Accountants and other finance professionals who want to better serve low-income and underserved communities can start by understanding the access barriers these groups face in order to provide them with advice that is tailored to their needs.
The Impact of COVID-19
The COVID-19 pandemic has impacted families from all walks of life, and low-income and minority communities have been hit especially hard compared to their predominantly high-income and white counterparts. This is due to a myriad of complex underlying issues, such as the prevalence of high-risk health factors as well as economic factors in underserved communities.
In the article “COVID Exacerbates Financial Planning Issues in Underserved Communities,” Sophia Duffy, an assistant professor of business planning at the Center for Economic Empowerment and Equality within The American College of Financial Services, discusses some of the low-cost planning strategies advisors can implement when helping underserved clients.
“Financial advisors should be mindful of the impact of the effects of the pandemic, particularly to provide strategies to protect lower-income families against financial ruin. Advisors, who are well aware of the risks of failing to plan, should be mindful that those risks are more pronounced at present,” Duffy said.
One area where advisors can be particularly helpful to underserved clients and those who have been affected by COVID-19 is health care planning, which includes more than helping your clients to obtain proper health insurance coverage.
“The long-term health impacts of COVID-19 bring long-term care planning to the forefront. Long-term care insurance adds another layer of protection to protect against overwhelming debt due to costs from a prolonged illness. Such insurance covers costs that may not otherwise be covered by health insurance, such as nursing home costs, custodial care and care for assistance with daily activities like bathing and getting dressed,” Duffy said.
Clients should also plan for incapacity by preparing a living will and creating other documents that will formalize a client’s wishes for their medical care should they be unable to do so, Duffy said. Other areas where advisors can offer guidance include disability insurance, life insurance and income protection should the sole income earner in a family become ill or die. Finally, advisors can help underserved clients with estate planning for property. While many low-income families may not have significant assets, estate planning for property is still crucial.
“The primary residence is typically the most significant asset that individuals own, and in fact, 54 percent of wealth owned by Black households is made up of home equity, so planning for the transfer of the home is crucial,” Duffy said.
Partnering with community organizations that offer free services and resources related to financial planning is one way for advisors to develop trust among underserved populations, Duffy said. Advisors should also consider whether clients in these communities will need translation services.
Racial Inequities in Banking
Advisors should be aware of the access barriers that underserved communities face, particularly in financial services, banking and building credit.
“Making up just 32 percent of the U.S. population, Black and Latinx households represent 64 percent of the country’s unbanked and 47 percent of its underbanked households,” according to “Racial Equity in Banking Starts with Busting the Myths,” a report published by the Boston Consulting Group (BCG) in February 2021.
A household that is “unbanked” does not have a bank account, while a household that is “underbanked” has a bank account but has used non-bank credit or transaction products in the last year. While a common assumption about the unbanked and underbanked is that these groups lack awareness of banking products, an analysis of data by the BCG found that almost half of unbanked households previously had an account.
“Having insufficient funds is a far greater barrier, with 29 percent of unbanked households citing minimum balance requirements as the top reason for not accessing mainstream financial services,” the BCG reported.
Furthermore, structural barriers to opening a bank account are prevalent in underserved communities, such as few to no bank branches in the neighborhood, inconvenient operating hours or language barriers.
“In many Black and Latinx communities, check cashers and payday lenders are more common than bank branches,” according to the report. “Without bank accounts, families cannot generate the data that helps establish creditworthiness.”
While mobile banking and fintech innovations can help to alleviate some of the challenges faced by these communities, brick-and-mortar bank branches are still relevant to building credit, according to “Life in a Banking Desert,” an article by Terri Friedline and Mathieu Despard published by The Atlantic.
A 2016 investigation by the New York Fed on the increase of “banking deserts” found that “residents lose access to small business loans and mortgages when bank branches close, hindering the investment and entrepreneurship needed to drive local economic growth,” the article said. This research will help experts better understand which regulatory reforms are needed.
“With these understandings, investments can be made in existing innovations like Self-Help Federal Credit Union’s micro-branch division, CT Prospera, and the Community Development Financial Institutions (CDFIs) that are providing safe, affordable and wealth-building financial products and services to lower-income communities and communities of color throughout the country,” the article said.
Supporting Micro Businesses
“Small business ownership offers a pathway to economic self-sufficiency for Black Americans, especially in Black-majority cities,” according to a July 2020 report by Pamela D. Lewis, a nonresident senior fellow with the Brookings Institution and the director of the New Economy Initiative (NEI) for Southeast Michigan. Lewis’s report focused on small businesses in Detroit, where the number of businesses owned by Black residents is higher than the national average.
“Microbusinesses owned by people of color are less likely to have an existing relationship with a commercial bank,” the report said. A microbusiness is a business that operates on a small scale, with fewer than 10 employees.
“Of the $20.8 billion loaned through the Small Business Administration’s 7(a) program in 2019, 32 percent went to minority-owned businesses, yet only 6 percent was loaned to Latino- or Hispanic-owned businesses and 3 percent to Black-owned businesses,” according to the report, which analyzed data from the U.S. Small Business Association (SBA).
The NEI conducted interviews with small business owners in Detroit to learn about the challenges they face related to “equipment, capital and technical assistance.” NEI found that the impact of capital relief is optimized when recipients have “access to real-world advice, coaching, tools and experts in the following areas: accounting, finance, cash flow management, marketing, digitizing the business, HR strategies, legal and daily operations.”
Accountants and other finance professionals should understand the barriers these businesses face and ways they can support them. These barriers include an inability to access SBA loans, higher insurance costs, workforce challenges and more, according to “How to include microbusinesses in economic growth strategies,” a blog post by Lewis published on the Brookings website in July.
While Lewis’s research focuses on ways communities can support these types of businesses, the strategies Lewis suggests can be implemented by individuals, too: providing expertise around real estate, accounting and other areas of business operations and offering coaching and mentoring.