I frequently find myself in a debate with a dear friend about the slew of surveys concerning the financial behavior of African Americans.
When the companies release their findings, which often show blacks lagging in savings and investment holdings, the question he’s left with is: Are the results because of race, class or poor marketing?
The most recent look at black financial habits comes from Prudential Financial, which released “The African American Financial Experience,” a survey that is part of the company’s research on multicultural markets.
Prudential found the same thing other financial companies have reported — that although a majority of African Americans want advice on saving and planning for retirement, many say they don’t know or can’t find a professional they can trust.
“Much of the hesitation seems to come from a lack of knowledge,” Prudential writes in its survey report. “Our survey revealed that the lower the level of knowledge respondents had about complex financial products, the lower the level of ownership of these products, the fewer adviser relationships, and the lower the level of industry trust.”
I can’t understand why financial professionals don’t get that it’s the complexity of the products they are selling that is befuddling people. Consumers are right to respond the way they do. You should not invest in something you don’t understand.
But African Americans are compromising their ability to meet their financial goals when they shy away from other products such as long-term care insurance and annuities, Prudential and other companies contend.
Then simplify the products and, more importantly, own up to the fact that the mistrust people have with the industry is not without merit.
“There is a long-standing perception that the financial industry has fallen short in terms of reaching and serving the African American community,” Prudential says.
That’s not a perception. Many financial services companies have taken advantage of consumers, including African Americans. We only have to look to the recent financial crisis to find evidence of deception and predatory lending practices. African Americans and Hispanics were disproportionately steered into higher-priced loans despite the fact that many — based on their income and credit profile — would have qualified for the best-priced terms.
AARP found in a recent investor survey that an overwhelming majority of 401(k) plan participants are largely unaware of the fees they pay to their plan providers. When asked, 71 percent of participants said they didn’t think they paid any fees.
“Fees are often hard to read and understand even when you know you are paying them,” said Jean Setzfand, AARP director of financial security. To help participants, AARP has created a fee calculator at aarp.org/401kfees.
When African Americans understand a financial product, they use it. Their ownership of traditional products such as life insurance and savings accounts is slightly higher than that of the general population. Makes sense to me. With a simple savings account, you put your money in the bank and the institution promises a certain interest rate (as pitiful as it might be). It’s a risk-free product. With term life insurance, you make premium payments and, if you die during the covered period, the insurance makes a payout to your beneficiaries.
Like my friend, I’ve grown weary of the black investor surveys that make comparisons without commitments. This time, at least, Prudential’s survey was constructive not because of its obvious findings but because the company is challenging itself and its competitors to acknowledge their part in why African Americans aren’t turning to them for advice.
Why is the African American market underdeveloped? It’s not because we don’t want their products or are too ignorant to understand their importance. It’s because sales and marketing people haven’t made the effort to cultivate and understand this market.
“This survey did a nice job laying out something we didn’t realize,” said Mark Hug, chief marketing officer for Prudential Individual Life Insurance. “You will hear the financial services industry say we are reaching out to communities, but the proof is in the perception of the community. If the community doesn’t perceive you’ve reached them, then you haven’t.”
Okay, so do a better job of explaining your fees. Come into the community to teach first before you try to sell. Nearly half of African Americans in the Prudential survey said they are interested in learning about investments through a faith-based organization. And if that happens, the faith-based organizations need to do their due diligence to make sure their people aren’t being taken advantage of.
Financial planning is essential. But African Americans are no different from other investors. They want financial peace and will invest and save better when companies earn their trust.
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