A Financial Services Diversity Action Plan

Both responding to and reflecting the times, leaders at major financial services organizations are growing increasingly vocal about the importance of cognitive and cultural diversity on a team’s long-term performance.


PLANADVISER has on various occasions reported the sobering statistics that demonstrate the financial services industry’s diversity and inclusion problem.

As of 2017, just 19% of advisers in the U.S. were women, data from the U.S. Bureau of Labor Statistics shows. And, considering the professional fields that intersect with the financial and retirement advisory space, the problem is thrown into sharper relief. Breaking down those numbers, 52% of accountants were women and 32% of attorneys were women. At the same time, even though African Americans made up about 13% of the United States population, the Bureau reported they accounted for only about 7.6% of financial services professionals.

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Sources have discussed the many historical and contemporary causes of this representational gap, and though there are differences of opinion about how to proceed, they have all recommended that firms and stakeholders make improving diversity a priority. Many recommend focused mentorship and outreach efforts, while others have emphasized the importance of creating compensation structures that make the job of being an adviser seem more attainable—especially during the early years of building a book of business. 

A new white paper published by Willis Towers Watson (WTW) adds to this important, ongoing discussion. Dubbed “Diversity in the Asset Management Industry,” the paper takes an unflinching look at this issue and, importantly, presents some practical recommendations for the firm and its peers to put into practice. The findings are based on the firm’s investment manager review process, which now takes into account “culture reviews” that consider the “impact of greater cognitive diversity on a team’s effectiveness.”

“In our view, an ideal asset manager has optimal cognitive diversity, where we define cognitive diversity as the inclusion of people who have different ways of thinking, different viewpoints and different skill sets in a team,” the paper says. “Cognitive diversity is hard to measure, but it is heavily influenced by quantitative metrics of diversity that we can collect. We therefore assess diversity across gender and ethnicity, and endeavor to assess the deeper and more nuanced aspects in our manager research process.”

As the WTW paper explains, the actual process of measuring these metrics will vary depending on the investment manager being considered, but there are some common points of analysis. For example, it is important to review a leadership team’s “differences in prior social, educational and working experiences.” It is also important, the paper explains, to recognize the depth of the issue, as less than 10% of investment management firms operating today can be said to be “diversely led.”

One important point raised in the paper is that purely quantitative screening for diversity and inclusion will remain challenging, so long as a minority of investment management firms openly discuss or disclosure their staffing information.

“Focusing on a single metric can also create limitations,” the paper says. “Take minority and female ownership as an example. At first glance, it seems to be a good metric, because it combines diversity with alignment, an important consideration in the sustainability of an asset manager’s competitive advantage. However, when we examine the data reported to a third-party database provider which comprises over 6,000 firms, only about a quarter of them provide ownership details, making screening by diverse ownership extremely limiting.”

The lesson is that there is no single avenue for sourcing or identifying diversely led firms or investment teams, the paper says. By the same token, it is difficult to definitively demonstrate, with a single metric or statistic, the relationship between an investment manager’s level of leadership/staff diversity and consistent outperformance. Of course, this does not mean a positive connection exists.

“Does diversity lead to better returns?” the paper asks. “At a minimum, diversity does not hurt returns. But, more than this, our assessment of diversity and performance outcomes shows that investment teams with diversity, in particular ethnic diversity, tend to generate better excess returns. Our research continues as we collect more data.”

Later sections of the WTW white paper pointedly address some of the ugly truths that underpin this entire discussion.

“Due to many biases against minorities in the industry, leading to fewer opportunities for many throughout their careers, there is an unbalanced talent pool [in the selection of firm leaders],” the paper suggests. “To address the systemic issue more holistically, we need to go beyond targeting what is currently a very small subset of minority and female-owned firms by also engaging with firms that are weak in diversity.”

The full paper includes a number of actionable recommendations directed at fellow asset managers and the investment consultant and advisory community. These include a push to shift decisionmaking structures away from “star models,” where only one person holds the final authority, in favor of truly team-based approaches that consciously attempt to introduce more diversity. It is also paramount to take a careful look at compensation procedures and policies on flexible working arrangements. 

The paper suggests collaborating with outside diversity networks that are engaged on culturally diverse college campuses, as well as those focused on helping career changers and people leaving the military. Looking internally, it is important to develop real tracking of diversity levels and a commitment to honest, clear communication practices about these issues. Another option is to consider forms of mentoring and reverse mentoring, or other types of sponsorship programs, that help to foster dialogue and communication across the levels and silos of an organization, with the interest of giving management a more meaningful understanding of the challenges and opportunities their employees face.  

