I was in Atlanta for a couple of days to attend Charles Schwab's INSIGHT 08 conference. Dorothy A. Brown's sojourn in the South has been considerably longer — she came to Emory Law School after teaching at Washington and Lee University, in the middle of "real" Virginia. As a pair of true-blue New Yorkers lunching on very authentic French bistro fare in one of the redder states of the nation we couldn't, of course, avoid talking about the impending presidential election.
—
Who: Prof. Dorothy A. Brown, Emory Law School
Where: Le Giverny, Emory Conference Center, 1615 Clifford Road, Atlanta
On the Menu: Small salad, overcoming distrust of Wall Street and eliminating the mortgage-interest deduction.
—
Pundits have talked about the Barack Obama 2008 campaign as the first "post-racial" presidential election in American history. This may very well be so, but differences between races — as well as among various ethnic groups — remain deeply entrenched in the United States. They reflect not only levels of income or places where Americans of different backgrounds live, work and educate their children, but their savings patterns — especially how they save for retirement.
Pension planners and asset managers would be well-advised to take note of those differences. They certainly pose social challenges to the nation but also — surprise — may present profit opportunities to financial advisors.
Risk Aversion
The impact of class, racial and ethnic differences on the way Americans save for their retirement is one of Professor Brown's scholarly interests. Last year, she published an article in the Louis & Clark Law Review titled "Pensions and Risk Aversion: The Influence of Race, Ethnicity and Class on Investor Behavior."
As she takes a bite of her appetizer-sized salad — she doesn't seem to be a big eater — Brown notes that industry surveys (including those conducted by Schwab) consistently show that share ownership is directly correlated with class and education. Higher incomes and higher educational attainment are typically associated with a higher proportion of income being invested in stocks. It seems that households in higher income brackets are either less risk-averse or, alternatively, have a longer-term investment horizon. Since a balanced stock portfolio has proved to be the safest and the most lucrative asset class over the longer term, not only do higher income households start out with more money, but they tend to make more money on their investments.
The correlation between incomes and education on the one hand and stock ownership on the other also holds for blacks and Hispanics. But with an important difference.
"These groups," says Brown, "tend to invest into stocks a lot less, in percentage terms, than white Americans in the same income brackets and levels of education. Worse, blacks and, especially, Hispanics, are less likely to own stocks than less educated whites in lower income brackets."
With lower incomes and/or skills, blacks and Hispanics are less likely to work for a company that sponsors a defined contribution pension plan, such as 401(k). Such plans, studies have shown, also tend to be associated with higher pay and more skilled positions. Blacks and Hispanics are also more likely to opt out of such plans even when they are offered by their employer. And, to add insult to injury, Brown says that when they do participate, they tend to invest in their employers' stock.
You don't have to think of the Enron calamity in the early 2000s, or the spate of recent bankruptcies on Wall Street, to see how this seemingly risk-averse investment strategy can badly backfire. If the employer runs into difficulty, you can find yourself out of a job and lose your retirement savings at the same time.
Starting Low, Ending Up Lower
