The scope of professional opportunities in the financial planning industry is incredibly broad, in addition to each profession's particular approach and area of expertise. But as varied as the profession is in types of work opportunities, the demographics of the industry do not reflect the diversity of the population. Why is that still true?
- Financial advisors have typically been middle-class White men.
- Women and ethnic minorities make up just a small percentage of all financial advisors, far lower than their representation in the greater population.
- While negative perceptions about the financial profession may dissuade some, the industry is trying to improve its diversity.
Women represent just over half of the U.S. population but account for only 15% to 20% of financial advisors and fewer than a quarter of certified financial planners (CFP). Racial and ethnic diversity is also substantially lacking: Blacks and Latinos account for just 4.1% of the more than 87,000 CFP professionals in the U.S.
Kimberly Foss, founder and president of Empyrion Wealth Management in Roseville, California, says the lack of diversity in the financial services industry is problematic because it skews practices and norms away from the realities of the larger society.
Foss says diversity is critical for remaining relevant, and the financial sector needs to be recruiting underrepresented groups in greater numbers “...if we want a body of professionals who can understand and empathize with a changing American society and culture.”
What accounts for the lack of diversity in financial services, and what can be done to change it?
Negative Perception May Inhibit Diversity
Winkfield says the financial industry’s failure to make significant efforts to encourage diversification and increase the number of women and racial and ethnic minorities operating in advisory roles, can be attributed to its perception of those groups. He cites Merrill Lynch and Morgan Stanley as examples of racial bias at work within the industry.
In December 2013, Merrill Lynch settled a $160 million lawsuit involving claims of unequal treatment of the firm’s Black brokers. More recently, Morgan Stanley asked a federal judge to move a racial bias lawsuit into private arbitration.
Gender discrimination may be a similar stumbling block for women. A recent working paper from the National Bureau of Economic Research found that female advisors were more likely to be punished more harshly than men following an incident of misconduct. They were 20% more likely to lose their jobs and 30% more likely to struggle with finding a new job, compared to their male colleagues.
Chloe McKenzie, founder, president, and CEO of BlackFem, Inc., a non-profit focused on creating opportunities for women and girls of color to build and sustain wealth, says that negative perceptions of the industry may also impact diversity.
“I think a lot of women, people of color, and women of color are not going into the industry because there’s such a large amount of distrust of the financial sector from communities of color, and from women,” McKenzie says.
According to McKenzie, the industry creates a catch-22 scenario in which women and underrepresented groups are reluctant to seek professional financial advice because they can’t readily find advisors they identify with. At the same time, a mistrust of the industry keeps women and racial minorities from entering the field to serve the groups who could directly benefit from their advice.
“The lack of diversity is hugely problematic for women and minorities seeking financial advice for a multitude of reasons, the two most prominent being comfort and respect,” Winkfield says. “Because of the boys’ club, a members-only power structure, and the inherent issues that come with it, those who do not belong in looks or gender are often intimidated or uncomfortable with their advisor options when seeking advice.”
This can stifle their ability to grow wealth, potentially widening the wealth gap. It’s also detrimental to the advisory industry itself.
“When people aren’t able to find an advisor they connect with, they get discouraged and procrastinate or start looking elsewhere for guidance,” says Ande Frazier, former vice president, distribution, Penn Mutual. “They’re turning to robo-advisors, the internet, or their family members and friends for advice, therefore discounting the important role of the advisor.”
Improving Diversity In Financial Services
Increasing diversity in the financial advisory industry requires a multi-faceted approach.
Foss says better and more effective mentorship programs could yield a significant improvement, in addition to developing recruiting practices that are intentionally targeted toward the interests and culture of racial minorities and women. An early emphasis on financial education can also elevate a career in the financial services industry so it's on the radar for women and people of color.
“We should be developing outreach programs targeting high school students, who need to know that ours is not only a viable industry but crucial for the long-term wellbeing of the general population,” Foss says. At the college level, expanded internship opportunities may prove critical in attracting more women and underrepresented people to the industry.
Winkfield says the challenge with these types of programs is making sure they’re creating a comfortable environment for the people they’re trying to recruit. This is something McKenzie’s organization has proven adept at. Education initiatives are the focal point of BlackFem, which advances financial literacy through programs offered in elementary, middle, and high schools, as well as online workshops for parents. “We’re culturally responsive and infuse the experiences of those that we serve into our curriculum, and to top it off, we look like the constituency we serve,” McKenzie says.
These efforts can attract the interest of women and underrepresented people to advisory careers, but the financial industry must also play a part in attracting the groups that it wants to hire. Winkfield says that encouraging diversity hinges on financial services companies adopting a more inclusive mindset: “It’s human to gravitate toward like-looking and like-minded people and it takes a conscious effort to seek out diversity when it’s not your normal.”
The Future of the Industry
In 2020, the CFP Board reported strong increases in the number and the diversity of CFP professionals.
Some of these significant milestones include an increase in the number of female CFP professionals to an all-time high of 20,633, reflecting a growth rate of 3.1% since 2019. The number of Black and Latino CFP professionals increased in 2020 to 3,688, a percentage growth of 12.6% over 2019’s number of 3,274.
Increasing diversity has been a major goal of the CFP Board, and supports its mission to ensure that the public has access to and benefits from competent and ethical financial planning advice.
The Bottom Line
Increasing diversity among financial advisors is rewarding for both the industry and the people it serves, which can have far-reaching implications. In recent years, it seems more likely that we are moving in the direction of a future where the financial planning profession mirrors the diversity of America.