Black Americans are investing and saving more. Here's how advisors can win new clients

Black Americans are saving and investing more, but they still lack access to financial knowledge, products and services, a new study showed.

The 2022 Ariel-Schwab Black Investor Survey showed that Black Americans' savings and investments increased 40% last year to an average $657 per month from $393 in 2020. The rise was driven by new investors, higher earners and younger investors under age 40. Investing by Black Americans ticked up to 58% in 2022 from 52% two years earlier. The investment racial gap also narrowed: Some 63% of white Americans invested in stocks, bonds and digital assets last year, down from 71% in 2020. 

"There's a sense of need to catch up," said Tanya Frias, the chief financial planning officer at Freeman Capital in Charlotte, North Carolina. "They're more likely to want to invest sooner rather than go through the steps of financial planning, but are very, very motivated to invest, whether it be in the market, real estate or in crypto."

The good news is that the participation of Black investors has steadily improved in recent years. The proportion of those owning a taxable investment account increased by 18% over 2012-2018, according to Financial Industry Regulatory Authority research. The proportion of Black Americans reporting no investment accounts fell to 46% from 49% over that period. 

Black Americans are increasingly learning about investing at a younger age. Today, they are as likely as white investors to discuss the stock market with their families, according to the Ariel-Schwab survey. Younger Black investors have already a higher participation in the stock market compared to white younger investors, 68% and 57%, respectively, the study showed. 

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But an education gap stubbornly persists. Younger Black Americans are more likely to first experience investing by putting money into high-risk asset classes like cryptocurrency — one-quarter of Black Americans currently own digital money; among Black investors under 40, the figure jumps to 38%, according to the Ariel-Schwab survey. Black investors are also more likely than white investors to believe investments in cryptocurrency are both safe and government-regulated, the survey found. 

"The confluence of low stock market participation, appetite for risky investment options and alarming lack of knowledge about fundamental investing principles is a red flag about the critical need for greater investor education," Mellody Hobson, the co-CEO and president of Ariel Investments, said in a statement.

Freeman Capital's Frias said there was an interest among her clients to invest their money in the Black community, whether through crowdfunding, startups or private equity. A research report by J.P. Morgan Wealth Management showed that 70% of Black Americans said it's important that their investments are in businesses owned, started by or operated by Black, Indigenous and People of Color (BIPOC) persons. Only one in four white investors said that was a priority.

Social media plays a big role among Frias' clients. She said she often has to explain investment risks and make sure customers cover the basics before going for riskier assets.  

"A lot of our clients that come to us,and  even if they're interested in investing, they haven't done the minimum when it comes to saving," she said. While the typical Black or Hispanic family has $2,000 or less in liquid savings, the typical white family has more than four times that amount, according to Federal Reserve data.

Terri Bradford, a payments specialist at the Kansas City Federal Reserve, explained that Black investors are drawn to crypto because they see it as "a relatively quick way to close the wealth gap with other races, particularly white consumers" and as "more trustworthy than traditional assets." She said Black consumers have a "generational lack of trust in financial institutions."

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According to the Ariel-Schwab survey, Black Americans of all ages are less trusting of the stock market and financial institutions when compared to white Americans. Black investors are also less trusting of people (32% vs. 45%) and more trusting of technology (31% vs. 21%) than white Americans. 

Rosalyn Glenn, an advisor at Prudential Financial, in Columbia, South Carolina, said that in order to get people of color to invest, education that builds trust in the process is critical. "You have to spend that time educating them so that they don't get nervous throughout the process and then pull out their money when the market is down," she said. 

Added Glenn: "I can speak about the products that they need to put in place to build wealth in their language and not make them feel less or not as smart as me because I'm using terms that they are not familiar with."

Advisors say that more diversity within the industry also plays an important role. Only 5% of U.S. wealth management professionals are Black, according to 2019 data from the Department of Labor. 

Frias said it's a missed opportunity not to see Black investors as clients. Her clients "are making over six figures, are becoming more financially savvy by the day and very much interested in building long-term wealth." 

According to consulting firm McKinsey, retail banks, wealth managers and insurance providers that offer more-equitable, more-accessible and better products and services can win $225 billion in cumulative spending from Black consumers from 2022 to 2030. The McKinsey research also showed that Black people want solutions that help them build long-term wealth, including products for retirement planning, financial planning, and wealth management.

"Black people have always been interested in building wealth," Glenn said. "What has been in place is a lack of access to build it."