Study: Investors of color entering market more quickly than whites

Investors of color are entering the market at a faster pace than white investors, according to a recent FINRA study.

The FINRA Investor Education Foundation Investors of Color in the United States report also found that new investors, particularly Black/African American and Hispanic/Latino investors, tend to be much younger than white investors.

New investors of color also exhibit many of the same behaviors that previous research has shown of younger investors. These include reliance on social media for investment information and trading risky investments like cryptocurrencies and so-called meme stocks.

“With a large number of young investors entering the markets, financial education leaders will need to adapt, including providing relatable and trustworthy resources on channels these new investors use,” said FINRA Foundation President Gerri Walsh.

“While conducting this research, we learned from investors of color about barriers they or their families faced previously in building wealth through investing. Seeing an influx of new investors of color is encouraging and highlights the importance of our markets becoming more accessible.”

Major findings from the report

Among the study’s findings:

Demographics:

• Investors of color are entering the market at a faster pace than white investors: Since 2015, the percentage of new investors has increased for all three groups analyzed — nine percentage points for Black/African American respondents, seven percentage points for Asian American/Pacific Islander respondents and six percentage points for Hispanic/Latino respondents. In contrast, the percentage of white respondents who are new investors has not changed substantially.
• Investors of color tend to be younger: This is particularly noticeable among Black/African American and Hispanic/Latino investors, nearly half of whom are under the age of 35.
• Motivation for investing: Non-white investors, particularly Black/African American and Hispanic/Latino investors, are more likely than white investors to be motivated by reasons beyond long-term profit, including short-term gains, a desire to learn more about investing, entertainment and excitement, and because their peers are doing it.
• Information sources: Black/African American and Hispanic/Latino investors are more likely than white investors to rely on friends, family, and colleagues, as well as suggestions provided in a mobile trading app, for information about investing. Black/African American investors are more likely than white investors to use online videos as resources. In addition, Black/African American and Hispanic/Latino investors are more likely than Asian American/Pacific Islander or white investors to rely on social media as a source of investment information.
• Investment products: Black/African American and Hispanic/Latino investors are more likely to engage in risky investments such as meme stocks, cryptocurrencies and options than are white and Asian American/Pacific Islander investors.
• Investment risk: Black/African American investors report higher risk tolerance levels than all other groups.
• Cultural and generational differences: The focus groups provided insights into the views of some young investors of color. For example, one focus group participant told researchers: “We’re first generation. Most families here are third, fourth, fifth generation, and they know the tricks. We don’t know anything about it. We know to save our money in the bank, where you don’t get anything back, as opposed to now learning about all these other ways of having your money work for you.”

Impact of findings on advisors

So, what is the importance of these findings for financial advisors?

“Many young investors of color are entering the markets, and this is changing the demographic characteristics of investors in the United States,” explained Olivia Valdes, senior researcher, FINRA Investor Education Foundation and an author of the report.

“This research can help advisors understand this shifting landscape and, perhaps more importantly, better understand and serve an emerging and growing group of prospective clients, as well as their existing clients.”

And how can advisors use these findings to better serve their clients?

“It is important for advisors to understand their clients, and this report provides rich information about investors of color that advisors can use toward this end, Valdes pointed out. For example, she added, knowing their motivations for investing, the information sources they use, and the investment products they are interested in can be used to help advisors provide more informed guidance to their clients.

The FINRA Investor Education Foundation supports innovative research and educational projects that empower underserved Americans with the knowledge, skills, and tools to make sound financial decisions throughout their lives.

The “Investors of Color in the United States” report examines the behavior and attitudes of investors of color based on data from FINRA Foundation’s National Financial Capability Study, coupled with a series of focus groups conducted with young Black/African American, Hispanic/Latino, and Asian American/Pacific Islander investors.

 

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]. 

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