A recent study by financial behemoth Prudential Insurance Co., "The African-American Financial Experience" reveals that African Americans are a strong and growing market for financial firms but also identifies impediments to African American wealth creation. We are an important, powerful, and integral part of the American landscape, comprising an influential and growing population that tends to be younger than the general market with a rapidly emerging middle class and affluent segment, according to Charles Lowrey, Prudential Executive Vice President and Chief Operating Officer. Counter-balancing the generally positive outlook for African-American financial success are significant self-imposed impediments to wealth creation. Understanding the financial concerns and aspirations of the our community is key for any financial professional looking to build upon these strengths.
First the Good News
One of the study's primary findings is that Black wealth and income are both improving as a group. Affluence, Education, and Homeownership rates have all increased vis-a-vis previous generations. The majority of respondents, 58%, were considered "Emerging Affluent" (a term which I really love) with annual incomes over $50,000. Moreover, when compared to the general population, blacks express more confidence in the nation's economic prospects, a key indicator of an individual's willingness to spend and or invest. While only 37% of the general population thinks the economy will improve any time soon, according to a USA Today/Gallup Poll released in September, nearly twice as many African Americans, 62%, believe the economy will recover within the next two years.
Not only did the Prudential study find the black Americans to have increasing affluence and income with an optimism on our economic prospects, it also found the black community to be fertile ground for increased business relationships with financial professionals. The majority of those surveyed recognized the need for sound financial advice and believed that working with a financial professional is an excellent way to obtain that advice. Only 25% of the African American population has a relationship with a financial planner, whereas nearly 35% of the general population has an adviser relationship. In fact, 85% of the study's respondents agreed with the statement "I would like advice on saving and planning for retirement, but I can't find a professional I can trust." Blacks who use advisers are precisely the type of client most advisers spend countless dollars prospecting for. They tend to be older, more affluent, own their own home and have families. This all translates into an excellent opportunity for advisers serving the Black community.
The study also found that the goals of African American clients resemble goals held by the general population at large. This supports the real-life experience of professionals in the field. In an article appearing in lifehealthpro.com Lazetta Rainey Braxton, CFP, founder of advisory firm Financial Fountains in Chicago, says that her black clients are mostly concerned about:
• Ensuring their estate planning documents reflect their wishes
• Maintaining tax efficiency with their financial accounts
• Properly allocating their investments and align those investments with their lifestyles
• Understanding Medicare and long-term care coverage
• Balancing their financial needs with the needs of their children and grandchildren
The Prudential study found that survey respondents rated "educating children about debt avoidance, providing college tuition, and passing money on to heirs as very important, significantly more often than did the general population." Additionally, the study found that "African-Americans are significantly more likely than the general population to cite charitable donations as an important financial goal" according to Rhode Island financial planner Ed McCarthy CFP in a recent article appearing on lifehealthpro.com.
Now the Bad
Some of the most alarming information gleaned from the Prudential study concerned our usage of retirement plans like 401K's. The study revealed that regardless of age and income, African Americans and Hispanics are less likely to participate in their company 401K plans, and when they do contribute, the savings level is much lower rate than whites and Asians. In this regard, the study's, findings were similar to those of the 2007 Ariel/Hewitt report which examined the savings disparities across racial and ethnic groups by sampling 3 million employees at Fortune 500 companies. The Ariel/Hewitt report found that plan participation among blacks was roughly 10% lower than that of the general population.
Not only are African Americans less likely to contribute to company retirement plans but we are more likely to withdraw or borrow money from the plans before reaching retirement. The Prudential study found that blacks workers are three times as likely to withdraw funds or borrow finds from their 401K than the general population. Of African American respondents, 24% had taken a loan against their 401K versus 8% of the general population. Nearly 18% say they made a withdrawal from their 401K versus 6% of the general population. "The challenge of meeting day-to-day expenses in a difficult economic environment has caused African American financial decision makers to make choices that help them solve immediate problems at the expense of their long-term goals." Put differently, African Americans seem to view their retirement accounts as short term savings tools-like Christmas club accounts-rather than long term investment vehicles not to be touched until their golden years.
Finally, according to the Prudential authors, Approximately 40% of African American households, as opposed to roughly 30% of the general population, cite high levels of debt and conversely a lack of disposable income as a significant hurdle to wealth creation. Thus, "the African American respondents were significantly more likely than the general population to indicate that reducing debt and improving credit-worthiness and educating children about debt avoidance are critical or very important financial goals." While carrying high levels of household debt is an impediment to financial success the authors note that "the fact that African Americans recognize the importance of maintaining or regaining their good credit, and are focused on addressing this critical issue, is a very positive sign."
Takeaways
The Prudential study, like previous studies examining the disparities between races when it comes to wealth accumulation, arrived at the conclusion that African Americans lag behind the general population in terms of saving and investment holdings. However, the Prudential authors note that, "similar to the general population, African Americans are keenly focused on saving, lowering their debt burden, and seeking information to become more knowledgeable about financial products." But what would cause African Americans to lag behind the general population if the desire is to improve financial conditions? The study points to the fact that many in the African American community do not trust financial services firms to act with their best interest at heart. According to the study: "Although the majority say they want financial advice, concerns about finding 'a qualified professional they can trust and relate to' prevent many [African Americans] from hiring an advisor." Author and Washington Post Financial Columnist Michelle Singletary wrote of the Prudential study: "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." She writes that financial services companies should come into African American communities and educate before they attempt to make sell.
