Tag Archives: Wealth Gap

Building Black Wealth Insights Study – U.S. Bank

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The racial wealth gap constrains the U.S. economy as a whole, resulting in $1-1.5 trillion in lost economic output and a 4-6% drag on America’s GDP.

The racial wealth gap in America is not just a ‘Black problem.’ It’s a problem that effects all Americans and is an ‘all of us’ challenge to remedy, according to U.S. Bank. “Extreme disparities and their persistent harm reach into every American’s future. We can all be energized by the opportunity to provide the tools of financial prosperity for Black families and other historically disadvantaged members of the American fabric because those benefits will be felt throughout our entire country. By working to close the racial wealth gap, we’re creating economic prosperity – more jobs, economic vitality – it’s better for business, for families and for communities. The racial wealth gap must be closed if we are to achieve our full potential as a nation,” says Greg Cunningham, SEVP, Chief Diversity Officer U.S. Bank

Building wealth and achieving financial security is a primary aspiration for most, but many communities, especially the African American community, face distinct systematic challenges in reaching these goals. And, the financial industry has an important role to play in eliminating the barriers and closing the racial wealth gap.

While everyone has a unique definition of financial security, it’s often defined as having peace of mind that their income is enough to cover both expected and unforeseen expenses.

U.S. Bank’s Building Black Wealth Insights Study attempts to understanding the needs, goals and challenges of the Black community. This research highlights many steps the financial industry must pursue to better serve the Black community, according to Gunjan Kedia, Vice Chairman, U.S. Bank Wealth Management and Investment Services.

In the United States, Black households hold significantly less wealth than white households, and over the last several decades, that gap continued to grow.2 While there has been some improvement, the net wealth of the average Black family today is less than 15 percent of that of a white family.1

The overall conclusion is that more work needs to be done to narrow the wealth gap; in fact, a 2018 analysis published by the Federal Reserve Bank of Minneapolis posited, “no progress has been made in reducing income and wealth inequalities between Black and white households over the past 70 years.”3

Also, according to the Q2 2021 Bureau of Labor Statistics report, the median weekly earnings for Black men were $877, or 78.7 percent of the median for white men ($1,115).4

It may come as no surprise, then, that our survey found Black affluent respondents feel they are at a disadvantage compared to rest of the population. Nearly twice as many Black affluent individuals as Hispanic individuals in the survey stated they had been treated differently by the financial services industry due to their race – and nearly four times as many compared to Asian and white individuals.

Despite these barriers, we found that Black affluent individuals are more likely than non-Black (white, Hispanic and Asian) affluent respondents to:

  • Have clearly defined financial goals.
  • Have a strong financial plan that helps guide their decisions.
  • Believe they are better at managing their finances than their parents.
  • Be more comfortable discussing money matters freely with friends and family.

U.S. financial institutions must acknowledge that they played a historical role in creating and sustaining present and persistent gaps in wealth by race and ethnicity. According to the Federal Reserve’s 2019 report, there is an 8:1 gap in wealth between white and Black families, and a 5:1 gap in wealth between white and Hispanic families.1 Financial institutions must not only acknowledges this history, but be willing to leverage the unique skills and expertise of its they possess to build wealth in African American communities and help close those gaps.

U.S. financial institutions must make a commitment to address this persistent racial wealth gap.

To help build wealth, banks and financial institutions must reduce actual and perceived barriers to their services, and redefine how they intend to serve the special needs of racially diverse communities. They must make a commitment to support businesses owned by people of color, help individuals and communities of color advance economically, and enhance career opportunities for employees and prospective employees

It must start by banks and financial institutions listening to and learning from their diverse customers and communities. “We are starting with the Black community, because that is where the wealth gap is greatest. We’ll continue to listen and learn in order to take steps to support lasting change,” explains Mark Jordahl, President U.S. Bank Wealth Management.

Despite the historical and current barriers faced by Black individuals, there are abundant opportunities by banks and financial institutions to cl,ose the wealth gap. And,
there is still much that industry leaders can do to support Black affluent individuals – and Black individuals at all economic levels. A few thought starters, according to U.S. Bank, are:

  • Advisor training – Ensure employees at all levels are trained to recognize their own individual biases and to treat all individuals with fairness – whether they’re greeting someone at a bank counter or considering approval for a loan product.
  • Advisor awareness – Acknowledge that working with a financial advisor may be uncomfortable for someone doing it for the first time or someone who has had a prior negative encounter. Consider how words and actions can impact an experience and commit to training client-facing advisors to enhance the client experience, especially for those from different backgrounds.
  • Diverse advisors – Know that representation matters. Expand hiring and retention efforts to ensure diversity doesn’t just occur at entry-level positions, but through all levels of client-facing roles and leadership.
  • Tailored advice – As with any customer, avoid making assumptions about financial goals and ensure financial planning advice takes into consideration the priorities of the individual or family. Examples may include ensuring current lifestyle needs are met, helping the next generation and leaving a legacy. Make real estatepart of the conversation and ensure fair mortgage lending.

https://www.usbank.com/dam/documents/pdf/wealth-management/perspectives/building-black-wealth.pdf

References:

  1. https://www.usbank.com/dam/documents/pdf/wealth-management/perspectives/building-black-wealth.pdf

Bridging the Divide: Racial and Ethnic Disparities in of Investing

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Historically, people of color have been under-represented as investor of stocks and bonds in taxable brokerage accounts.

