Data & Research February 2, 2016

Retirement a Key Factor in Getting African-Americans to Invest

“If anyone were ever poised to invest with confidence, it’s the black community,” says Mellody Hobson, president of Ariel Investments.
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Middle-class African-Americans are investing more in the stock market than they have in over a decade, according to the Ariel Investments 2015 Black Investor Survey.

The survey of 500 black and 500 white households with incomes of at least $50,000 found that 67% of African-Americans are invested in stocks or stock mutual funds, compared to 86% of whites. While blacks are still comparatively under-invested in stocks when compared to white households, that percentage is on an upward trend, from 60% in 2010 and 57% in 1998, the first year Ariel conducted the study. White household investing has also risen since 2010, from 79% to 86%.

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Seven in 10 African-American investors cite workplace retirement plans as a contributing reason for becoming an investor—double the rate of the next most common reason—having extra cash on hand they wanted to grow. More than half of African-American investors say workplace plans are the most important reason for becoming an investor—more than four times more common than having extra cash. For white investors, workplace retirement plans are also an important reason, but to a slightly lesser degree (63% cite them as a reason, while 45% say they are the most important reason).

Furthermore, for non-investors, retirement plans were cited as the most likely entry point into the world of investing. When non-investors were asked their likelihood to invest under various circumstances, 58% of African-Americans and 63% of whites said they would be likely to invest if their employer offered a good 401(k) plan.

“Clearly, access is a key factor,” says Mellody Hobson, president of Ariel Investments. “My hope is that as more employers offer retirement plans, we will continue to see both white and black participation in the market continue to rise, better preparing everyone for retirement and other financial goals.”

NEXT: Other factors leading African-Americans to invest

The survey found that retirement is a rising priority for both racial groups. In 2000, 33% of African-Americans said their most important goal for saving and investing was for retirement. This year, 44% of African-Americans see retirement savings as most important— more than twice as many as those that save for any other goal. In 2000, about half of whites were focused on retirement savings. In 2015, six in 10 whites state this as their primary goal.

The study found that income is a key factor in African-American stock market participation, with only 57% invested at the income range of $50,000 to $100,000 compared to 81% at the range of $100,000 and more. For whites, the discrepancy was smaller (83% versus 92%). A high level of education is also a predictor for African-Americans participating in the market. Blacks with a graduate degree have a 72% participation rate, as compared to college graduates and below, who participate at a rate of 63%. For whites, the difference is not statistically significant (88% versus 86%).

The survey also found age plays a role in investing. The lowest participation in the stock market among African-Americans is among seniors: only 56% of those 65 and older are invested (compared to 88% of whites in that age bracket). For whites, the lowest participation was among those younger than 40 (73%) while the black younger-than-40 demographic followed closely behind (67%).

African-Americans are more optimistic about the economy than their white counterparts, according to the survey. Compared to whites, African-Americans are more likely to feel hopeful about the current U.S. economy (75% vs. 50%), feel that the economy has fully recovered or is on its way to full recovery since the recession (65% vs. 40%) and feel bullish about the stock market (65% vs. 53%). These findings are in stark contrast with the results of the 2010 survey, when just 43% of African-Americans were bullish compared to 60% of whites.

“If anyone were ever poised to invest with confidence, it’s the black community,” says Hobson. “This optimistic sentiment marks a time of tremendous opportunity, not only for African-Americans to take further advantage of the stock market’s wealth building potential, but also for the financial services industry to reach out to this historically under-served group.”

In Practice February 1, 2016

Switching to a Fee Model Can Benefit a Practice

Over the last decade, financial advisers have been moving from commission- to fee-based models.
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As the wealth management industry becomes more competitive and complex, advisers need to embrace new business models in order to remain successful, CLS Investments LLC says in a white paper, and the adviser movement toward fee-based models is front and center. The reason: fee-based advising and investment management outsourcing are key ways to enhance client service.

“Making the Switch: The Benefits of Moving to a Fee-based Model” visits the theory behind the adviser trend to switch compensation models. The movement away from commission-based models has been a growing trend in wealth management for more than a decade, CLS says, and could even be reaching critical mass. The Advisor IQ Series white paper notes the amount of assets in fee-based accounts more than tripled, from $987 billion in 2003 to $2.7 trillion in 2013, according to data from Cerulli Reports.

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That means that for the first time, advisers derive more of their total revenues from fees than commissions. However, the commission model is not yet obsolete. According to CLS:

  • 11% of advisers are commission-only;
  • 23% of advisers are fee-only; and
  • 23% of advisers use a mix of both compensation models.

With the emergence of low cost, online robo-advisers, this trend will only accelerate because of technology-driven, competitive options. CLS reassures those advisers that have not yet embraced fee-based compensation models and says there’s no reason to panic. “The good news is that it is never too late to begin,” the paper says. While there is a definite urgency for advisers to transition their compensation models, most don’t have to abandon commissions altogether.

Commission-based advisers can gradually transition their book of business. Many advisers that have made the switch to fees often say they’ve accrued many business benefits. They also note that they are able to provide enhanced service to their clients.

NEXT: Transaction-based models can eat into an adviser’s time.

The move away from time-consuming transactions can help advisers free themselves from having to constantly sell investment products to meet their revenue goals, the paper notes. Annuitizing their book, as CLS describes fee-based service, advisers generate a renewable and predictable revenue stream by accessing professional, institutional-caliber third-party money managers for ongoing outsourced investment management. 

The increase in an adviser’s time and productivity translates directly into the ability to better service clients, develop enhanced relationships, and pursue new business development opportunities.

“Advisers have told us that by freeing themselves from having to act as salespeople and maintaining more of an open architecture approach, they are able to more easily outsource time-consuming functions, such as portfolio management,” says Todd Clarke, chief executive of CLS Investments. “As an adviser, time is a valuable asset, and with more time on their hands, advisers can focus on better servicing their clients, developing relationships, and pursuing strategic business development opportunities.”

Another advantage is that fee-based advisers no longer have to start each year with zero in revenue, which automatically puts them into production mode and takes valuable time away from higher-value activities such as strategic planning, prospecting, and relationship management.

By outsourcing the time-consuming tasks of portfolio management, trading, rebalancing, and reporting to professional third-party money managers, advisers free up valuable internal resources—which can lower costs and enhance productivity, adding up to better profitability and the ability to drive higher incomes.

“At CLS, we have a front row seat to the industry’s top advisers, which allows us to see how industry trends are born and continue to evolve,” Clarke says. The white paper is intended to encourage an open dialogue around how professionals can make strategic business development goals that simultaneously benefit their clients, he explains.

“Making the Switch: The Benefits of Moving to a Fee-based Model” is available on CLS Investments’ website.

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