Two American Financial Plans

Two American Financial Plans website on computer screen

Abacus Founder Brent Kessel and Kamila Elliott, President of GRID 202 Partners and Chair-elect of the CFP® Board of Directors, have co-authored a new research paper titled Two American Financial Plans, showing how the racial wealth gap in the United States remains wide and significant. Without further intervention in the political and financial arenas, this gap will likely persist well into future decades. Financial advisors and investors can help shrink this gap by being aware of this difficult history and looking for opportunities to educate and evolve their approach towards finance. The following blog is a snapshot of excerpts from the larger research paper.


Democracy and Capitalism


“Democracy is the worst form of government, except for all those other forms that have been tried from time to time.” 

— Winston Churchill, November 1947


Democracy and capitalism have created higher standards of living for modern-day Americans than any system of government or economics in human history. But despite the many technological advances of the 19th and 20th centuries, America continues to see immense levels of racial wealth inequality, which can be traced back to Jim Crow institutional discrimination and the country’s historical reliance on cheap labor and labor trafficking (i.e. slavery). In 1863, at the height of the Civil War, Black Americans possessed 0.5% of this country’s wealth. Even with the social progress of the last 150 years, Black Americans now own only 1.5% while making up approximately the same 13% share of the U.S. population in both 1863 and 2019. The median Black household holds just 13 cents for each dollar of wealth the median White family has: $24,100 to $188,200. Even after controlling for education, employment, and other financial characteristics, the racial wealth gap persists, suggesting that institutional and systemic barriers are more responsible than individual choices for this ongoing divide.

Several financial planning changes could have a positive impact. CFP practitioners, using financial planning technology, can provide valuable insights into the racial wealth gap while the financial services industry more broadly can play a critical role in helping to narrow it. Given the research paper found substantial long-term wealth disparities, it sought to illustrate these cumulative effects of present-day inequalities, irrespective of historical cause, on the wealth-building process going forward. With all other characteristics constant, the two families in the study—highly representative of the typical American households of their respective races—ended up with extraordinarily different results. 

The Jones and Williams Families 

Meet Ashley and Michael Jones and Chris and Emily Williams. These two households—quite similar in their dreams and values—differ in one crucial way: their race. The Joneses, Black, and the Williamses, White, each represent a typical household of their respective race. The two financial plans we created for them, based on national data for Black and White households, produced two entirely different future wealth outcomes. These plans projected that in 2064, the Jones family net worth in present dollars would be $789,164, $1,993,563 less than the Williams household net worth of $2,782,727. Including expected inflation of 3%, those figures rose to $2,897,379 and $10,216,650, respectively.

Overall, our findings suggested that the racial and social progress made since the civil rights movement and the end of de jure institutional discrimination (such as ‘redlining’ in neighborhood housing) has done little to improve the economic situation of a typical Black family. In fact, a median 70- to 80-year-old Black household today has a net worth of $74,070, whereas the median net worth of similarly aged White households is $262,342, 3.54 times greater than the Black family’s net worth. Our study’s results reveal a nearly identical picture, 50 years in the future, with White net worth 3.53 times greater than the net worth of a typical Black household.

Wealth doesn’t refer only to wages or liquid assets, which explains why the racial wealth gap doesn’t correspond to the shrinking racial income gap. Wealth, or net worth, offers a comprehensive account of a family’s overall financial state—home equity, investments, retirement accounts, savings, debts, etc. Wealth provides choice, security, health and longevity, extended family and community benefits, job creation, and eventually, inheritance. It can fund a college education for children. It can facilitate a family member to take entrepreneurial risk. In short, wealth is the engine of financial success and upward mobility for a family, and thus, for the community to which that family belongs.

