Journal of Financial Planning: November 2021
Brent Kessel, CFP®, is the co-founder and CEO of Abacus Wealth Partners, a $4 billion sustainable wealth management firm whose mission is to expand what’s possible with money. Abacus’ 40 advisers help clients define their most important social values and financial goals, and then manage all aspects of their financial lives in service of both. Brent has taught impact investing at MIT, been featured on the front page of the Wall Street Journal and the cover of Yoga Journal, and his book, It’s Not About the Money, was named one of the top five business books of the year by Kiplinger’s Personal Finance.
Kamila Elliott, CFP®, is the president of GRID 202 Partners, a financial planning firm with locations in Washington, D.C., Georgia, and North Carolina. She has nearly two decades of financial planning and investment experience assisting high-net-worth individuals, endowments and foundations, and business owners with comprehensive wealth solutions and holistic planning. She is on the Board of Directors for the CFP Board and will be Chair of the CFP Board in 2022, the first African American woman and youngest ever to serve in that role.
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Looking around board rooms and industry conferences, a financial planner is likely to see all White and almost all male faces. The lack of diverse representation is compounded by the fact that as folks get more experienced in our industry, they tend to raise minimums. The old logic is that if you can help a million-dollar client versus a $100,000 client, you’ll make five to 10 times as much in fees while doing the same amount of work. There’s nothing wrong with wanting to maximize one’s personal income, but sadly, a million-dollar minimum excludes 99 percent of Black and 98 percent of Latinx potential clients. There are ways that planners can narrow the racial wealth gap in spite of systemic issues.
Research
We wrote a paper, “Two American Financial Plans: The Next 50 Years of the Racial Wealth Gap and What You Can Do About It,” that outlines many of the issues facing Black households and people of color. We used probability-weighted national data to create two households that are typical of their respective race. However, the future wealth outcomes for these households were very different. We found that a typical Black family will accrue $789,164 in wealth, 70 percent less than a typical White family’s $2.7 million (both in present dollars). Even if both families earn bachelor’s degrees, contribute the same amount to a 401(k), and invest identically, the Black family’s wealth will be 51 percent lower.
What have we done about this as a profession? Part of the issue is that planners don’t understand the cultural context of why these disparities exist. When you look at the media, there are presumptions about why the wealth gap persists, but a lot of them are false or not fully informed.
We wanted the paper to unfold much like a financial plan does. We looked at the next 50 years, not just a static moment in time because what we as planners are interested in is how we help clients reach their goals. So much of the journalism regarding the racial wealth gap focuses on the current gap. You may have heard that Black wealth is 13 cents for every dollar of White wealth.1 Those are median ratios, and they’re as of right now. If you look at probability-weighted wealth, 50 years out in the future, Black wealth is 28 cents for every $1 of White wealth, almost exactly what the probability-weighted ratio is today.
Our goal for this paper was to see the advice that financial planners can give their Black clients to help them narrow the racial wealth gap as much as possible, and even see if there is a level of financial planning and personal achievement that can eliminate it entirely.
History of the Racial Wealth Gap
The history of the Black wealth gap is highly systemic. It starts from slavery and land ownership. Land ownership is one of the biggest contributors to how most people generate wealth and pass it on to future generations. However, even when there have been opportunities to build some equity, there are layers of additional policies put in place to avoid providing assets or ownership to people of color, and more specifically Black people. Eminent domain and redlining have kept generational land ownership out of reach for most Black Americans. The racial wealth gap has a 400-year head start, but an informed financial planner and a motivated client can still overcome this historical barrier.
There are a number of systemic issues that have prevented Black families from accumulating wealth at the same rate as their White counterparts.
Earnings. The earnings gap between Black households and White households is actually widening, regardless of education levels. Lifetime earnings of Black households are now 25 percent lower than White households. In 2000, they were 21 percent lower.
If we match the probability-weighted Black family’s earnings to the White family’s, and match their spending and their housing as well, that alone would eliminate 59 percent of the racial wealth gap. We as practitioners can’t just get rid of the wage gap—that’s going to be up to employers and corporations or government policy—but we can guide clients to decisions that will result in higher lifetime earnings. Those higher lifetime earnings are the driver of everything that builds wealth: 401(k) participation, buying a home, or having the money to pay for education and healthcare, all of which drive economic growth.
