At a time when House Republicans just voted against the expansion of state-run retirement plans for workers without job-based plans, a new robo-advisor targeting those employees has just launched.
(Related on ThinkAdvisor: House Votes to Block State-Run Retirement Plans)
Finhabits, an RIA based in New York City, focuses specifically on minority workers who lack a retirement plan, offering both traditional individual retirement accounts and Roth IRAs as well as taxable investment accounts, via a bilingual (English and Spanish) electronic platform.
“Seventy-four percent of Latinos and 60% of African-Americans don’t have retirement accounts … because most work in smaller businesses that often don’t offer a 401(k) plan,” the firm’s founder and CEO, Carlos Garcia, told ThinkAdvisor. “Current service providers are not serving them, so we created a service from the ground up.”
(Related on ThinkAdvisor: How Discrimination Influences Financial Decisions)
In addition, minority investors who have retirement savings but have faced discrimination tend to overestimate investment risks and under-allocate equities, which leads to inadequate retirement savings, according to a 2016 study from the University of Miami School of Business Administration.
The Finhabits service starts with a questionnaire asking investors about their age, money needs, employment, net worth and income. Then Finhabits helps investors create a portfolio of low-cost index ETFs from Vanguard and BlackRock, which include U.S. and international stock ETFs as well as ETFs comprising government bonds, corporate bonds, tax-exempt bonds, inflation-protected bonds and, for taxable accounts, REITs.
“Each portfolio has a well-balanced mix of these groups to help investors reach their goals and limit risks,” said Garcia. “And once they start investing we can help them develop the habit by giving nudges.”
Costs range from $1 a month for accounts under $2,500 to a 0.5% fee for accounts worth $2,500 or more, plus an average 0.12% portfolio management fee, paid to the ETFs. Investors can start with contributions as low as $5 a week.
Garcia, who grew up in Texas, the son of Mexican immigrants, said that many minority households like his own lack the habit of saving for the future, including their retirement. “My parents engrained in us to work hard but they never talked about financial planning or investing long term.”
He said the need in minority communities for education about retirement savings is not necessarily related to income or education. “I am an example. I went to MIT then worked at Merrill Lynch, but it was not until my third year there that I enrolled in a 401(k).” He was eligible, but hadn’t paid much attention to the “huge package of papers from HR.” “We need to make the service accessible and simple so that user develops the habit. Then it’s up to the individual to start saving for retirement. You have to develop the habit.”
Finhabits is targeting minority workers who are citizens or green card holders who earn roughly $40,000 or more annually and don’t have a retirement plan at work or a current relationship with a wealth manager, said Garcia.
“Our mission is to make investing much more approachable and accessible for the people who need it most,” Garcia said in a statement announcing the launch. “I see technology as the great equalizer that’ll help us close the wealth gap that exists in our country today.”
As for the House vote to repeal rules that would have enabled states to create retirement plans for those workers who lack one, Garcia called it “a bump in the process.” And he disputed the Republican argument that such accounts create unfair competition for private financial firms. “The fact is these firms have been in business for the last 20 years and haven’t cared about those workers. I hope it’s just a bump.”
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