Due to decades of federal, state and local policies that advantaged white communities and systemically marginalized Black, brown and Indigenous communities, wealthy households in the United States are disproportionately white.

All levels of government have created conditions for the racial wealth gap through discriminatory and often blatant racial policies that favor white families over families of color.

A large disparity in stock ownership between racial/ethnic groups exist in the United States. Nearly two-thirds of American households have some form of investment, typically through taxable brokerage accounts, IRAs or employer-sponsored retirement account like a 401(k). About one-third (35%) said they owned stocks, bonds or mutual funds outside of retirement accounts in a Pew Research Center survey.

Although a sizeable number of households report owning investment accounts, people of color, particularly those who identify as African American or Hispanic/Latino, are underrepresented as investment account holders.

While African American and Hispanic/Latino adults make up 12 and 16 percent of the U.S. adult population, respectively, they comprise only 10 and 11 percent of households with taxable investment accounts, according to the FINRA study. Taxable investments include investments in stocks, bonds, mutual funds or other securities outside of retirement accounts.

Moreover, white families make up 65 percent of families but own nearly 90 percent of corporate stocks, nearly 90 percent of private business assets, and more than 76 percent of real estate holdings. Black and Hispanic families, in contrast, own 1.7 and 0.5 percent of corporate equities respectively, less than 2 percent of private business assets, and under 6 percent of real estate holdings.

FINRA Foundation’s National Financial Capability Study findings confirmed the presence of a persistent investment racial and ethnic divide: African American and Hispanic/Latino respondents were largely underrepresented as taxable investors and overrepresented in households without any investment accounts. Few had investments outside of a retirement account and many had no investment accounts whatsoever.

One encouraging trend was that the proportion of those owning a taxable investment account increased by 18 percent for African Americans over the six-year study period. However, gender differences, particularly among respondents of color, were more troubling, even when controlling for demographic differences. While the gap between white women and white men was relatively minor, with white women 6 percent less likely to own a taxable account than white men, across the six-year period, African American women and Hispanic/Latina women were 14 percent less likely than their male counterparts to own a taxable investment account. Similar gender gaps were identified among Asian American respondents.

The racial/ethnic composition of investing households indicates sizeable gaps between some communities of color and white respondents throughout the six-year period studied. Focusing on those with taxable investment accounts, African American and Hispanic/Latino adults are underrepresented relative to white respondents, although for African American respondents, the gap seems to be closing.

Still, understanding the role that race and ethnicity play in the likelihood of owning a taxable investment requires consideration of other key factors. Many people of color face obstacles that can hinder their capacity to invest. For example, income, wealth and educational disparities, stemming largely from structural racism, create barriers unique to this population.

The study examined households with taxable investment accounts; households whose only financial investments are in retirement accounts; and households without any investment accounts over the course of six years, from 2012 to 2018.

There was a large disparity between the investment account ownership of some communities of color and that of white adults. African Americans and Hispanic/Latino respondents were underrepresented among households with a taxable brokerage investment account and overrepresented among households without any type of investment account. Among African American and Hispanic/Latino respondents, nearly half reported not having a taxable investment account, while only about a quarter reported having taxable investment accounts.

The legacies of systemic racism and racial barriers are deep and complex. The data highlights that inequities across many areas, whether it be education, healthcare, criminal justice, or financial inclusion, are more pronounced for people of color and those from minority backgrounds.

Increasing the representation in taxable brokerage accounts of African Americans and Hispanic Americans may serve as a major factor to narrow a significant racial and ethnic wealth gap. It could enable people of color to benefit from market returns and close the wealth gap.

References:

  1. https://www.pewresearch.org/fact-tank/2020/09/25/few-in-u-s-owned-stocks-outside-of-401ks-in-2019-fewer-said-market-had-a-big-impact-on-their-view-of-economy/
  2. https://itep.org/investment-income-and-racial-inequality/
  3. https://www.finrafoundation.org/sites/finrafoundation/files/bridging-the-divide_0.pdf
  4. https://itep.org/investment-income-and-racial-inequality/

FINRA Foundation’s National Financial Capability Study examined investment account ownership over a six- year period across households of differing racial and ethnic backgrounds.

Black-White Inequality Wealth Gap

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“Wealth is a safety net that keeps a life from being derailed by temporary setbacks and the loss of income.”  Brookings Institute

The wealth gap for African Americans remains significant. A close examination of wealth in the U.S. finds evidence of persistent and staggering racial disparities and past racist federal policies, according to the Brookings Institute findings. Specifically, the disparities include:

  • At $171,000, the net worth of a typical white family is nearly ten times greater than that of a Black family ($17,150) in 2016.
  • Gap in stock market participation between the groups persists, with 55 percent of Black Americans and 71 percent of white Americans reporting stock market investments.

