racism and actual representation show that discrimination against consumers suggests that there may be an effect of black adviser.

The authors point out that their analysis does not address racial wealth disparities.

“With most advisors claiming a percentage of their assets under management and firms reportedly using race/identity matching to match clients and advisors, racial wealth A disparity contributes to and may perpetuate this underrepresentation of black advisers.” The authors caution.

Given efforts to address the issue of black advisor underrepresentation in the financial advisory industry, these findings suggest that this issue may ultimately need to be addressed at the market or societal level. The authors conclude that it is possible that

“Trends of racial bias in the region may make it more difficult for stakeholders in the field to reduce the underrepresentation of Black advisers,” they explain. “Policy makers and other community members may need to move away from racial bias and incorporate strategies that positively impact their own market areas.”

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