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How Black Culture Influences Financial Planning and Decision-Making

Black investors, when compared to other wealthy clients, are more apprehensive about debt, more generous with their relatives, and more likely to own their own businesses.

The racial economic gap has received wider attention this year amid the Black Lives Matter protests and the Covid-19 pandemic, which has hit Black Americans especially hard. Much of the conversation addresses the vulnerabilities of poor and middle-class Black families, but the disparity between the highest Black and white earners is also vast.

According to an analysis published in February by the Brookings Institute, the median net worth of the nation’s top 10% by income (only 3.6% of this decile is Black) is $1,789,300 for white families, versus $343,160 for Black families.

The analysis attributes this disparity to several factors. White families receive much larger inheritances, and Black families who reach the top 10% of income distribution one year are more likely than white families to drop out in subsequent years. High and middle-income Blacks are also more likely than their white counterparts to financially assist relatives and neighbors.

Studies also show Black young adults are more likely to hold higher levels of student loan debt than white young adults. They’re also more likely to have been raised in households where money was scarce and investment vehicles weren’t accessible or utilized.

“Even if you have a good saver in the household, a lot of the time a good saver is someone who puts money into a savings account, in the Black community or in communities of color,” says Lauryn Williams, a CFP and founder of Worth Winning LLC, a virtual financial planning firm serving women, millennials and Olympic athletes. Williams, of Trinidadian descent, won three Olympic medals as a track and field sprinter and bobsledder.

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Another obstacle for Black investors is the shortage of Black advisors. According to data self-reported to the CFP Board, they comprise just 1.5% of CFP designees.

Advisors don't need to be the same race or ethnicity to work well with a client, but they should be able to recognize the cultural difference that impact the client’s financial decisions, say Williams and Luis Strohmeier, a partner and wealth advisor with Octavia Wealth Advisors, an independent Cincinnati-based RIA.

The Octavia team, which broke off in June from AXA Equity Advisors, manages approximately $1.2 billion in assets. Strohmeier, who is Hispanic and grew up in Peru, says minorities comprise about a fifth of Octavia’s 2,000 clients. Roughly 100 are of African descent. Some emigrated from the Caribbean islands, Ghana, and Nigeria. Others are second or third generation Americans, or had ancestors arrive here as slaves.

About 80% of Strohmeier’s clients of African descent are doctors, lawyers and accountants who own their own businesses. None came from wealthy backgrounds. “They saw their parents struggle to make ends meet,” he says, and this has made them very apprehensive about debt. They often want to start saving for college as soon as a child is born and paying off a home is usually a very important goal, he says.

He has also found that his clients of African descent are more likely to extend financial support to their parents, siblings, and other relatives. “They share their struggles, they share their wealth,” he says. They recognize that it’s more rare to do really well, he says, and they feel that responsibility to care for the rest of their family.

So instead of creating nuclear family plans, which he says are more common among white clients, the plans he develops for his Black clients may also provide for mom and dad, a brother who wants to attend college, a sister who is struggling after a divorce, and nieces and nephews. He’s also observed that they’d rather invest more in a primary home that can accommodate large family gatherings than buy a vacation home.

Strohmeier’s clients of African descent are often initially shy about discussing their finances with an advisor because they often don’t know anyone who has worked with one, he says. “Having an advisor that understands their family dynamic and traditions is paramount,” he says. And he gets it, he says, because it’s very much like his Hispanic culture. During his childhood, 50 people would be at his house on Sundays, he says.

Williams of Worth Winning also emphasizes the importance of getting to understand clients’ family dynamics and traditions. “Keep digging deeper and really spend a little bit of extra time trying to learn more about upbringing and cultural things you may not be aware of,” she says. Encourage clients to let you know if anything you say makes them uncomfortable, she says, and ask them if it’s OK to ask more questions.

Disappointing experiences with a couple of financial advisors—who she says didn’t encourage her to be forward thinking and didn’t bring up the blind spots lurking in investment decisions—prompted Williams to earn her MBA, get her real estate license and start her CFP coursework while she was still competing as a professional athlete.

“My initial thoughts when I think about being a Black woman is the sense of responsibility,” she says. “We know that Black men are more highly incarcerated,” she says, so single-parent homes, with a single stream of income, are more popular. It’s pretty common for single mothers to have other relatives living in their households, she says. She also sees young women without children supporting younger siblings or cousins. 

“When you’re making a financial decision, very seldom is it a decision for yourself,” she says. “It’s a decision that’s going to impact a whole community of people that are depending on you for your resources.” This makes clear budgeting and a financial plan important—and it’s no less important for her other clients.

Many of Williams’ Black millennial clients are plagued by student loans. They were told higher education would be their stepping stone to higher earnings and a better path to success, she says, but this cohort needs to be better educated about loans and potential career opportunities before they take on this debt.

At the other extreme are athletes who can find themselves with six or seven-figure income depending on the sport, she says. But this sudden money effect can also be difficult for them to manage if no one in their households ever had similar earnings or knew anything about investing. “Plus you still have that pressure of multiple people you know who aren’t in the best financial situation,” she says. “You want to be able to help them; they’ve always helped you.”

Williams tells her athlete clients that there are a lot of opportunities that come with their money but there are also a lot of mistakes that can be made. She educates them about income fluctuations, their small window for earnings, the importance of living below their means, the best ways to go forward with their money, and the tools they’ll need.

There are also more subtle cultural values in the Black community that most advisors may not typically pick up on. Williams recalls hearing a story about an advisor who told a client not to spend her tax return on a TV because she didn’t have a lot of money or an emergency fund. The advisor didn’t realize she was looking after her grandchildren in a dangerous neighborhood and that the TV would keep the children in the house and safe.

Williams also points out that many Black women spend a lot of money on their appearance. This can include hair straightening, expensive clothing, and even plastic surgery. “I think all women like to look pretty,” she says, “but we talk about what we might feel as a pressure to spend money on creating an appearance that is going to make us fit in a little bit more because society makes us feel not as beautiful.”

Research published last year by the Spectrem Group determined that cultural heritage and background can have a significant impact on how people invest and how they relate to risk, investment purpose, and financial advice. The study included individuals with different self-reported ethnicities (white, black, Hispanic, and Asian) and net worth of $100,000 to $25 million (excluding primary residences).

The study found that Black investors, compared to the other ethnicities, are more likely to be invested in a professional practice or a privately held business.  They’re also more likely to be invested in alternative investments and real estate. Nearly one-quarter (24%) believes their advisor should beat stock market averages by at least four percentage points annually.  

According to the Spectrem study, Black investors also want to be more actively involved in the day-to-day management of their investments, are more concerned about being able to retire when they want to, and have a greater interest in receiving regular communication from their advisors.  

Strohmeier’s Black clients have brought up the Black Lives Matter movement with him and he’s hearing a two-fold reaction. They’re telling him that they think it’s important to create awareness of the fact that this country still has a lot of discrimination—something he says he and his Hispanic and Asian clients have also felt. But his Black clients are also telling him about the dismay they feel about the looting and violence. To them, “It’s like, you just took my entire voice out by lighting a building on fire,” he says. “The voice would have been heard much louder peacefully.

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