First the Good News
One of the study's primary findings is that Black wealth and income are both improving as a group. Affluence, Education, and Homeownership rates have all increased vis-a-vis previous generations. The majority of respondents, 58%, were considered "Emerging Affluent" (a term which I really love) with annual incomes over $50,000. Moreover, when compared to the general population, blacks express more confidence in the nation's economic prospects, a key indicator of an individual's willingness to spend and or invest. While only 37% of the general population thinks the economy will improve any time soon, according to a USA Today/Gallup Poll released in September, nearly twice as many African Americans, 62%, believe the economy will recover within the next two years.
Not only did the Prudential study find the black Americans to have increasing affluence and income with an optimism on our economic prospects, it also found the black community to be fertile ground for increased business relationships with financial professionals. The majority of those surveyed recognized the need for sound financial advice and believed that working with a financial professional is an excellent way to obtain that advice. Only 25% of the African American population has a relationship with a financial planner, whereas nearly 35% of the general population has an adviser relationship. In fact, 85% of the study's respondents agreed with the statement "I would like advice on saving and planning for retirement, but I can't find a professional I can trust." Blacks who use advisers are precisely the type of client most advisers spend countless dollars prospecting for. They tend to be older, more affluent, own their own home and have families. This all translates into an excellent opportunity for advisers serving the Black community.
The study also found that the goals of African American clients resemble goals held by the general population at large. This supports the real-life experience of professionals in the field. In an article appearing in lifehealthpro.com Lazetta Rainey Braxton, CFP, founder of advisory firm Financial Fountains in Chicago, says that her black clients are mostly concerned about:
• Ensuring their estate planning documents reflect their wishes
• Maintaining tax efficiency with their financial accounts
• Properly allocating their investments and align those investments with their lifestyles
• Understanding Medicare and long-term care coverage
• Balancing their financial needs with the needs of their children and grandchildren
The Prudential study found that survey respondents rated "educating children about debt avoidance, providing college tuition, and passing money on to heirs as very important, significantly more often than did the general population." Additionally, the study found that "African-Americans are significantly more likely than the general population to cite charitable donations as an important financial goal" according to Rhode Island financial planner Ed McCarthy CFP in a recent article appearing on lifehealthpro.com.
Now the Bad
Some of the most alarming information gleaned from the Prudential study concerned our usage of retirement plans like 401K's. The study revealed that regardless of age and income, African Americans and Hispanics are less likely to participate in their company 401K plans, and when they do contribute, the savings level is much lower rate than whites and Asians. In this regard, the study's, findings were similar to those of the 2007 Ariel/Hewitt report which examined the savings disparities across racial and ethnic groups by sampling 3 million employees at Fortune 500 companies. The Ariel/Hewitt report found that plan participation among blacks was roughly 10% lower than that of the general population.
Not only are African Americans less likely to contribute to company retirement plans but we are more likely to withdraw or borrow money from the plans before reaching retirement. The Prudential study found that blacks workers are three times as likely to withdraw funds or borrow finds from their 401K than the general population. Of African American respondents, 24% had taken a loan against their 401K versus 8% of the general population. Nearly 18% say they made a withdrawal from their 401K versus 6% of the general population. "The challenge of meeting day-to-day expenses in a difficult economic environment has caused African American financial decision makers to make choices that help them solve immediate problems at the expense of their long-term goals." Put differently, African Americans seem to view their retirement accounts as short term savings tools-like Christmas club accounts-rather than long term investment vehicles not to be touched until their golden years.
Finally, according to the Prudential authors, Approximately 40% of African American households, as opposed to roughly 30% of the general population, cite high levels of debt and conversely a lack of disposable income as a significant hurdle to wealth creation. Thus, "the African American respondents were significantly more likely than the general population to indicate that reducing debt and improving credit-worthiness and educating children about debt avoidance are critical or very important financial goals." While carrying high levels of household debt is an impediment to financial success the authors note that "the fact that African Americans recognize the importance of maintaining or regaining their good credit, and are focused on addressing this critical issue, is a very positive sign."
Takeaways
The Prudential study, like previous studies examining the disparities between races when it comes to wealth accumulation, arrived at the conclusion that African Americans lag behind the general population in terms of saving and investment holdings. However, the Prudential authors note that, "similar to the general population, African Americans are keenly focused on saving, lowering their debt burden, and seeking information to become more knowledgeable about financial products." But what would cause African Americans to lag behind the general population if the desire is to improve financial conditions? The study points to the fact that many in the African American community do not trust financial services firms to act with their best interest at heart. According to the study: "Although the majority say they want financial advice, concerns about finding 'a qualified professional they can trust and relate to' prevent many [African Americans] from hiring an advisor." Author and Washington Post Financial Columnist Michelle Singletary wrote of the Prudential study: "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." She writes that financial services companies should come into African American communities and educate before they attempt to make sell.
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