This disparity means that Black Americans will have less money saved and invested for retirement, and less accumulated wealth to pass onto the next generation than their white peers.

Figure 1. White families have more wealth than Black, Hispanic, and other or multiple race families in the 2019 SCF.

Notes: Figures displays median (top panel) and mean (bottom panel) wealth by race and ethnicity, expressed in thousands of 2019 dollars.

These gaps in wealth and investments between Black and White households reveal the effects of centuries’ of accumulated inequality, discrimination and racism, as well as differences in power and opportunity that can be traced back to this nation’s inception. The Black-White wealth gap reflects a society that has not and does not afford equality of opportunity to all its citizens.

It is important to note that it was never the case that a White asset-based middle class simply emerged, according to research based on a study of historical and contemporary racial inequality. Rather, it was extraordinary government policy, and to some extent literal government giveaways, that provided Whites the financial assets, educational opportunities, land grants and infrastructure to accumulate and pass down wealth.

In contrast, blacks were largely excluded from these wealth generating benefits. When they were able to accumulate land and enterprise, it was often stolen, destroyed or seized by government complicit in theft, fraud and terror.

Federally funded racism in housing and labor unions

In the mid-twentieth century, the government subsidized builders to construct suburbs of single-family homes  in scores of developments across the country on explicit federal condition that no homes be occupied by African Americans, according to the NAACP Legal Defense Fund. Over several generations, federally subsidized white homebuyers gained a quarter million dollars in home equity or more. In contrast, the government restricted African Americans, including war veterans, mostly to segregated urban apartment rentals where no wealth appreciated.

White homeowners were able to bequeath some of this federally subsidized wealth to subsequent generations, after using it for retirements, children’s college education, care for elderly parents, or medical emergencies. African Americans had to use current income for such expenses, if they could do so at all, pushing many into poverty. Largely because of twentieth century federal segregation policy, while average African American income is about 60 percent of white income, African American wealth is only 7 percent of white wealth.

Other federal policies forced African Americans into poverty, continuing for generations. In 1935, the government gave construction and factory unions the right to collectively bargain for higher wages and benefits. As proposed by Senator Robert Wagner, the law denied that right to unions that barred African Americans. Segregated unions lobbied to remove that provision and the Wagner Act was then passed, unconstitutionally empowering unions to exclude black workers — a policy that continued for over 30 years. Denied the best blue-collar employment, African Americans participated less in the collectively bargained income boom that raised white working class incomes in the three decades following World War II.

Wealth

“Black children are less economically upwardly mobile partly because of the multigenerational effects of federal and state government racist policies that purposely segregated their grandparents and great-grandparents into low-income communities and low paying jobs from which exit was difficult.”

Wealth is the sum of resources available to a household at a point in time; as such it is clearly influenced by the income of a household, but the two are not perfectly correlated.

Two households can have the same income, but the household with fewer expenses, or with more accumulated wealth from past income or inheritances, will have more wealth.

As a result, high- and middle-income white families are much wealthier than Black families with the same incomes. A few reasons are that White families receive much larger inheritances on average than Black families. Economists Darrick Hamilton and Sandy Darity conclude that inheritances and other intergenerational transfers “account for more of the racial wealth gap than any other demographic and socioeconomic indicators.”

For example, while 51 percent of white Americans say they have inherited wealth, just 23 percent of Black Americans have, according to an annual Ariel-Schwab Black Investor Survey.

All of this matters because wealth confers benefits that go beyond those that come with family income.

Wealth is a safety net that keeps a life from being derailed by temporary personal economic setbacks and the loss of income, according to Brookings Institute. This safety net allows people to take career risks knowing that they have a buffer when success is not immediately achieved.

Family wealth allows people (especially young adults who have recently entered the labor force) to access housing in safe neighborhoods with good schools, thereby enhancing the prospects of their own children.

Wealth affords people opportunities to be entrepreneurs and inventors. And the income from wealth is taxed at much lower rates than income from work, which means that wealth begets more wealth.

Education a Way to Weslth

Social science research indicates that blacks attain more years of education than whites from families with comparable resources. Essentially, blacks place a high premium on education as a means of mobility

Yet, the racial wealth gap between Blacks and Whited expands at higher levels of post secondary education. In short, Black families where the head graduated from college have less accumulated than wealth than white families where the head dropped out of high school.

One take-away…better mindsets regarding wealth and money alone can’t fix the legacy of unconstitutional and racist federal and state sanctioned economic policy.

References:

  1. https://www.brookings.edu/blog/up-front/2020/02/27/examining-the-black-white-wealth-gap/
  2. https://www.aboutschwab.com/ariel-schwab-black-investor-survey-2021
  3. Source: Federal Reserve Board, 2019 Survey of Consumer Finances.
  4. https://www.marketwatch.com/story/heres-why-black-families-have-struggled-for-decades-to-gain-wealth-2019-02-28
  5. https://www.epi.org/blog/is-poverty-a-mindset/