Education. Having conversations with clients about the kind of education they want their children to get, and the effect that education will have on their future earnings, is an important step in narrowing the wealth gap. Our research found that a bachelor’s degree doubles an individual’s lifetime earnings (compared to a high school diploma), but a BA in a STEM field can triple them. Interestingly, an associate degree in certain vocational trades will have higher lifetime earnings than a BA in humanities. For some clients, it may even make sense to return to school to complete a BA (as we modeled in our paper).
Housing. The housing gap is also widening, as 38 percent of Black families owned their home in 1960 compared to 65 percent of White families.2 As of 2019, those shares increased to 44 percent and 74 percent, respectively, a 30-point divide—wider than it was 61 years ago. There’s this expectation among many Black households that when you finally think you’ve made it, something will happen. When Black families have been able to buy homes in good locations, developers have at times relied on eminent domain to get rid of those homes to build a highway, and families were not fairly compensated. Forty-five percent of Black households experience racial discrimination when looking to purchase a home as compared to 5 percent of White households, according to the report by NPR, “Discriminations in America: Experiences and Views of African Americans.” In Tulsa’s Greenwood District, Black business owners were able to overcome a lot of the challenges they were faced with. Their successes were violently taken away, and there was never remuneration to make them whole again. These types of behaviors by government, financial systems, and racial majorities have created mistrust of large institutions among many Black clients, which has led to asset allocations more concentrated in cash, annuities, life insurance, and residential real estate than their White counterparts. Based on historical returns, our estimate is that the typical Black asset allocation earns almost 2 percent less per year than the typical White allocation. Planners can have a huge impact in this area.
Education is related to housing, as teachers at schools in affluent areas are more likely to have majored in the discipline they are teaching. New York City did a study of public school systems and found that outcomes and grades in STEM classes were lower for urban areas due to the teachers’ knowledge, education, and experience.3 Younger or less experienced teachers tend to be in urban areas, while teachers with more experience tend to be in more affluent suburban areas. Not having a strong educational foundation will limit students’ outcomes and potential for future wealth.
401(k) Participation. This is one of the biggest opportunities planners have to narrow the racial wealth gap. 401(k) account participation between the composite households is nearly identical when controlled for access to an employer-sponsored plan and income levels, but we found that Black participants contribute less on average. The biggest reason for that is wages; if your wages are 25 percent lower, you need to consume more of them just to make ends meet. If we can help our Black clients have enough income or have low enough spending that they can participate in their 401(k) at the same 8.5 percent average contribution rate, and with the same asset allocation, as White participants, that alone eliminates 25 percent of the wealth gap.
Also, Black participants take hardship withdrawals at 2.76 times the rate of White participants.4 That’s a costly decision for participants, as they stop benefiting from market appreciation and incur taxes and high fees.
Black families have been so used to losing so much that they’re afraid of loss. There is a real fear of participating in the market because there is no definitive rate of return like one might expect with a cash value policy or a savings bond. Due to lower net worth, many Black households have been excluded from accessing financial planning. Now, with more awareness, social media, and technology, a whole generation is learning about investing.
Incarceration. Black folks and White folks use drugs at the same rate and commit crime at the same rate, but the incarceration rate is not the same. Black Americans are 2.7 times more likely than White Americans to be arrested on drug-related charges and 6.5 times more likely to be incarcerated, according to the Brookings Institution.5
We computed the cost of incarceration in lost wages. The average incarcerated person is age 34,6 and one out of three Black men will spend an average 1.3 years in prison.7 We used probability-adjusted wages and found that if incarcerated people could have earned those wages and invested them, the future balance would be $198,780 when they get to retirement at age 65. This figure does not account for the cost to families to support incarcerated loved ones with visits and phone calls, along with court costs and fines.
Interventions
Lead with goals-based planning. Particularly with clients who are unfamiliar with investments, saying an investment can make you 8 percent doesn’t really have context; it doesn’t move them to invest their money. When leading with goals-based planning in your first meeting with clients, you may not even talk about money—you just talk about their goals. Listen first and align their goals with your recommendations. Our industry is moving past leading with performance, but it’s even more critical for Black households that you lead with goals in your planning.
