Why Financial Literacy?
A major differentiating factor between those who understand how to make money work for them has everything to do with financial literacy, which is also why I believe that it is the key to creating and sustaining wealth for African Americans. According to the 2009 Consumer Financial Literacy Survey, “54 percent of African-Americans, significantly more than their white counterparts, strongly agree that they could use answers to everyday financial questions from a professional.” This survey also found that “African-American adults were less likely than Caucasian adults to have learned personal finance information from school.”
The disparity of wealth between white and black households has a lot to do with education. Many African-Americans who are investing today, whether through their company sponsored retirement (401k) plan, an IRA/ROTH IRA or in a regular taxable brokerage account, are first-generation investors. Thankfully, because of the Internet and online trading resources such as “E-Trade” and “TD Ameritrade”, African-Americans are now more likely to explore opening a brokerage account and buying stocks and mutual funds.
The Need For More African American Personal Finance Professionals
However, the problem of financial literacy has a lot to do with the lack of black financial advisors, representing financial services institutions throughout the United States. While I commend the progress that some companies have made in recruiting African-Americans to become financial advisors, there is still a long way to go before there is an adequate level of black financial professionals who serve the financial education needs of African-Americans. At many large brokerage firms, the percentage of African-Americans who are employed as financial advisors is around 2 percent or less! Given such abysmally low percentages of African-American financial advisors in the United States, should we be surprised by the wealth disparity between white and black Americans? According to economic survey data taken from 2,000 U.S. families who were interviewed every three years between 1984 and 2007, researchers have found that the wealth disparity between white and black households has more than quadrupled regardless of income brackets, according to a recent study conducted by the Institute on Assets and Social Policy (IASP) at Brandeis University.
Close The Wealth Gap: Financial Literacy and Public Policy
In 1984, the average white family in the sample group held around $20,000 more in assets than the average black family. By 2007, the “racial wealth gap” had increased by $75,000. However, taking into consideration the most recent data, the average white family had approximately $630,000 in wealth, compared to just $98,000 for African-American families and $110,000 for Latino families. In fact, prior to the recession caused by the lack of regulatory and financial oversight on Capitol Hill and Wall Street, White families on average were about four times as wealthy as non-white families, according to the Urban Institute’s analysis of Federal Reserve data. By the year 2010, White Americans were six times as wealthy as African-Americans.
Becoming financially literate will also strengthen the ability of many blacks to recover from the devastation caused by the Great Recession. Recovering is not simply a matter of watching the value of your 401(K) reach the level that it was at before the recession. If you do not learn how to properly diversify your portfolio (whether your portfolio is comprised of real property or stocks, bonds and mutual funds) in such a manner so that it will endure through the next financial crisis, you will inevitably repeat history in terms of the value of your investments.
African-Americans must place as much of an emphasis on becoming financially literate as we do on getting a four-year college education! If financial literacy continues to elude the black community, then getting a quality four-year college education will be out of reach for many of us, because of correlation between the rising cost of attending college and unemployment among African Americans. The present and future financial sustainability of a strong black middle class is dependent on African-Americans becoming more financially literate today so that tomorrow the African-American community will have a fighting chance to close the ever-widening wealth gap that has always existed between whites and blacks in America, which unfortunately, have become even wider in this post recession era.
It Likely Started During the Jim Crow Era
The Jim Crow era in the United States history began when Reconstruction was abruptly ended, which was in 1877. The period after the Civil War, 1865 – 1877, was called the Reconstruction period. Abraham Lincoln started planning for the reconstruction of the South during the Civil War as Union soldiers occupied huge areas of the South. He wanted to bring the Nation back together as quickly as possible and in December 1863 he offered his plan for Reconstruction which required that the States new constitutions prohibit slavery. (Source: https://www.howard.edu/library/reference/guides/reconstructionera/)
Reconstruction was also an attempt to lift formerly enslaved African Americans up to the same socio-economic status of White Americans and for the brief 14 years that it lasted and for a time it was beginning to work. During this period, formerly enslaved African Americans became Members of Congress, U.S. Senators, mayors, physicians, attorneys, business owners, educators, etc. Then, it all ended with the The Compromise of 1877. This was also known as “the great betrayal”. It was an unwritten deal, that settled the intensely disputed 1876 U.S. presidential election. It resulted in the United States federal government pulling the last troops out of the South, and formally ended the Reconstruction Era.
Red-Lining – A Tool of Jim Crow
Starting in the 1930s, the Federal Home Loan Bank Board and the Home Owners’ Loan Corporation conspired to create maps with marked areas considered bad risks for mortgages in a practice known as “red-lining.” The areas marked in red as “hazardous” typically outlined black neighborhoods. This kind of mapping concentrated poverty as (mostly black) residents in red-lined neighborhoods had no access or only very expensive access to loans.
