New Study Ties Lack of Advisor Diversity to Local Racism

What You Need to Know

The results of a new analysis suggest market-level racial animosity toward Black people is negatively associated with Black advisor representation.
On the positive side, the paper suggests, there are likely more Black advisors working in the field today than prior estimates have shown.
The authors conclude that the representation problem may ultimately need to be addressed at the market or societal level, rather than by individual firms.

There is nothing new about the persistent lack of diversity in the financial advisor business, and an extensive body of industry and academic research exists that shows just how serious the representation gap remains.

As such analyses tend to demonstrate, traditional approaches to recruiting and retaining diverse talent continue to fall far short of firms’ stated goals, and even those organizations with the best intentions are still persistently failing to adequately attract and assimilate diverse talent, especially at senior leadership levels.

However, as explored in a forthcoming report set to be published in the Certified Financial Planner Board of Standards’ Financial Planning Review, less research has been conducted to explore the question of how race-based discrimination as a societal matter has harmed advisor industry representation.

According to the paper, “Racial animosity and black financial advisor underrepresentation,” it is not just unconscious bias or outright racial discrimination coming from within the advisor industry that has held the trade back from achieving anything like adequate representation for Black Americans. Rather, greater racism in a given region or market is also directly associated with greater Black advisor underrepresentation.

A team of four researchers put together the analysis, including Jeffrey DiBartolomeo, Derek Tharp and Elizabeth Parks-Stamm, all from the University of Southern Maine, alongside Michael Kothakota, the head of research at CFP Board.

The researchers estimate that about 10% of financial advisors are Black, compared with 13.4% of the U.S. population. Their results suggest market-level racial animosity toward Black people is negatively associated with Black advisor representation.

Specifically, they estimate a representation difference of 0.9 percentage points when comparing markets with the highest and lowest levels of racial animosity, which they track based on a proxy generated by analyzing internet search traffic activity.

For the average market with an estimated 11.4% Black advisor representation, the authors explain, an increase of 0.9 percentage points would represent a meaningful 7.9% increase in Black advisor representation.

Difficulty Measuring Racial Attitudes

According to the authors, despite industrywide concern about the lack of diversity, a reliable estimate of Black Americans’ representation among financial advisors is still needed.

For its part, the Bureau of Labor Statistics estimated in 2020 that about 6.9% of personal financial advisors were Black, compared with 13.4% of the U.S. population. Another analysis put together by Data USA, the authors note, put the estimate even lower, between 4.7% and 6.7%.

The new report therefore seeks to provide a refined estimate based on race and ethnicity estimates for every client-facing financial advisor in the U.S., and to that end, the researchers employ a classification algorithm that provides unique racial and ethnic estimates for each individual licensed within the advisor industry based on their name, gender and location.

“We then apply this to a dataset enhanced by a commercial vendor to include job role classifications, allowing us to estimate industry demographics among those specifically identified as client-facing financial advisors,” the researchers explain. “Then, we look for real-world correlates of Black financial advisor representation by exploring whether representation is correlated with local racial attitudes.”

As the authors admit, measuring racial attitudes can be difficult, as consumers may not be comfortable sharing racial preferences or prejudices in consumer surveys. In the present study, they used Google search data to examine whether area racism against Black people was prevalent, and whether it was associated with greater underrepresentation of Black advisors within U.S. markets.

As a baseline, the researchers hypothesized that area racism, as reflected in Google search volume for an anti-Black racial epithet, would be negatively associated with representation of Black advisors within U.S. markets.

Factors Affecting the Proportion of Black Advisors

According to the new paper, out of more than 640,000 securities-licensed individuals, over 237,000 (or about 37%) have a job classification containing “advisor.”

Issues at the Market and Societal Levels

According to the authors, the new study provides compelling evidence that helps to contextualize the ongoing underrepresentation of Black Americans in the financial industry. As the authors point out, the clear lack of representation is driven by factors coming from within and outside the industry’s control.

“While this analysis cannot speak to causal relationships between an area’s racial animosity toward [Black people] and Black advisor underrepresentation, we believe both managerial discrimination (an institutional practice within an organization) and consumer discrimination (an influence outside of an organization) are two potential mediators that warrant further examination,” the authors conclude.

In contrast to prior survey research that did not find evidence of consumer discrimination via self-report, the results of the new analysis, which uses an “unobtrusive measure” of area racism and actual representation, suggest there may be an influence of consumer discrimination against Black advisors.

The authors note that their analysis does not address the racial wealth gap.

“Given most advisors charge a percentage of assets under management, and companies have been reported to use race/identity matching to match clients to their advisor, the racial wealth gap may both contribute to and be perpetuated by this underrepresentation of Black advisors,” the authors warn.

Given the efforts to address the problem of underrepresentation of Black advisors within the financial advisory industry, the authors conclude, these findings may also suggest the problem may ultimately need to be addressed at the market or societal level.

“Attitudes of racial prejudice in areas may make it more difficult for stakeholders in the field to reduce the underrepresentation of Black advisors,” they explain. “Policymakers and other community members may need to incorporate strategies to positively influence their market areas away from racial prejudices.”