Funny how people with wealth and power find ways to hold onto them.
The small world of asset management, where companies make money investing the wealth of others to grow it ever larger, has proved incredibly efficient at keeping outsiders at bay. The leading firms in the field remain dominated by white men, though they offer only middling returns.
Needless to say, people are beginning to ask questions. U.S. Reps. Maxine Waters, D-Calif., chairwoman of the House Committee on Financial Services, and Joyce Beatty, D-Ohio, chair of the Subcommittee on Diversity and Inclusion, have demanded the nation’s 31 largest investment firms provide diversity data.
“In addition to having an abysmal record of diversity within their investment firms, they’ve also not made it a priority to do business with diverse-owned asset managers and other businesses,” Waters said in a recent hearing. “Their excuses are not new and are laden with long-standing, unfounded biases against diversity.”
She and Beatty want the firms to explain why they have not done better and what they plan to do differently.
Industry data shows that minority-owned and diverse asset management firms outperform industry averages. Yet pension funds, university endowments and family trusts — and more importantly, the consultants who advise them — place their assets with underperforming legacy firms that remain lily-white and decidedly male.
Minority and women-owned firms, as a result, handle only 1.3 percent of the $71 trillion in assets under management, according to the Knight Foundation. That proportion has not changed in two decades.
Last July, I first wrote about how asset manager Gilbert Garcia was using his seat on the Securities and Exchange Commission’s asset management advisory committee to tackle the problem. He is the managing partner of Houston-based Garcia, Hamilton and Associates, a minority-owned fixed-income manager handling $16 billion.
Garcia recently shared his findings with the SEC’s diversity and inclusion subcommittee to create a list of recommendations. Surprise, surprise, he discovered a culture of informal rules that maintain the status quo.
“The largest money managers have all the market share, and the largest consultants have all the market share, so it’s generally hard for new entrants,” Garcia told me. “They have instituted these barriers of entry for no other reason but to keep out new players. And they always apply the barriers of entry most strictly to women- and minority-owned firms.”
Many consultants who advise investors will not recommend a small management firm or one without a lengthy track record. The consultants claim their fiduciary duty prevents them from recommending these firms, which are likely to be owned by women or minorities.
But that’s just not true, Garcia explains; it is an excuse these consultants invented to give business to their buddies, who often pay them for other services. Sometimes the bigotry is blatant. Consultants have told Garcia they cannot hire him because he does not have enough white men.
“I’ve seen it firsthand with my experience on pension boards,” Garcia said. “I’ve seen very high-quality diverse managers come in with a private equity fund, and people say, ‘Oh, well, it’s their first fund, and we don’t invest in first funds.’ And then I see, a couple of months later, the very same thing, but they are not diverse. They’re just white males. And they get hired even though it’s their first fund.”
As the abolitionist Frederick Douglass observed, power concedes nothing without a demand. Garcia wants the SEC to make diversity and inclusion a core value and a material fact in policymaking. He wants the SEC to require financial services firms to report how many women and minorities work at what levels.
“I want to see better disclosure; transparency always sets you free,” Garcia said.
Giving the public a chance to gauge a firm’s diversity ties in with investors focused on environmental, social and governance issues. Countless analyses have shown that firms with diverse boards and leadership teams perform better in the long run.
Therefore, when a consultant or pension board refuses to consider a minority- or woman-owned firm, Garcia said, they are violating their fiduciary duty to hire the best asset manager for the job.
Garcia also wants the SEC to reconsider its pay-to-play policies and require firms to reveal more about their political donations. Many asset managers handle funds from the public sector, where politicians can influence which firm gets hired. He has proposed these steps to the SEC’s Asset Management Committee, of which he is a member, and it will vote in June on whether to make a formal recommendation to the commission.
No one is talking about setting quotas for historically underutilized businesses or creating mandates. Garcia knows from personal experience he can outperform the more prominent money managers if given a chance. He’s asking for nothing more than a playing field made level by greater transparency.
Tomlinson writes commentary about business, economics and policy.