Retirement Industry Cheers New ‘Securing a Strong Retirement Act’

The bipartisan piece of legislation includes provisions that have long been popular among retirement industry stakeholders, including the elimination of barriers to allow greater use of lifetime income products.

Members of the Ways and Means Committee of the U.S. House of Representatives have released a proposed retirement reform legislation called the Securing a Strong Retirement Act of 2020.

The proposed legislation was introduced by Ways and Means Committee Chairman Richard Neal, D-Massachusetts, and Ranking Member Kevin Brady, R-Texas.

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As the pair explain, the proposed legislation builds in various ways upon the landmark Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law in December and was the most comprehensive retirement security legislation in more than a decade. 

Though it will take some time for the retirement planning industry to digest the proposed legislation, early feedback has been positive, reflecting the reactions to the initial publication of the SECURE Act last year.

“Our country is facing a retirement savings crisis that has been compounded by the economic impact of the COVID-19 pandemic,” says Financial Services Institute (FSI) President and CEO Dale Brown, noting that his organization is still digesting the sizable proposal. “It is promising to see continued interest in Congress to address this critical issue, and we applaud the committee leadership’s bipartisan approach. We look forward to working constructively with lawmakers to ensure this crucial legislation effectively assists Main Street Americans’ ability to achieve a financially secure retirement.”

“Congress is demonstrating once again that retirement security is a bipartisan issue in which leaders from both political parties focus on solutions to benefit workers and retirees,” adds Wayne Chopus, president and CEO of the Insured Retirement Institute (IRI). “We are very appreciative of the leadership, hard work and commitment of House Ways and Means Committee Chairman Richard Neal and Ranking Member Kevin Brady to introduce this legislation to help workers and retirees save more so they can enjoy a financially secure and dignified retirement.”

Chopus notes that the IRI has been advocating for many of the points included in the Securing a Strong Retirement Act, including the provision to increase the qualified plan required minimum distribution (RMD)  age to 75, the elimination of barriers to allow greater use of lifetime income products, the expansion of retirement savings opportunities for nonprofit organization employees and the creation of greater clarity for startup tax credits that incentivize small businesses to join multiple employer plans (MEPs) and pooled employer plans (PEPs).

Chris Spence, managing director of federal government relations at TIAA, also hails the legislation, while expressing some caution.

“TIAA applauds Chairman Neal and Congressman Brady for today’s introduction of the Securing a Strong Retirement Act of 2020,” he says. “This bipartisan legislation will build on the important retirement reforms set in motion by enactment of the SECURE Act, which passed last year. While we are just beginning our review of the legislation, TIAA is supportive of a number of proposed measures that will address today’s retirement security challenges. We believe that as Congress works to refine this bill, ultimately, it will improve the retirement readiness of Americans and help millions attain a secure financial future.”

A preliminary analysis suggests the legislation is indeed ambitious and a potentially worthy successor to the highly popular SECURE Act. Among many other provisions detailed across some 130 pages of text, the legislation proposes expanding automatic enrollment in retirement plans, simplifying and increasing the saver’s credit, enhancing 403(b) plans, expanding automatic enrollment in retirement plans and indexing the individual retirement account (IRA) catch-up limit. Other sections address the treatment of student loan payments as elective deferrals for purposes of retirement plan matching contributions, while others describe a new military spouse retirement plan eligibility credit for small employers.

An early summary provided by the American Council of Life Insurers (ACLI) highlights the following goals of the legislation:

  • Promote savings earlier for retirement by enrolling employees automatically in their company’s 401(k) plan, when a new plan is created;
  • Create a new financial incentive for small businesses to offer retirement plans;
  • Increase and modernize the existing federal tax credit for contributions to a retirement plan or IRA (the saver’s credit);
  • Expand retirement savings options for nonprofit employees by allowing groups of nonprofits to join together to offer retirement plans to their employees;
  • Offer individuals 60 and older more flexibility to set aside savings as they approach retirement;
  • Allow individuals to save for retirement longer by increasing the required minimum distribution age to 75;
  • Allow individuals to pay down a student loan instead of contributing to a 401(k) plan and still receive an employer match in their retirement plan;
  • Make it easier for military spouses who change jobs frequently to save for retirement;
  • Allow individuals more flexibility to make gifts to charity through their IRAs;
  • Allow taxpayers to avoid harsh penalties for inadvertent errors managing an IRA that can lead to a loss of retirement savings;
  • Protect retirees who unknowingly receive retirement plan overpayments; and
  • Make it easier for employees to find lost retirement accounts by creating a national, online, database of lost accounts.

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