How Do DEI Initiatives Benefit Financial Advisory Firms?

Financial advisory firms manage trillions of dollars, connecting them intimately to questions of wealth and equity. But when the U.S. Government Accountability Office reviewed the industry in 2017, it found that less than 1% of those assets, then estimated at more than $70 trillion, were managed by minority or woman-owned firms.

But there may be growing investor interest in promoting diversity in firms. For example, a study by the SEC’s Asset Management Advisory Committee—characterized as the most detailed inspection of DEI in the industry to date—found that investors are valuing DEI information when deciding to invest.

So, what should financial advisors consider for their practice when it comes to DEI, and how are firms attempting to implement it?

What Are DEI Initiatives?

While often used to mean the same thing, diversity, equity, and inclusion refer to three separate, though connected, concepts:

• Diversity refers, in simple terms, to including people with different demographic characteristics such as race, sex, sexual identity, or disability. 
• Equity refers to businesses offering different resources to account for privilege and power differences. 
• Inclusion refers to whether people feel included and have a voice in decision-making.

These three concepts are used to evaluate a company’s progressiveness and innovativeness.

Ways Advisory Firms Can Do More In DEI

For financial advisory firms, DEI can mean connecting consumers to a diverse set of qualified financial advisors or having a diverse staff. 

For example, the retail wealth management group Lincoln Financial Network runs a network that connects consumers to Black and Latinx financial professionals through a digital platform. The company argues that its platform will decrease isolation among those groups and will, therefore, stimulate financial well-being by expanding access to financial advice. The group has also held professional development sessions. There are also internships such as the BLatinX Internship Program meant to encourage Black and Latinx people to become certified financial planners.

But, on the whole, proponents suggest there’s more work to do in the industry: The industry has focused more on diversity than equity or inclusion, according to an interview given by Kevin Keller, CEO of the CFP Board of financial planners, at their 2022 diversity summit. Other members present at the meeting called for more transparency in hiring practices.

The 2021 SEC’s Asset Management Advisory Committee report, mentioned above, made recommendations to address what it argued was a lack of diversity and transparency around diversity practices in the industry. It recommended that the agency require more detailed gender and race disclosures, along with setting up a way to increase records-keeping and further studies.

For individual firms, it’s often recommended that they craft a mission unique to their firm, and develop strategies and ways of measuring goals, while getting buy-in from employees and leadership.

Examples of DEI Initiatives in Action

So how are some of the top firms approaching DEI?

Investopedia surveyed the publicly available information for some of the largest firms and then asked a few firms from its 100 Top Financial Advisors list to find out.

The biggest names in financial advice have issued DEI statements, which include publishing regular reports about DEI initiatives they are pursuing:

• In a 2022 report, for instance, BlackRock calls DEI a “business imperative” and claims to have met its internal goals for gender, ethnic and racial representation.
• Vanguard, for comparison, also emphasizes its attempts to attract and retain diverse staff and publishes an overview of the race and ethnicity of its workforce.
• Fidelity similarly advertises its associate-led community investment program, and it claims that in 2022 43% of its new hires were people of color and that the company spent $350 million on “diverse suppliers.”

How do other firms approach diversity?

Make It Your “Why”

“As a majority female, Black-owned firm, we are redefining the traditional structure of mainstream RIAs by leveraging our cultural competency skills, authentically engaging holistic financial planning advice, and creating a hospitable environment for our employees and clients alike,” wrote Lazetta Rainey Braxton, founder and CEO of Investopedia Top 100 Financial Advisory firm Lazetta & Associates, in response to an inquiry about the firm’s DEI practices.

She described diversity, equity, inclusion, and belonging as holding at the center of why the firm began, when the country is becoming a “racial mosaic.”

“We celebrate weaving our ‘Why’ into our internal and external practices that span employee training, career paths, company handbook, team huddles, prospect introductions, client meetings, and company retreats,” Braxton wrote.

Work With Diverse Suppliers

“We make intentional efforts to include a diverse slate of candidates for job openings, and we select employees through a fair and consistent hiring process,” wrote Peter Lazaroff, chief investment officer of Plancorp, an Investopedia Top 100 Financial Advisory firm.

Plancorp also seeks out women and minority-owned businesses to be their suppliers, according to Lazaroff.

Don’t Focus On “Initiatives”

“I disagree with how most firms are looking at DEI,” said an email from Kirk Chisholm, wealth manager and principal of Innovative Advisory Group, another Investopedia Top 100 Financial Advisory firm.

Chisolm’s firm actually avoids specific initiatives, which he views as the wrong approach to increasing diversity.

“Pragmatically, people who are in underrepresented groups in the financial services industry should not be looked at as lacking opportunity. They have a tremendous opportunity. Their lack of presence in the industry gives them a competitive advantage over others who are not from that represented group. People like associating with others that are like them. If people looked at the issue as an opportunity rather than a problem, more could be accomplished.”

Benefits of DEI in the Workplace

The reputed benefits of DEI include higher employee morale, lower turnover, and greater competitive advantage. And often, proponents stress profitability, in what’s known as the “business case.” A number of projections suggest that “diverse” corporations out-produce and out-earn non-diverse firms largely by encouraging innovation from traditionally underrepresented groups. The upside is said to spill over into the broader economy as well, with prominent projections claiming that greater diversity could pull in trillions of extra dollars.

But there’s been some skepticism over how genuine most DEI pledges are in general. While corporations are quick to talk about their commitment to diversity, many of them have been slow to make non-superficial changes, writes Salvador Ordorica, the CEO of the translation service Spanish Group, LLC. For Ordorica, corporations can use diversity “cynically” as a way to win plaudits for minor changes, sometimes referred to as “slacktivism.”

Even for well-intentioned initiatives, the evidence can be thin. There’s some research suggesting that many of the DEI industry’s recommendations, from unconscious bias training to workshops, are at best limited in effectiveness and, at worst, can cause backlash. For example, one meta-analysis of hundreds of “prejudice-reduction” interventions found that only “a small fraction” were effective.

Measuring DEI in the Workplace

Lately, there have been calls to make DEI more data-led, a process that involves spelling out DEI goals and using metrics to track progress. In part, this is a response to criticisms of DEI that suggest the industry is not evidence-backed. But it also allows companies to track whether their policies are having their desired effect.

The Bottom Line

Corporate interest in DEI has surged since 2020, and popular opinion of them is mostly positive. But corporate pledges may not be stable, and actual DEI recommendations are not necessarily backed by evidence at this point. Regardless, there is an appetite for well-crafted, measurable DEI initiatives in financial advising which proponents argue will help combat structural hurdles like the racial wealth gap.