Slump Has Heightened Distrust Of Stocks By

By Allison Bell

Financial advisors who sell variable annuities, variable life insurance policies and other stock-linked products may have to spend extra time this fall convincing African-American clients to see things their way.

“Many high-income African-Americans are retreating from the stock market,” according to the authors of the 2003 Black Investor Survey report.

Figures from the survey, which was sponsored by Ariel Mutual Funds, Chicago, and Charles Schwab & Company Inc., San Francisco, show that the share of high-income African-American respondents who say they dont trust the stock market with their money has increased to 49%, from 34% in 2000.

The share of African-Americans who told researchers that the stock market is the best place for long-term investing has fallen to 46%, from 67% in 2001.

The recent stock slump has also shaken the confidence of high-income white survey participants, but 62% still say the stock market is the best place for long-term investments. Only 33% say they distrust stocks, meaning white survey participants are still about as confident in stocks after three years of bear markets as African-American participants were while the Dow Jones Industrial Average was over 10,000.

Results from another major survey, the Minority Retirement Confidence Survey, which is sponsored by an affiliate of the Employee Benefit Research Institute, Washington, have shown that, in 2001, while the stock market was slumping, 37% African-American workers were so skeptical about financial institutions that they kept some of their retirement savings in “cash in a safe place at home or in a safe deposit box.”

A few very conservative financial advisors mistrust the stock market and recommend that clients plow cash into bonds, gold or solar-powered batteries. But the stock market has been doing better this year, and most mainstream advisors argue that, in the long run, investors will get the best returns if they make steady contributions to portfolios that include a high percentage of stock.

Debbie Stroman, a financial planner and marketing manager at Gateway Capitol Financial, Linthicum, Md., says she believes that, in the real world, African-American consumers have investment portfolios that resemble the portfolios of similar white consumers.

“A non-African-American might be exposed to more things,” Stroman says. “But they dont necessarily own the products.”

Results from the Minority Retirement Confidence Survey support the idea that African-American workers tend to have financial views that resemble the views of other workers with similar incomes, says Ruth Helman, research director at Mathew Greenwald & Associates Inc., Washington, the market research firm that conducts the survey.

Greenwald gathers enough income data to let researchers separate survey responses for participants with annual incomes under and over $35,000.

African-Americans with incomes under $35,000 are more likely to report owning life insurance, but “other differences tend to disappear once you hold income constant,” Helman says.

Making apples-to-apples comparisons is difficult because, for one thing, published survey results comparing the financial product buying patterns of African-American consumers with those of other consumers are scarce. Few insurers, insurance trade groups or marketing firms break out insurance purchasing information by race.

Even the Ariel/Schwab survey series, which includes participants with a minimum annual household income of $50,000, ends up with pools of African-American participants that are much different from the pools of white participants.

Participant profiles for the 2003 survey, for example, reveal that the African-American participants had a median age of 44, a median annual household income of $78,000 and a median financial investment portfolio value of $64,000. Forty-seven percent of the African-American participants had children in their households.

The white participants had a median age of 48, a median annual household income of $80,000 and a median portfolio value of $96,000. Only 38% of the white participants had children in their households.

The figures suggest that the high-income African-Americans surveyed might be more interested in saving for their childrens college bills and might feel a need to be more cautious about investing their smaller portfolios.

Other Ariel/Schwab survey results confirm that high-income African-American consumers tend to be more risk-averse and more interested in education savings than their white counterparts.

The Ariel/Schwab researchers found that the African-American survey participants and white survey participants were about as likely to have bank savings accounts, certificates of deposit, individual bonds and annuities.

But 66% of the African-American participants reported having whole life insurance, compared with 56% of the white participants.

Fifty-two percent of the white participants had individual stocks and 63% had stock or bond mutual funds. Only 38% of the African-American participants owned individual stocks and only 54% owned stock or bond funds.

Twenty-one percent of the African-American participants owned “education IRAs” compared with just 14% of the white participants.

At Gateway, Stroman has seen firsthand evidence of the popularity of the new educational savings vehicles among high-income African-American families.

Most clients are interested in hearing about products such as 529 college savings plans, but Stroman reports that, when she discusses the products with African-American clients, “theyre ready to take action right away.”

When researchers asked participants “with which type of institution do you have the most assets?”, only 9% of the African-American participants named brokerage firms. Twenty-nine percent of the African-Americans named life insurance companies.

In contrast, 21% of the white participants named brokerage firms and 13% named life insurance companies.

Although the typical African-American participants more cautious approach might fare poorly in the long, especially if inflation increases, that cautious approach seems to have paid off during the recent stock market slump.

The median value of the white participants financial investment portfolios fell 24% between 2001 and 2003, but the median value of the African-American participants portfolios fell only 9.9%.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 8, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.