The practice did not begin to end until the 1970s. Then, in 2008, a system of “reverse red-lining,” which extended credit on unfair terms with subprime loans, created a higher rate of foreclosure in black neighborhoods during the housing crisis. (Source: https://www.history.com/topics/black-history/segregation-united-states)
Red-Lining resulted in a much lower percentage of home ownership among African Americans vs. White Americans. It is arguably the -if not one of the- main contributors for the wealth gap that exists today between White and Black Americans and I believe that this has inadvertently created a disparate impact with respect to the employment of African Americans as financial advisors. Here’s why I say that. I am a former Assistant Branch Manager of A.G. Edwards & Sons, Inc. and I was a Branch Manager for Raymond James Financial Services, an independent broker-dealer.
Thankfully, I can attest that A.G. Edwards & Sons, Inc. did everything they could to ensure that their hiring practices were inclusive of everyone, regardless of ones race, ethnicity, religion, sexual orientation, etc. A.G. Edwards was a model brokerage firm when it came to hiring African Americans and Latinos to represent the firm as Financial Consultants.
However, a Branch Manager who is tasked with the responsibility to recruit financial advisors who can be successful, I believe is sometimes placed in a difficult position. For example, if you consider that from the 1930’s until the early 1960’s housing discrimination was pretty much the order of the day, it is fair to say that there were also fewer African Americans home owners. Not to mention the number of cities throughout the United States where African Americans were simply not welcomed by the residents to move into their neighborhoods…and let’s not forget some of the real estate agents that would either “steer” African Americans into predominately Black neighborhoods, or refuse to show homes for sale to prospective Black homeowners if that house was located in a mostly White community.
My point is that if housing wealth is one way that parents have been able to send their children to college, by being able to borrow equity from their homes, or through strong professional networks (with business owners, affluent individuals, etc.) that was a natural part of their neighborhoods, these same “benefits” were less likely to accrue to African Americans if they 1) Red-lining prevented them from buying a home 2) lacked the “affluent” individuals and entrepreneurs in their community who could offer mentoring and employment opportunities.
If you consider that this was the case from the 1930s to at least the 1960’s, a good 30 years, how likely is it that African Americans who may want to become a financial advisor would have the same access to people (family, friends, mentors, etc.) who are the “ideal” client for a brokerage firm, i.e. people who are regarded as members of the “high net worth community”? It’s probably very unlikely that this would be the case. At least it was for me, including for some of my friends who I have hired over the years to represent my investment firm. We had to go out and build a strong network and develop a list of high net worth individuals with whom we could prospect as future clients.
I am not saying that every White American who has ever became a financial advisor had a ready made high net worth network of friends and family to tap into in order to develop his or her practice. The end result of the disparity created by Jim Crow is that there have been fewer African American Financial Advisors which equates to fewer African Americans being educated about matters of personal finance, i.e. stocks, bonds, mutual funds, options, commodities, etc. One would have to look at this in the aggregate in order to get a sense of how much -and for how long- the African American community has been left out of the “wall street conversation.”
A hiring Branch Manager who may want a diverse office -for those who are at least thinking about the importance of this- only has a limited number of seats to fill. Therefore, one of the things that he or she will probably consider is what is the background of this candidate? Who does this candidate know? How likely is it that this candidate will be able to either develop a professional network, or preferably contact people within their family and group of friends who have enough money to fit this firms model of an “ideal client”? A hiring manager may very well desire to extend an offer to African Americans, as my former Branch Manager did for which I am grateful to him today. But, I must say that I was turned down by every other Branch Manager at the brokerage firms throughout Washington, DC and Virginia before I received not one, but two offers from two different A.G. Edwards branch offices.
I am pleased to say that hiring me turned out to be one of the best hires my branch manager ever made! In order to address this problem of financial literacy within the African American community, we need more people -regardless of their race or ethnicity- to engage with African Americans across the net worth spectrum and provide the much needed financial education. Furthermore, financial literacy needs to be taught in schools. It should be required in my opinion.
This is our charge and we can do this!
A quote that represents my business philosophy as a wealth-management advisor and personal-finance educator is borrowed from a man whose material and spiritual wealth has been spoken of through the centuries. His name was King Solomon. He said, “How much better it is to get wisdom than gold! And to get understanding is to be chosen rather than silver!” (Proverbs 16:16) Martin A. Smith is an alumni of Howard University (School of Communications ’92) and the President of Wealthcare Financial Group, Inc. a retirement planning and investment advisory firm. For additional information, Martin can be reached at: (770) 683-3608 | firstname.lastname@example.org.
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