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Key Takeaways
- A recent FINRA Foundation report reveals that investors of color are entering the markets at faster rates than white people, and these new investors tend to be younger.
- Information sources for investment decisions vary by ethnicity, with reliance on social networks more prevalent among Black and Hispanic investors.
- Younger investors of color, as well as younger white investors, tend toward risky vehicles such as cryptocurrencies and meme stocks.
- Older investors of color opt for more conservative investment vehicles driven by specific financial goals.
People of color in the U.S. are becoming investors at a faster rate than white people, and are much younger when they decide to enter the stock market, according to a new report from the Financial Industry Regulatory Authority’s (FINRA) Investor Education Foundation.
The findings were based on an analysis of data from the foundation’s 2021 National Financial Capability Study, coupled with focus groups conducted with young Black, Hispanic and Asian American/Pacific Islander investors in March 2023.
According to the FINRA Foundation, these new, young investors of color exhibit many of the same behaviors previous research has shown of other younger investors. For example, young investors rely on social media for investment information and gravitate toward risky investments like cryptocurrencies and meme stocks.
Younger Group of Investors
The study found that nearly half of Black investors and 38% of Hispanic investors are relatively new to the market, with less than two years of experience with investing.
In contrast, the majority of Asian American/Pacific Islander and white investors have been participating in the market for 10 years or more.
“With a large number of young investors entering the markets, financial education leaders will need to adapt, including providing relatable and trustworthy resources on channels these new investors use,” said FINRA Foundation President Gerri Walsh in a statement.
“While conducting this research, we learned from investors of color about barriers they or their families faced previously in building wealth through investing,” she added. “Seeing an influx of new investors of color is encouraging and highlights the importance of our markets becoming more accessible.”
Motivations for Investing
The report found that non-white investors, particularly Black and Hispanic investors, are more likely than white investors to be motivated by reasons beyond simply long-term profit.
While investors of all ethnicities said salting away money for the long term was a goal, 91% of Black investors cited making money in the short term as an objective, while 87% said learning about investing was a motivator.
However, investors working with a financial advisor, who are typically older, tended to be more focused on the long term than younger investors were.
“Among my clientele, the key motivation for investing is building enough wealth to have enough money in retirement, and passing it down to their kids as a second motivator,” says Luis Rosa, a certified financial planner and founder of Build a Better Financial Future, based in Pasadena, California.
“This is pretty much typical across the board with my Anglo and non-Anglo clients,” he adds.
Information Sources
According to the FINRA report, there are substantial differences by ethnicity in the types of information sources used to make investing decisions.
The report found that Black and Hispanic investors are more likely than white investors to rely on friends, family and colleagues for investment information.
“Particularly in communities of color, I have found that trust is often more important than technical or professional expertise,” says Brian K. Seymour II, founder and CEO of Prosperitage Wealth in McDonough, Georgia.
Seymour says clients often turn to their spouse, parents, friends or clergy before a financial advisor.
“Historical remnants of redlining and predatory lending are reinforced by recent stories like Wells Fargo opening unauthorized accounts to Navy Federal approving Black mortgages at a fraction of the rate of whites,” Seymour adds. “While strides are being made, the industry remains dominated by older white men, with less than 2% of CFPs identifying as Black.”
Social Media Investment Sources
According to the FINRA Foundation, investors of different ethnicities relied on online videos about business and finance at the following rates:
- Black: 74%
- Hispanic: 56%
- Asian/Pacific Islander: 51%
- White: 38%
The study found that investors sought information about popular investments on a mobile trading app at these rates:
- Black: 65%
- Hispanic: 58%
- Asian/Pacific Islander: 45%
- White: 33%
“So-called ‘finfluencers’ on social media apps like YouTube, Instagram and TikTok provide accessible, albeit incomplete, introductions to numerous topics from debt management and credit card hacking to investment recommendations and advanced tax strategies,” says Seymour.
The impact of these online personalities is both a blessing and a curse, he says.
“Blacks have become increasingly interested in the importance of personal finance and investing, but unvetted bad actors have led many to make poor decisions, leaving them more jaded than before,” Seymour says.
Stephanie Blakes, a certified financial planner and founder of Seren Wealth Advisors in Houston, has also found that a distrust of the traditional financial services industry leads Black clients to seek out advisors of color.
“Many of my clients are utilizing YouTube, podcasts and financial documentaries more and more, versus the old way of magazines, books and articles,” she says.
