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How Can Advisors Help Blacks, Hispanics Improve Financial Planning?
Financial Planning
Wednesday, May 2, 2012
Partner Insights

Financial advisors sometimes puzzle over how to effectively reach and serve black and Hispanic clients. A Vanguard study released recently suggests they can start by drilling home a simple message: emergency savings accounts are a must.

Blacks were almost twice as likely to take a hardship withdrawal from their 401(k) accounts as whites, and Hispanics were about one third as likely to do so, according to a Vanguard study released this week.

But the planning opportunity lies in a deeper look at the findings. When blacks savers dipped into those 401(k) accounts, they withdrew around 3.5 percentage points less of their account balances than whites and Hispanics. Taken by themselves, Hispanics withdrew a similar fraction of their account balances as whites.

Smart advisors who are tapped into the thinking of minority clients—or any group who might share similar income characteristics—can spot the planning opportunity right away.

“For these groups, this is the largest single source of money they have accumulated,” said Dywane Hall, a registered principal and branch manager for LPL Financial in Alexandria, Va. “They do not have the outside savings sources that say Caucasians may have.”

Some black and Hispanic clients do not perceive of their 401(k) plans as income replacement mechanisms for retirement, like they should, Hall says. Instead, they see them as regular bank accounts. Sometimes clients even consider using the money to help send children to college, Hall said.

“The retirement plan sponsors have to do a better job of educating them on how tapping that money affects their ability to retire at levels of dignity,” he said. “Let’s take a look at it from a holistic standpoint.”

Holistically speaking, many compelling reasons exist for planners to dissuade blacks and Hispanics from tapping into their 401(k) accounts before retirement. First, the IRS, considers 401(k) withdrawals to be accretive to income, under certain circumstances. That means an income tax bill follows, Hall said.

Processing fees, such as the check-cutting fees asset custodians charge on withdrawals, are another major consideration, said Lee DeLorenzo, CFP, president of United Asset Strategies, a planning firm based in Garden City, N.Y.

DeLorenzo advises on a plan comprised of a couple hundred participants, many of whom are of Caribbean and Hispanic descent. She observes higher hardship withdrawal rates among lower-paid plan participants across all ethnic and racial groups. If a client took a $1,000 withdrawal, and absorbed a custodial check-cutting fee of $60, that saver is already getting charged a 6% fee on that transaction.

“You say, ‘well, that’s criminal,’” DeLorenzo said.

Also frustrating, from a planning perspective, is that sometimes those lower-earning plan participants cannot afford to contribute enough money to their 401(k) accounts to qualify for the full match, plus sock away money in a separate rainy-day account, DeLorenzo said.

Yet the Vanguard study controlled for gender, education and levels of wealth and found similar hardship withdrawal rates along racial and ethnic lines, said Cyndy Pagliaro, a senior research analyst with Vanguard's Center for Retirement Research. Also, Asian plan participants were excluded from the hardship withdrawal analysis, because they took so few draw downs that the sample size was not meaningful.

From Vanguard’s perspective, the solution is simple: Encourage a stronger culture of emergency savings among all clients.

“When you look at the impact on their retirement plan savings, blacks and Hispanics are not withdrawing anymore than anyone else,” Pagliaro said. “Advisors can work with them to set up separate emergency accounts.”

(10) Comments
I agree with some of the issues discussed. Some financial planners only go after clients with a large enough asset base so they can get paid. As a result the minority community will be over looked because it takes time to educate and sometime that my not result in compensation. I educate all my clients on the need for emergency savings ( dispite the rate low rates on short term savings). Before accepting a client I inform them that an emergency savings is necessary to be come a client and I explain why. If they have one then they must be adding to it on a regular basis. If they don't, they must start one immediately before becoming a client. Have we really done our jobs as financial planner if we accept a large rollover and received a fee or commission, only to loose it to emergency withdrawals.
Posted by William L | Thursday, May 03 2012 at 9:31AM ET
What are we talking about here exactly? The title of the article leads one to think that advisors should approach "blacks and Hispanics" differently, but by the end of the article, it is clear that advisors should help any client based on thier situation, not their ethnicity. The title is misleading, and in my opinion, bigoted.
Posted by Diana S | Thursday, May 03 2012 at 1:37PM ET
As an African-American female estate planner I am offended by this headline; just as I am about "financial bloggers" who make sweeping generalizations about women and financial planning. Despite whether this article's headline was meant to cause a "stir" or was actually considered appropriate, it is relatively ineffectual, tone-deaf, patently offensive writing.

My clients are diverse, with large and modest estates, both estate sizes cutting across the ethnic and white strata. However, returning to the headline and the "editor" who allowed it, does this represent the opinions of Financial Planning? If so, then the publication writers and editors need to be educated as well.

When will people realize that financial planning is not an ethnic issue but, yes, an educational issue? Yes, there are more people of color who are a disproportionate part of modest and low income brackets and, consequently, experience emergencies that would not be emergencies in the high-middle or upper income brackets. However, those experiences are not singularly because of skin color. As William P stated, it is an educational issue, which I also consider my duty. Educating clients as opposed to just gauging them or "churning and burning" as they said in the "old days" is essential to creating long-lasting, mutually rewarding client relationships and a better economic national community.

Posted by Max E | Thursday, May 03 2012 at 6:53PM ET
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