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It’s no secret that there’s a racial wealth gap in America. According to a 2021 report by the U.S. Federal Reserve, the average Black and Hispanic household held roughly 15-20% as much net wealth as Asian and white American families. And the wealth gap is evident for other racially diverse populations. Post-pandemic, the wealth gap has narrowed slightly. Still, as Kamila Elliott, CFP® and Brent Kessel, CFP® noted in their 2021 paper, “Two American Financial Plans,” significant differences remain and are likely to persist without systemic changes and greater access to trusted, ethical financial planning advice from CFP® professionals.

Understanding the Racial Financial Gap

Although the growth of wealth of Black and Hispanic families outpaced that of white families between 2019 and 2022 (61%, 47% and 31% growth, respectively), significant barriers remain in the nearly two century-old history of the racial wealth gap.

In a 2021 paper for the Journal of Financial Planning, Elliott and Kessel reported that a typical Black family, during their lifetime, will accrue roughly 70% less in wealth than a typical white family. If both families attended college, contributed the same amount to a 401(k) and invested identically, the Black family’s wealth would still be 51% lower.

This disparate relationship between wealth and racial demographics in the U.S. trickles down through the personal financial experience of many Americans. For example, in 2019, Black borrowers were 1.8 times more likely to be denied a conventional mortgage than white applicants. This issue has been exacerbated in large metropolitan areas such as New York and Chicago. There, Black Americans seeking a mortgage were roughly twice as likely to be declined.

The result: the homeownership rate for white households was 75% in 2022, compared to 45% for Black households, according to data from the U.S. Department of the Treasury.

“Contrary to what one might expect, the racial divide in homeownership rates has actually expanded since 1960, a time when blatant housing discrimination was both legal and common”

— Brent Kessel, CFP®

“Contrary to what one might expect, the racial divide in homeownership rates has actually expanded since 1960, a time when blatant housing discrimination was both legal and common,” said Kessel. “We all know that housing is an intergenerational asset, often the only one. It’s also a means of forced savings and, in our highly consumeristic culture, it might be the only wealth accumulation tool available to many Black families.”

How CFP® Professionals Can Address the Wealth Gap

While providing advice to clients from different backgrounds can be complex, CFP® professionals are in a unique position to assist in narrowing this gap by expanding their work with diverse client bases and providing personalized and timely advice. This work begins, however, with an understanding of the cultural sensitivities that vary from client to client, and how those backgrounds impact the financial advice a CFP® professional provides.

According to Elliott’s and Kessel’s paper, if Black clients accessed financial products at the same rate as white clients, the financial sector could earn approximately $2 billion annually in greater revenue. If the racial wealth gap was closed, the sector would earn an additional $60 billion in annual revenue.

Even more important, wealth management firms must commit to developing more diverse and inclusive practices. CFP Board understands the importance of this commitment and is actively pushing for increased diversity among CFP® professionals and their client bases. In 2022, CFP Board welcomed the most diverse class in CFP Board’s history, hitting an all-time high in the number of racially and ethnically diverse new CFP® professionals.

Firms and practices that follow suit are seeing promising returns. Those with the highest ethnic and cultural diversity often achieve median performance 15 points higher than firms with the lowest diversity (59% vs. 44%, respectively), according to a 2018 McKinsey study.

“This growth means that more of the public will see people who look like them, creating more accessibility to financial planning, or optics of increased accessibility,” Elliott said. “The resulting benefits include more access to comprehensive advice for racially diverse investors, helping them take the necessary steps to build and retain long-term wealth.”

Cultural Sensitivity and Recent Progress

With this growth, another keystone to closing the racial wealth gap is a CFP® professional’s understanding of their client’s background. This requires a clear picture of their client’s financial history.

For example, a Black client may approach their wealth differently than a white client. Understanding that there have been potential roadblocks for a Black client in the process of accumulating that wealth (e.g., an historical earnings gap, denied mortgages, high-interest loans to pursue a college education) requires CFP® professionals to take a more personalized approach to the planning process.

“If educational outcomes and the wage gap persist with a particular client, a CFP® practitioner will likely have to help their Black client save significantly more and invest more aggressively than their white counterparts to meaningfully narrow the future racial wealth gap,” said Kessel.

Practical Steps for CFP® Professionals

Elliott and Kessel suggest that planners start with goal-based planning. Understanding goals is always important, but clarity of purpose is especially crucial with clients who may not understand what it means to make 7- 8% returns. Sometimes financial planning professionals assume that their clients are generally the same – they have similar goals, and they assume key aspects of financial planning impact all clients in consistent ways. Becoming more sensitive to their clients’ backgrounds can build the understanding of differences between clients and how they approach managing their wealth.

“Understanding the ‘why’ behind actions or inaction is key to delivering and implementing financial plans”

— Kamila Elliott, CFP®

“Understanding the ‘why’ behind actions or inaction is key to delivering and implementing financial plans,” said Elliott. “The growing focus on the psychology of financial planning arms financial professionals with the tools needed to broach difficult conversations regarding limiting behaviors that detract from wealth building.”

Elliott and Kessel also recommend developing a “red flags” checklist to spot overlooked items in a client’s plan, such as healthcare or renters’/homeowners’ insurance.

“Black Americans, for example, are concentrated in industries with high turnover rates and are unemployed at more than twice the rate of their white counterparts. Therefore, having an emergency reserve — one of the ‘red flags’ on many CFP® practitioners’ checklists — is imperative,” said Kessel.

By understanding such sensitivities, CFP® professionals can develop plans that fit the unique needs of racially diverse clients. That’s good advice for CFP® professionals in all situations, but particularly important for those committed to closing the racial wealth gap in the U.S.

“Don’t expect clients who’ve either been through financial trauma at the hands of major institutions or been taught to mistrust markets or employers to simply follow your advice blindly,” said Kessel. “Listen to their stories, validate their feelings, and educate them as to the consequences of one choice versus another, truly giving them the final say in which choice they make.”