Investment Products
The FINRA Foundation reports that Black and Hispanic investors are more likely to gravitate toward risky investments such as meme stocks, cryptocurrencies and options. This tracks with the findings that investors of color tend to be younger than white investors, on the whole.
“Age is likely playing a significant role. Nearly half of Black and Hispanic investors are under 35, so many of their investment behaviors and attitudes reflect those of younger investors more generally,” says Olivia Valdes, senior researcher at the FINRA Foundation.
When researchers compared non-white and white investors who are the same age, they found that the race-based differences are much smaller and sometimes disappear.
Older Investors Are More Traditional
Older investors of color, who have specific goals such as retirement or financing education for children or grandchildren, opt toward more conservative vehicles.
“Due to mistrust and knowledge of policies like redlining, undervaluing homes in minority communities, higher interest rates for minorities, less job security and poorer health outcomes, people of color generally want products with liquidity that are easy to understand, such as stocks, mutual funds and ETFs,” says Blakes.
Rosa says his clients are also most comfortable with those more traditional investments. “Occasionally, a client may express interest in a whole life policy or annuity,” he says. “There are times when I don’t see a product a client is interested in as appropriate in their case, and I would recommend something different.”
For example, he says, if a client expresses interest in a permanent life insurance product, he may recommend a term policy instead, based on the client’s situation.
Investment Risk
When FINRA Foundation researchers asked how much risk they would be willing to take with their investments, Black investors reported higher risk tolerance levels than Hispanic or white investors.
Here again, age differences likely play a role. “Younger investors in general are inclined towards riskier and more complex products,” says Valdes. “These habits are not unique to investors of color, but rather are reflected in this population because many investors of color, particularly Black and Hispanic investors, are quite young.”
Blakes says risk tolerance is a topic she discusses at length with her clients.
“People of color generally have fewer safety nets, if any at all,” she says. “If they lose money in the market and also lose their job, they risk much more extreme outcomes.”
For example, she says, it may take a person of color with the same education and experience twice as long to find a new job than their white counterpart.
“And, as research shows, they have likely been earning less pay for the same job, especially if they are women of color,” she says. “All of this accumulates to create a situation where a higher emergency fund is required, and less risk can be taken in investing portfolios because retirement savings may be needed in between jobs.”
Cultural and Generational Differences
When asked whether they thought non-white investors were different from white investors in any way, participants in the FINRA Foundation’s focus groups indicated that differences were not due to ethnicity itself, but instead due to socioeconomic variables that often correlate with ethnicity in the U.S.
Blakes points out that the burden of historical racism means investors of color tend to have much lower generational wealth, less access to quality education and lower job stability, meaning there’s not always a surplus of income to invest.
“Even if they really want to invest in the future, they are having to manage that by maintaining a safe, comfortable lifestyle today while also educating kids, saving for retirement, and more often than not, helping aging parents or family members,” Blakes says.
Rosa sees a difference in how his older Latino clients approach investing, versus millennial Latinos. “The older generation tends to prefer traditional investments like mutual funds and ETFs, whereas the younger generation seems to be a bit more willing to take risk, via individual stocks and cryptocurrencies,” he says.
He also says younger clients seem more intent on retiring at a much earlier age. “They are focused on enjoying experiences while they’re younger, rather than working until 65 to then start traveling,” he says.
Family Involvement
But he’s also noticed two differences between his Latino and white clients.
“One is regarding their elderly. In the Latino culture, clients are very against sending their elderly to assisted living facilities, so it’s very common for elderly parents to live with their children and/or have help from other family members,” he says.
With white clients, he says, “It seems more common for their elderly to be placed in a facility when they’re at the stage where they need help.”
Another difference is that many of Rosa’s Latino clients include their children in their planning. “So I often have family meetings with the parents and their adult children,” he says.
Cultural Barriers to Achieving the American Dream
Valdes said FINRA Foundation conversations with young investors of color revealed that socioeconomic variables, such as not having money to invest, were significant hurdles for themselves, their families and their communities.
These young investors of color also mentioned a lack of investing knowledge and a distrust of mainstream financial institutions. “I see people of color working really hard and striving to achieve the American Dream while overcoming the effects of centuries of structural racism,” says Blakes.
Policies and programs for decades essentially locked Blacks out of the same opportunities available to whites, resulting in less generational wealth today.
“I am in my 50s and my parents were directly affected by these policies, which means so am I,” Blakes says. “I had to support my parents in retirement. They were never able to provide a financial safety net for me, and that is the reality for most of my clients of color.”
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