Reasons Why Ethnic Minorities Fall Behind on Investing
Ethnic minorities in the UK and US do not invest as much as they should. Their lack of participation in the financial markets compounds the existing pay and wealth gap. If we want to live in a fairer, more equal world, we need to solve this issue. So what are the options?
What are the Figures for Ethnic Minority Investment?
The latest CNBC/Momentive Invest in You survey found that almost half of Black Americans didn’t have any investments. For Black women, the number is even higher, at nearly 60%.
In the UK, things aren’t much better. The Office for National Statistics (ONS) released data that demonstrated the severe differences in pension uptake across the country.
The report looked at median private pension wealth for ethnic groups. Bangladeshi, Black African, Chinese, “any other ethnic group” households had pensions of less than £5000. White British-headed households had £80,000.
What are the Reasons Behind the Pension Gap?
There are a complex set of factors that contribute to the pension gap. One commonly cited reason is the labor market. Ethnic minorities, on average, earn less, have higher unemployment rates, and are more likely to be self-employed.
Not having the liquidity to invest in a pension is a big problem with few easy solutions. Additionally, many ethnic minorities have come from jurisdictions where public trust in institutions is low. Education can help people understand the benefits of pensions and investment and explain the checks and balances involved.
Barriers with Ethnic Minority Investment
The financial industry has a fair way to go to achieve equal outcomes. Over the years, many big firms have made significant diversity pledges. However, when it comes to actions, they’ve fallen short.
In a recent City of London Race to Equality report, a shocking 66% of ethnic minorities said they had experienced workplace discrimination due to their background. A further 4 in 10 believed that their employers weren’t doing enough to create an inclusive environment. At the same time, 28% said that discrimination was holding back their careers.
If discrimination holds back employees, it breeds mistrust. And a lack of trust is another significant factor in low ethnic minority investment participation.
Another aspect that affects trust is a lack of transparency. Only 13 members of the FTSE 100 released their ethnicity pay gaps. Those that have published revealed ethnic pay gaps as high as 27% (British Land).
A lack of career progression means a lower income to invest. Investing gives everyone a chance to grow their money. Since the 2008 financial crisis, saving interest rates have been typically lower than 1%. If savers want to beat inflation, they need to consider investing. When you consider that average 10-year stock market returns are historically over 9%, the importance of investing becomes clear.
Not investing widens the wealth gap. It exacerbates existing labor market forces and structural inequalities. If we are to make headway on these issues, ethnic minorities must be encouraged to participate further in investments and pensions.
Solutions to the Investment Gap
There is no magic pill that can solve this issue overnight. However, there are several actions we can all take to closing the investment gap.
Ethnic minorities and women often feel the investment industry fails to engage them. A recent report from White Marble Consulting supported by Schroders cited “historic and ongoing exclusion” as barriers to entering investment. One solution recommended in the report is to leverage social media personalities and influencers to encourage participation.
In many avenues, social media influencers have taken the role of traditional advertising. However, this type of engagement can go beyond just selling products. Funds could use it to build trust, educate, and increase financial literacy.
#2. Diversity Initiatives
Closing the pay and investment gap will require uplifting specific communities. More jobs, mentoring, and clearer career progression paths are needed. Some banks are doing the work and matching promises with action. Associations have an essential role to play in increasing workplace diversity, especially in the finance industry.
#3. More Investment in Minority Businesses
Saving and investment require liquidity. For many ethnic minorities, this is a barrier to investment. A recent report into how venture capital (VC) money has been invested into new UK startups painted a disheartening picture.
Despite ethnic communities making up 14% of the UK population, all-ethnic teams received only 1.7% of VC funds between 2009 to 2019. Better investment for everyone will lead to more liquidity and opportunity.
Some funds are taking the lead. Citi announced a $200 million investment fund to target historically underfunded teams. More needs to follow.
#4. Pension Reform
The People’s Pension has some interesting thoughts on how pension reform could solve these issues. They suggest lowering the eligibility criteria for workplace pensions from £10,000 to £6,136. That change would bring in 1.2 million workers, 15% of whom are ethnic minorities. Additionally, they believe pension contributions should count from the first pound not use the current £6,136 threshold.
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Alpesh Patel OBE
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