Importantly, the benefits of wealth are intergenerational. Family wealth clearly influences educational attainment, which in turn plays its own role in building assets. Family wealth allows for informal financial assistance, for example, contributing to the down payment on a home. Family wealth provides critical security to cover unexpected expenses. At death, family wealth means an inheritance. In these ways—and many more—family wealth is transformative. As the effects of wealth are intergenerational, historical policies that have stripped Black wealth and limited its future growth continue to impact Black families today. The consequences of these policies don’t immediately disappear once they’re no longer administered; the descendants of those directly impacted by slavery and Jim Crow laws experience poorer financial outcomes than their White counterparts. Once Michael and Ashley Jones and Emily and Chris Williams have all passed away, the Joneses will have less to leave their children. And so the cycle repeats, again and again, generation after generation.

The Future Without Intervention

Most of the future racial wealth gap emerges due to significant gaps in earnings—even after adjusting for education level—and differences in investment and retirement account growth. These inequalities contain both systemic and individual elements, indicating the racial wealth gap does not necessarily have to remain fixed. Many of these systemic elements are a result of persisting inequities and discrimination in education, student loans, employment, lending practices, and housing. One example that is representative of most: all of the civil rights and economic progress of the past 52 years has reduced the likelihood of a Black child being born into a poor neighborhood by 6% while reducing the probability of a White child being born poor by 33%. Financial resources often define access to early childhood education programs and the United States lacks a universal pre-Kindergarten education system. Since Black children are more likely to grow up in poverty without high quality preschool, they enter kindergarten behind White children by nearly nine months on average in math and seven months in reading, early inequalities that shape educational outcomes years later.

Essentially, equal achievements often end up not yielding equal results. Research shows neither better decision-making nor harder work would have eliminated these differences, as the realities of access and affordability impact Black and White households differently. That said, some of the individual elements result from persisting skepticism in the Black community towards certain types of investing and engaging with financial institutions who, from a historical standpoint, have not always dealt with the Black community equitably. 

It would take Herculean efforts for a typical Black household to erase the wealth gap without substantial policy reform and social progress, but Black households can nonetheless considerably diminish the racial wealth gap with greater access to objective financial advice. That is, Black families can indeed improve their financial outcomes by adjusting their investment strategy and asset allocation—especially with the advice of financial professionals and financial planners—despite the racial wealth gap’s systemic components. Although the financial services industry has a long way to go regarding diversity and accessibility, it remains a valuable resource for Black households seeking to develop intergenerational wealth and secure their financial futures. 

How Financial Planners Can Help

As financial planners, we believe the financial services industry can and should play a key role in solving the racial wealth gap. Financial professionals can use several strategies to improve wealth outcomes in communities of color. Not only is it the right thing to do, but it would also significantly increase revenue throughout the financial sector. In order to actively repair trust in financial institutions, however, firms need to deliberately increase inclusion, both in new hires and in client diversity. The financial sector has a long way to go in this regard; a 2019 report by the CFP board found that only 1.5% of Certified Financial Planners are Black. The same report expressed that workplace diversity—when bolstered by a culture of inclusion—brings a host of material benefits, including greater revenues, better employee satisfaction and retainment, and better treatment of a wider range of clients. 

On the client side, one major barrier to accessing wealth management services for people of color is the minimum asset requirement at many firms. As our paper demonstrated, the racial wealth divide is enormous, thereby limiting the ability of Black households to receive wealth management services and advice, which in turn entrenches the racial wealth gap. In order to actively include poorer people of color, often in need of financial advice, firms can lower minimum asset requirements, adopt retainer or project-based fee structures, and increase sliding scale or pro bono work. 

Clearly many elements of the racial wealth gap operate in areas beyond the influence of financial planners. Much of the racial wealth divide is institutional, but that doesn’t mean we can’t make a difference. In addition to the consequential guidance shared in our paper, ranging from choice of college major to avoiding expensive banking and credit, we can advise our Black clients to adopt more aggressive asset allocations, start saving early for their children’s education, and fund retirement accounts at appropriate rates. Even if the financial sector can’t close the racial income gap or eliminate discrimination, we can still collectively produce a big impact.


Download the Two American Financial Plans paper here


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