How Do DEI Initiatives Benefit Financial Advisory Firms?

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

There’s been growing investor interest in promoting diversity in firms, however. A study by the U.S. Securities and Exchange Commission (SEC) Asset Management Advisory Committee found that investors value DEI information when deciding to invest. The study has been characterized as the most detailed inspection of diversity, equity, and inclusion (DEI) in the industry to date.

What Are DEI Initiatives?

Diversity, equity, and inclusion (DEI) refer to three separate though connected concepts.

• Diversity refers to including people with different demographic characteristics such as race, sex, sexual identity, or disability.
• Equity refers to businesses offering varying 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 innovation.

How Advisory Firms Can Do More in DEI

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

The retail wealth management group Lincoln Financial Network runs a network that connects consumers to Black and Latino/Latina financial professionals through a digital platform. The company argues that its platform will decrease isolation among these groups and will therefore stimulate financial well-being by expanding access to financial advice. The group has also held professional development sessions.

Internships such as the BLatinX (BLX) Internship Program are meant to encourage Black and Latino/Latina people to become certified financial planners.

Proponents suggest that there’s more work to do in the industry, however. It’s focused more on diversity than equity or inclusion, according to an interview given by Kevin Keller, CEO of the Certified Financial Planner Board of Standards, at their 2022 diversity summit. Other members present at the meeting called for more transparency in hiring practices.

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

Examples of DEI Initiatives

Investopedia surveyed the publicly available information for some of the largest firms and asked a few firms from its 100 Top Financial Advisors list to cite it. The biggest names in financial advice have issued DEI statements that include publishing regular reports about DEI initiatives that they’re pursuing.

• Vanguard also emphasized its attempts to attract and retain diverse staff. It published an overview of the race and ethnicity of its workforce.
• Fidelity advertises its associate-led community investment program and it claims that 43% of its new hires in 2022 were people of color. The company spent $350 million on “diverse suppliers.”

Make it your “why”

“As a majority female, Black-owned firm, we are redefining the traditional structure of mainstream RIAs (registered investment advisors) 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.

She described diversity, equity, inclusion, and belonging as holding at the center of why the firm began when the country was 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,” Kirk Chisholm said in an email. Chisholm is the wealth manager and principal of Innovative Advisory Group, another Investopedia Top 100 Financial Advisory firm.

Chisholm’s firm avoids specific initiatives that 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,” he said. “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 who 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. Proponents often stress profitability in what’s known as the “business case.”

Several projections suggest that “diverse” corporations outproduce 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.

There’s been some skepticism over how genuine most DEI pledges are in general, however. Corporations are quick to talk about their commitment to diversity but many have been slow to make non-superficial changes, according to Salvador Ordorica, CEO of translation service The Spanish Group LLC. Ordorica indicated that corporations can take “a cynical approach” to diversity as a way to win plaudits for minor changes, sometimes referred to as “slacktivism.”

Large companies tend to justify DEI by stressing its usefulness in business performance rather than making a moral case that DEI encourages fairness within organizations. The business case for DEI may discourage inclusion, however, with one study finding that emphasizing profitability in this way makes the businesses appear less attractive to the underrepresented groups it may be trying to attract.

The evidence can be thin even for well-intentioned initiatives. Some research suggests that many of the DEI industry’s recommendations from unconscious bias training to workshops are limited in effectiveness at best and can cause backlash at worst. One meta-analysis of hundreds of “prejudice-reduction” interventions found that only “a small fraction” were effective.

Measuring DEI in the Workplace

There have been calls to make DEI more data-led, a process that involves spelling out DEI goals and using metrics to track progress. This is partly a response to criticisms of DEI that suggest the industry isn’t evidence-backed but it also allows companies to track whether their policies are having the desired effect.

The Bottom Line

Corporate interest in DEI has surged and popular opinion is mostly positive. But corporate pledges may not be stable and actual DEI recommendations aren’t necessarily backed by evidence. There’s nonetheless an appetite for well-crafted, measurable DEI initiatives in financial advising that proponents argue will help combat structural hurdles like the racial wealth gap.