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.
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.