How to invest in racial equity: an advisor’s guide

As wealth managers seek to hire and serve more Black Americans and other historically excluded minorities, financial advisors have a new roadmap for racial equity investing.

The Croatan Institute, a nonprofit research organization that focuses on using finance to advance social equity and sustainability, compiled a list of public and private funds, fixed-income products and cash instruments that advisors and clients can explore as a means of increasing access to capital, supporting workplace equality and boosting products and services for clients who are Black, Latino or other minorities. The organization’s Racial Equity, Economics, Finance, and Sustainability program issued the report, entitled “Capital at a Crossroads,” last month.

Since the murder of George Floyd last year, wealth managers have been making pledges and donations for greater representation and impact, hosting new events designed to engage minority client bases and putting out their own research as well. In three examples from this week alone, The American College of Financial Services’ Center for Economic Empowerment and Equality released a survey of middle-class Black women’s finances, U.S. Bank unveiled a report called “Building Black Wealth Insights” and New York Life made a $50 million investment in an affordable housing capital program called the Enterprise Community Loan Fund. Advisors themselves have gotten involved with efforts like the BLatinX Internship and CHIP.

Croatan Institute

The deluge of information and resources, combined with uncertainty relating to past unkept promises throughout American history, make the present a “tell-tale moment” as to whether there will be systemic change for the future or more of the same, said Croatan Senior Fellow Sharlene Brown. She and analyst Athena Owirodu are the authors of the institute’s report.

With all of the money being directed toward the efforts, the industry should “measure and say, ‘OK, what are the things we're trying to achieve with these dollars?’” said Brown, who worked internationally in the field of microfinance before joining the institute. “In many ways, this work for me is a form of development that we're doing as a nation, so we need to figure out a baseline and then move forward,” she said.

Available products
In that vein, she recommends that advisors and clients begin with education about the legacy of racial discrimination and how it relates to the wealth gap today, such as the Christian nonprofit anti-hunger organization Bread for the World’s simulation game. From there, the cash and cash equivalent investments listed in the institute’s report provide what is often the easiest way to begin adapting racial equity investments across the portfolio. Products like Jackson, Mississippi-based Hope Credit Union’s Transformational Deposits and Durham, North Carolina-based Self-Help Credit Union’s Community Recovery Term Certificates enable clients to get a higher yield than traditional savings accounts and steer capital to underserved areas.

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In terms of equity products, advisors can consider screened stocks that are part of Adasina Social Capital’s Social Justice All Cap Global ETF, the Impact Shares NAACP Minority Empowerment ETF or separately managed accounts under Active Investment Advisors’ Racial Equity Investment Portfolios. In the fixed-income realm, investors could earn yield while spreading capital through products like Community Capital Management’s Minority Community Advancement Racial Empowerment Strategy or its Community Impact Bond, as well as a bond fund launched earlier this year by U.S. Bank and Enterprise Community Partners to back minority developers of affordable housing.

The investments described in the institute’s report extend to alternative products, too. The Black Farmer Fund, Inclusiv’s Racial Equity Investment Fund and Calvert Impact Capital’s Southern Opportunity and Resilience Fund support minority-owned businesses and Community Development Financial Institutions. Other private equity or venture capital firms focusing on minority business owners include Backstage Capital, Equilibrium Impact Ventures and Resilient Ventures. The report suggests replacing existing products in the asset classes inside client portfolios to some of the many options identified in the institute’s research.

“My hope is that within portfolios we see an amplification,” Brown said. “My concern is that this is just a moment. ... Maybe we can hold onto the limelight to continue to have this dialogue.”

More ways to get involved
The array of product options in racial equity investing reminded Pamela Jolly, a senior strategist with The American College, of how “wealth management plays a very large role” in the growing efforts across financial services, she said in an interview. The training and certifying organization asked 3,500 Black women with a median income of $60,000 about their views and level of trust in financial firms between July and September. At least 60% find it difficult to locate advisors and other professionals they trust, and a “lack of trust” turned out to be the second most popular reason for not working with financial firms after the cost being “too expensive.”

“To our knowledge, this is the largest national study of Black women's financial behavior as it relates to building wealth,” Jolly said.

The women surveyed said they were looking for firms and professionals who grasp their goals and know their communities much more than those “trying to transact the products,” Jolly added. Earlier this year, the college started its Center of Economic Empowerment under Executive Director Karim Hill.

“We take a consultative approach,” said Hill, a former 20-year banking industry veteran. “If you want to have that understanding, partner with the center. It doesn't matter if you're independent or if you're one of the largest firms on Wall Street.”

One of the biggest fee-only RIAs in the country, Waltham, Massachusetts-based Ballentine Partners, has been conducting research of its own on how to create an impact portfolio using the kinds of products described in the institute’s report, according to the firm’s financial education specialist, Akeiva Ellis, one of Financial Planning’s 2021 Rising Stars. The level of “awareness and acknowledgement” of systemic racism is on the rise in the industry, she said.

“That was encouraging to me to see that first step, but that first step is not enough,” Ellis said. “I want to be the person who doesn't just talk about stuff who actually does something. That’s what I’m expecting and hoping that more individuals and organizations are going to start to do.”