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Black Americans’ Distrust of Finance

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Redlining, subprime mortgages sold in minority and immigrant neighborhoods, higher interest rates on car loans – black Americans have reason to distrust the financial system.

This spills over into their retirement planning, specifically their relationships with financial planners and how much they save, concludes a study in The Journal of Personal Finance. Among the findings is that blacks and, to a lesser extent, Latinos have difficulty trusting planners.

Past research shows trust can play an important role in financial decisions. People who trust the stock market, for example, are more likely to invest in stocks. But black Americans start out with generally lower trust levels: nearly half reported “low trust,” compared with only about one-quarter of whites, according to the survey data used by three finance professors in their study last year.

The researchers then assessed whether trust levels affected two specific behaviors: hiring a financial planner and saving for retirement.

A lack of trust reduced the likelihood an individual will engage a planner by 18 percentage points, compared to individuals who tend to be more trusting. The surprising result was that blacks were actually more likely to hire a financial planner than were whites with similar incomes when the researchers controlled for trust – meaning the controls eliminated differences in behavior related to individual trust levels.

Another finding was that while blacks have less retirement savings than do white Americans of similar incomes, this difference virtually disappears when the analysis controls for the difference in their trust levels.

If black Americans could get past their inherent lack of trust and get good advice or good financial products things might be different, said one of the study’s authors, Terrance Martin, an assistant professor of finance at the University of Texas-Pan American in south Texas.

“You might see less of a difference between black households’ accumulated retirement saving relative to white households,” Martin said.

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