ESSENCE REPORTS: Minority And Women-Owned Firms Face Uphill Battle In Competing For Investment Management Opportunities

A government report released Wednesday confirms what some leading Democratic members of Congress suspected years ago — while people of color comprise a significant percentage of the federal workforce, federal employers invest their money with asset managers who are far from diverse.

While people of color make up 34 percent of the federal workforce, and women comprise 44 percent, less than one percent of the $70 trillion assets managed in the U.S. are managed by minority or women-owned firms (MWO asset managers or firms).

This is a fact that draws particular ire among some public officials.

As Senator Corey Booker tells ESSENCE, he was stunned when he began his Congressional term in 2013 and discovered how few minority and women owned firms were being tapped to handle federal pension plans. “While states like Texas and New York had emerging manager programs, the federal government which manages hundreds of billions of dollars had no diversity in their management. I was astonished,” he shared on Tuesday, just prior to GAO’s official release of the report.

After a series of meetings with stakeholders and pressing the Obama administration on the issue, Booker—along with Congresswoman Maxine Waters, Congressman Gregory Meeks, and Senator Elizabeth Warren—banded together to advocate for MWO asset managers a bit further.

The Representatives and Senators tasked the Government Accountability Office (GAO) with investigating why there was such disparate use of MWO firms and to recommend how this disparity can improve.

Representative Meeks finds that creating diversity is important at every stage in the institutional investment process, which consists of Boards of Directors who set policies and appoint senior managers; consultants; and investment committees, among other parties.

New York City, where Meeks represents his Queens district, is a helpful example. “The Comptroller of New York City demanded that those consultants recommending asset managers [also] be diverse,” Meeks shares with ESSENCE. “You have to have diversity at every level, as opposed to just going to the good ol’ boys.”

A lack of qualified MWOs are not a valid justification for this reliance on the same large investors.

As Senator Booker asserts, “independent analysis by the Knight Foundation shows that many of these MWOs outperform the firms that our public pension programs were using. This is not a matter of who is performing best at managing money. Clearly, if that were the case, we would see more than one percent of all of these assets by women or minorities.”

So what may lead to these systemic barriers? Specifically, according to the GAO study, “institutional investors often prefer to contract with large asset managers with brand recognition and with whom they are familiar. Also, small firms, including MWO firms, are often unable to meet minimum requirements set by institutional investors, such as size and past experience.”

But on broader level, this exclusion is also American tradition.

Recent Census data shows that while White, Asians, and Latinos are making more money than they did in the year 2000, Blacks are the only racial group making less than they did nearly two decades ago.

The inequality among asset managers, Booker maintains, “is yet another example where, historically, the government has created profound generational wealth in this country that frankly, women and minorities didn’t have a chance to compete.”

As examples, he cites discriminatory federal housing policy and criminal justice laws, wherein Black men and women are disproportionately targeted, and whose subsequent criminal records limit their earnings potential.  

By using a process that “excludes high-performing women and minority managers,” Booker continues, “means your government is picking and choosing winners and losers. And that is patently unacceptable.”

Moving forward, the GAO identified four key practices that institutional investors can use to increase opportunities for MWO asset managers:

The first step is to have top leaders who demonstrate commitment to increasing opportunities for MWO asset managers.

Secondly, agencies must remove potential barriers by reviewing investment policies and practices that limit the participation of smaller, newer firms.

Thirdly, the GAO recommends conducting outreach to inform MWO asset managers about investment opportunities and selection processes.

Lastly, institutional investors for federal entities should explicitly communicate priorities and expectations about inclusive practices to investment staff and consultants and ensure those expectations are met.

Of the seven federal entities GAO reviewed, only a few used all of the abovementioned practices. Several made partial, limited, or no use of the practices.

Congressman Meeks also urges federal employees to speak up. “Pensioners should demand diversity in the asset managers. They have a voice also.”

He, along with Senator Booker, will continue to press the issue with the federal agencies’ institutional investors.

Ultimately, Senator Booker asserts, fighting for equality among these managers is one way the wealth gap may be addressed, “by making sure everyone in America has a fair chance to compete and a fair chance at opportunity.”