Cover Story: Invest Globally, Advise Locally

Advisors operate in a worldwide sphere when it comes to planning for clients, and over the past year, investment globalization has been the place to be. Since the nadir of the stock market in March 2009, international investing has led the way: for all of 2009, while general U.S. stock funds returned 31.3%, international stock funds returned 41.8%, according to Morningstar. The MSCI Emerging Markets Index returned 74.5% for the year. But, you might argue, isn't international, especially emerging markets, just way too volatile? Yes, in 2008, the MSCI Emerging Markets Index fell 54% in a year when the S&P 500 fell 38.5%, but many experts believe emerging markets remain a source of diversification and potentially higher returns, and may not be as volatile as they are traditionally considered. Jeremy Siegel of Wharton argued January 6 in an interview for Knowledge@Wharton, for example, that "Asia is very much back on the road to recovery," and that since it "has been the major driver of economic growth around the world over the last several years…this recovery has a very sound basis. It will continue into this year."

When asked at the IMCA 2010 New York Consultant's Conference on January 11 to pick an asset class for the next 10 years, Nouriel Roubini, professor of economics at New York University's Stern School of Business, highlighted emerging markets, since, he explained, the "share of the global economy from emerging markets is rising; from the advanced economies, falling." Roubini added that it's "a trend that's likely to continue." The majority of the members of Investment Advisor's panel of market gurus (see page 7) agreed with the statement that "Global investing is the best place for alpha in 2010," though with a caveat or two. (See long-time IA contributor Ben Warwick's take on what's ahead in the markets for 2010 on page 31).

However, independent American advisors also are rooted in geography: they operate by definition close to home, in a specific town or neighborhood; they are often active benefactors of their communities; and their clients are often of a specific type. But there are more "types" than ever in the United States. We are a diverse country, though at 11.1%, the percentage of Americans who are foreign born is quite a bit below the 14.7% record high as measured by the Census Bureau exactly 100 years ago, in 1910. Jody Agius Vallejo of the University of Southern California points out that unlike the immigrants who arrived at the turn of the 20th century, today's are "notably non-European: 85% of the country's immigrants arrive from Asia, Latin America, or the Caribbean." In fact, says Agius Vallejo, while immigration has slowed down over the past decade, using the latest statistics from the 2000 Census Bureau, the U.S. foreign-born population exceeded 34.2 million as of 2004, and the U.S.-born second generation accounted for another 30.4 million. Immigrants and their children comprise almost 65 million people, or about 23% of the U.S. population.

Agius Vallejo further points out that a "quarter of the labor force growth in the next 20 years is going to be children of Hispanic immigrants," whose spending power is likely to "reach about $1 trillion this year; it's a fast-growing market and an underserved one in terms of financial planning."

While acknowledging that now there's a "large working class population, there's also this emerging middle-class Latino population," she says we're also seeing an increase in the numbers of educated professionals and also business owners. There's a "stereotype reinforced in the media that Latinos are poor or likely to remain so for generations," but Agius Vallejo's research shows significant gains among the population in "intergenerational mobility in indicators of assimilation or incorporation," such as occupation, income, and home ownership.

Are you comfortable serving that diverse population? Agius Vallejo and other experts consulted for this story suggest that you should be, even if you don't speak Spanish or Hindi or Urdu. You do need to understand more about the culture and family structures of these immigrant groups. You may also need to disabuse yourself of some preconceived notions, starting with the idea, says Agius Vallejo, that you need to speak Spanish to market to the Latino population. In fact, by the second generation (people whose parents were immigrants), Latinos prefer to be spoken to, and read marketing materials, in English. Agius Vallejo also points out that, like most previous immigrant populations, by the third generation (those whose grandparents were immigrants), for most Latinos speaking Spanish is dead. America, she says, is "the graveyard of languages."

Not a Monolithic Culture

To begin, says Agius Vallejo, an assistant professor of sociology at USC who has conducted research into the Hispanic middle class for years, feel free to call people whose country of origin (or their parents' or grandparents') is Spanish speaking either Latino or Hispanics. Using statistics from the Census Bureau, she notes that Latinos are now the largest single minority group in the United States, comprising 15% of the population. Moreover, Hispanics' proportion of the population is projected to increase to 30% by 2050. Agius Vallejo points out that this growth "is being driven by natural increase, not immigration," which means, she says, that "we are going have a larger second and third generation of children and grandchildren of immigrants." While speaking Spanish may be a marker of the first generation, "it's not a monolithic population," and while Latinos are an ethnic group that is "disproportionately Mexican" in the U.S., "there are differences in national origin and in class."

So what are the differences, what are the commonalities, what are the opportunities for advisors among this growing, and increasingly affluent, group?

Agius Vallejo says there are three general segments of the Hispanic market, though she is quick to point out that there are "outliers in each segment who do not fit within these profiles."

o The First Generation. Hispanic immigrants value saving and investing, but tend to have lower incomes and are more concerned with day-to-day subsistence, which, she says, means that they have fewer financial resources to direct toward investing. The first generation is probably more comfortable speaking Spanish and they engage with Spanish-language media. "This demographic," Agius Vallejo says, "likely requires more relationship building and financial literacy education" about the U.S. financial industry, "especially because many Hispanics hail from countries that have experienced market failures. However, this is a large demographic with many opportunities, especially because income, rates of home ownership, and English language proficiency rise with length of time in the United States." First-generation Hispanics, and Asian immigrants, she points out, "typically expect their children to give back financially. If the financial status of the first generation is secure you will not see the second generation giving back as much."

Financial advisors can reach this population, Agius Vallejo says, "through local Spanish language media outlets relatively inexpensively. Most metro areas have smaller magazines (like Para Todos in Southern California) or newspapers that cater to this population." There's another way to reach this population: through Hispanic grocery stores, many of which rent out small booths to outside vendors.

o The Working Class 2nd and 3rd Generation. This is a population that has higher incomes than the foreign born and higher levels of education, and will be "comfortable speaking in English," Agius Vallejo says. Some might work in jobs that provide pensions, but many will not.

o Upwardly Mobile and Middle-Class Hispanics. The main issue with this group is that some "grew up 'solidly' middle class and therefore their behaviors, in terms of individualism and unidirectional flows of support from parents to children, are similar to whites." Since the majority of this group has "achieved their mobility in one generation," they retain ties to poorer relatives and acquaintances of the same ethnic group (co-ethnics, in sociological parlance) and "provide less advantaged relatives with financial support." This is a group, she says, that has traditionally achieved their mobility through education, while those without college degrees may have forged an alternate path to mobility through entrepreneurship.

"Advisors can reach this population not only through Hispanic professional/business asssociations," Agius Vallejo points out, "but also through Hispanic organizations targeted at specific professions like attorneys (local chapters of the Hispanic Bar Association) and engineers." These organizations tend to exist in the traditional 'gateway' states for Hispanic immigrants, particularly in the Southwest, Florida, and California, but others, such as the Hispanic Chamber of Commerce or the National Latina Businesswoman Association, can be found nationwide.

There's another financial development in those gateway areas: small local banks and credit unions targeted at Hispanics. Some of these banks serve all three of the segments outlined above, and some are targeted specifically at entrepreneurs and business owners. "Advisors should investigate the types of financial services these banks offer," she suggests, "as they may be able to form partnerships with Hispanic banks to provide financial services they lack."