This article is sponsored by Credit Suisse.
In 2010, just a few months before the year’s Census showed that population growth among African-Americans had outpaced total population growth by nearly one-third, the Commerce Department published a study on capital access among minority business owners, identifying a different and less optimistic trend. It found that minority business owners were less likely to receive loans compared with non-minority business owners; that they received loans that were, on average, less than half the size; and that they received loans that were, on average, 140 basis points more expensive. Despite rapid population growth, in other words, African-Americans faced continuing constraints in launching businesses and creating wealth as a result.
This past November, Credit Suisse published a study demonstrating the impact of the Commerce Department’s findings among even the nation’s wealthiest African-Americans. The study, entitled “Wealth patterns among the top 5 percent of African-Americans,” compared wealth-management behaviors of the richest African-Americans – those with over $357,000 in net worth – with those of whites at the same wealth threshold. The central finding: Conservatism runs high in financial decision-making among the top 5 percent.
For example, the wealthiest African-Americans have 9 percent of their non-financial assets invested in business assets—defined as equity in their own businesses or someone else’s – compared to 37 percent for the white comparison group. Real estate – generally a safer bet than business investments—accounted for a much larger proportion of investments. Among the top 5 percent of African-Americans, 41 percent of non-financial assets are invested in real estate outside of one’s primary home, compared with 22 percent for the study’s white comparison group.
“Investing in real estate has historically been a smart and steady way to build wealth,” said Stefano Natella, Global Head of Equity Research at Credit Suisse and one of the principal authors of the study. “But if you successfully invest in a company—a tech company is a great example—you could you could see a multiplier of three, four, even ten times your wealth. That’s where more conservative wealth-management behaviors can sometimes be limiting.”
Among the study’s other findings: The investment portfolios of the top 5 percent of African-Americans are three times more heavily weighted towards CDs, savings bonds and insurance than the portfolios of the study’s white comparison group, and are nearly one-half less weighted towards stocks, bonds and mutual funds.
If historically limited access to capital among African-Americans has been one driver of such conservatism, what others exist? The report cites “wealth mobility” as another driver. Only 37 percent of African-Americans whose parents were in the highest quartile of net worth in 1984 remained there 20 years later, for example, versus more than half, or 56 percent, of whites. At the same time, the study found that it is much more difficult for African-Americans to move into the highest wealth brackets from lower wealth brackets: Only 7 percent of the children of the poorest African-Americans climbed to the highest wealth levels, compared to 12 percent for whites.
“When you look at the wealth mobility data, and you overlay it with the Commerce Department data, the picture becomes clear,” said Pamela Thomas-Graham, the bank’s first African-American Executive Board member, and the Head of Credit Suisse’s New Markets business. “A more conservative investing approach is a sensible and pragmatic response to these factors. The question is how to change the picture and to accelerate wealth creation.”
Thomas-Graham cited the Credit Suisse Entrepreneurs Circle, which the bank launched in late 2014, as an example of its efforts to do so. The Entrepreneurs Circle includes over a dozen African-American business leaders from around the country and provides them with access to debt financing, industry and functional expertise, and a community of sponsors and mentors. “It won’t fully resolve historical issues of capital access and wealth mobility,” Thomas-Graham said. “But we think it will make a meaningful difference in helping African-American entrepreneurs accelerate the growth of their companies. That will drive greater wealth creation for them. More importantly, it will drive greater wealth creation for the communities in which they live and work. And that will move the needle in a tangible way.”
The findings also show that education is a key driver of wealth among the top 5 percent of African-Americans. Almost 69 percent of African-Americans at the 95th percentile of net worth have a college degree, compared with 64 percent for the study’s white comparison group.
“Education drives wealth in this community in an unparalleled way,” said Stefano Natella, Global Head of Equity Research at Credit Suisse and one of the principal authors of the study. “One implication, though, is that people within the study’s focus group pursue managerial and professional jobs more frequently than entrepreneurial ventures. This implies steady but slower wealth creation.”