Understanding goals is important to help clients make choices with the most positive outcomes for their situations. For example, clients or clients’ children who are considering pursuing a degree out of passion or a desire to follow in the footsteps of a role model may have lower lifetime earnings. Talking through goals and comparing the impact of higher earnings over time to the impact of a career like teaching or social work can help clients weigh the trade-offs.
Understand your cultural competency. There are going to be some cultural differences between White clients and Black clients that planners should be aware of. For example, Black families are more charitably inclined in terms of giving per household. But if you want to help someone reach their goals, you can’t tell them to go from giving $200 a week to their church or favorite charity to $0 and expect them to come back. Further, we found that Black households that earn between $100,000 and $150,000 were more than twice as likely as White households to provide informal financial assistance to siblings or parents. Planners should include informal financial support that Black clients give to parents, siblings, and adult children as part of their clients’ full financial pictures.
Develop a “red flags” checklist. Look for where there are big holes in your clients’ financial plan, such as no health or renters’ insurance. One financial behavior that is more common among Black Americans and is causing harm is attending a for-profit college. Black Americans attend for-profit schools at a higher rate but have lower educational outcomes and their incomes are not commensurate with those of graduates from nonprofit universities. We found the average for-profit tuition is $10,000 higher than a public community college and $2,000 higher than a nonprofit, public four-year university. Eighty-eight percent of Black Americans who attend a for-profit college don’t graduate, which means they’ve probably incurred debt, and they haven’t received any wage premium in exchange. Black graduates accrue around $45,000 in student loan debt compared to under $30,000 for White graduates but have lower outcomes in terms of job prospects.
Conclusion
People often hear the contributing factors to the racial wealth gap in isolation, but when you look at them collectively, you see the impact. We can help individual clients plan around some of these factors, but as a society, we can’t plan our way out of today’s racial wealth gap. Today’s CFP® professional can help his or her Black clients dramatically narrow or even eliminate the racial wealth gap for themselves, despite overwhelming obstacles and historical disadvantages.
When sitting down with Black clients, it’s helpful for a CFP® practitioner to understand the unbelievable and continuous uphill battle they’ve likely fought for generations. When these folks are sitting across from you in the office and saying, “Well, I’m not sure I can trust the stock market. I’m not sure I can trust this big bank that you want me to switch my checking account to,” start by listening and validating their point of view, even if you haven’t experienced it. Once they feel seen and understood, they’re in a better position to hear your advice and profit from the tremendous power of making a few key financial and educational decisions differently than they otherwise might have to improve their financial outcomes.
Endnotes
- Bhutta, Neil, et al. 2020, September 28. “Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances.” Board of Governors of the Federal Reserve System. www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm.
- Lopez, German, et al. 2018, April 4. “How America Has—and Hasn’t—Changed since Martin Luther King Jr.’s Death, in 11 Charts.” Vox. www.vox.com/identities/2018/4/4/17189310/martin-luther-king-anniversary-race-inequalityracism.
- Darling-Hammond, Linda. 2001. “Inequality in Teaching and Schooling: How Opportunity Is Rationed to Students of Color in America” In The Right Thing to Do, The Smart Thing to Do: Enhancing Diversity in the Health Professions: Summary of the Symposium on Diversity in Health Professions in Honor of Herbert W. Nickens, M.D. Edited by B.D. Smedley and A.Y. Stith. www.ncbi.nlm.nih.gov/books/NBK223640/.
- Shapiro, Thomas. 2017. Toxic Inequality: How America’s Wealth Gap Destroys Mobility, Deepens the Racial Divide, and Threatens Our Future. New York, NY: Basic Books.
- Brookings Institution. 2016, October 21. “Rates of Drug Use and Sales, by Race; Rates of Drug Related Criminal Justice Measures, by Race.” The Hamilton Project. www.hamiltonproject.org/charts/rates_of_drug_use_and_sales_by_race_rates_of_drug_related_criminal_justice.
- Porter, Lauren C., et al. 2016, January 8. “How The U.S. Prison Boom Has Changed The Age Distribution Of The Prison Population.” Criminology 54 (1): 30–55. doi:10.1111/1745-9125.12094, ncbi.nlm.nih.gov/pmc/articles/PMC5603283/.
- Kaeble, Danielle. 2018, November. “Time Served in State Prison, 2016.” Bureau of Justice Statistics, United States Department of Justice. https://bjs.ojp.gov/content/pub/pdf/tssp16.pdf.
