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How much have you embraced diversity, equity, and inclusion at your firm?
Chances are that your answer reveals whether you see DEI as an important opportunity or as yet another addition to an already full plate of advisory and executive responsibilities, and perhaps while a meaningful goal, just not a business priority.
In between these two poles is another group: those who have taken a few steps to address DEI but have yet to embrace it fully. They are, in effect, checking the proverbial box but not really leaning and leading into this transformational opportunity.
I was reminded of this when I spoke with a colleague who relayed the story of a dinner with advisors where diversity became a topic of discussion, followed by a shared admission that a number were simply checking the box. In other words, they were taking superficial actions, at most, and saying the right thing but little more. I suspect that this could explain our painfully slow progress as an industry on this critical front.
It also led me to wonder about the cost to otherwise astute business leaders: Why are they consciously choosing to underleverage this opportunity and at what detriment to their firms?
Classic leadership theory suggests three possible responses to this query: 1) many advisors lack the skill to pursue DEI successfully; 2) many advisors lack the will to do so; or 3) some combination of these two.
Advisors in the first category likely don't have much personal experience with DEI or relationships with colleagues or consultants who do. Those in the second category likely perceive the cost of this change to be too great relative to its impact, which means that they don't understand--or possibly don't accept--the "business case" for DEI.
My suspicion is that most advisors are in the third camp: They know diversity is the right thing to do, but they're not sure that it's really worth the effort for their particular firm, and they don't know where to get help from in order to develop an achievable strategy.
The Math Behind DEI and Your Business
Let's start with the business case. Simply put, the research shows that the more diverse your firm, the greater the likelihood that it will outperform over time, which is true if you're a two-person shop or a firm with billions under management.
To assess the business case for DEI, the consulting firm McKinsey & Company began publishing its "Diversity Matters" series. Among its findings:
- Gender-diverse firms are 15% more likely to outperform, whereas racially/ethnically diverse firms are 35% more likely to outperform (2015).
- In the past five years, the impact of gender-diversity success increased to a 25% greater likelihood of outperformance (2020).
- Among the many benefits of the successful practice of DEI are improved customer experience, greater employee satisfaction, and better decision-making and innovation (2018).
- Firms with diverse leadership are 21% more likely to outperform in terms of profitability and 27% more likely to have superior value-creation results (2018).
Another way to look at it: In addition to the huge and compounding opportunity cost, what's the real negative impact on productivity and profitability of failing to pursue and practice DEI successfully?
The math illustrates this profoundly. If your firm can achieve a growth rate only a third of what McKinsey observed of organizations that practiced gender diversity successfully, this could be worth as much as 28% in additional revenue growth in the next five years.
Irrespective of your firm's margins, this significant improvement can become even greater the better you get at DEI. If you're able to achieve a comparable level of progress at practicing racial/ethnic diversity successfully, the payoff is even bigger--as much as an additional 74% in revenue growth in the next five years.
Your Two Constituencies
So, given the depth, breadth, and conclusiveness of the research--though there may be a few advisors who still refuse to accept the data--how exactly does one practice DEI in ways that lead to long-term, sustainable superior performance?
One way to address this opportunity is to think of your two client constituencies as an advisor: your internal clients, who are your colleagues, and your fee-paying external clients. Increasing your organizational cultural fluency can lead to meaningful improvements in your relationships with both of these groups, which, in turn, can lead to the outsize performance that the DEI research reveals.
For example, research shows that having more female advisors makes your firm attractive to women investors, who now collectively control more than half of all assets to be managed. But--and I'm speaking mainly to men here--in order to attract and, most importantly, to retain female professionals, your firm's culture will have to be welcoming to them.
That means conducting a cultural audit that will help you understand your firm's perceived positives and negatives from the perspective of your two client constituencies and then begin the meaningful work of evolving your firm's culture. This will lead not only to a better gender mix among your advisor colleagues, but it will also make your firm much more attractive to female clients and prospects.
Again, why should you consider this? Because, according to one expert organization, achieving better gender diversity in the wealth-management space could lead to an additional $25 billion in fees for advisors and their firms.
To position your firm to benefit from these efforts, you can connect with industry associations and other groups that will bring you into communication with female advisors at various career stages. You can then complement these efforts by increasing your outreach to organizations that can connect you with professionals of color, those who are next generation, members of the LGBTQ+ community, people with disabilities, or any group with whom your firm has little real experience. Or hire a DEI consultant to explore the myriad ways to do this.
Yes, there may be some initial discomfort at the beginning stages of these outreach efforts, but the magnitude of the enhanced performance that can follow will more than compensate for this.
It's incredibly important to remember that bringing more-diverse talent in the door is just the first step. You must complement this with an ongoing focus on inclusion, thereby integrating these new colleagues fully into the life, culture, and work of the firm.
Here are some of the key steps:
- Education: This is for both yourself and your existing team members. Learn about the realities of DEI (both the benefits and costs). That means coming to grips with the business case for DEI and what it really takes to pursue it, and then committing to it.
- Perform a cultural audit: Use surveys and other methods of obtaining an assessment that's as objective as possible from the perspectives of all the firm's constituencies/stakeholders (that is, leaders/partners, staff/employees, clients, the broader community [professional and geographic], and so on).
- Cast a wider talent net: Create purposeful and sustained engagement to reach to sources of more diverse talent and eliminate hiring biases in the selection process.
- Become an "employer of choice" and commit to "inside-out leadership": Create an industry-leading employee experience that leads to a similarly positive and competitively differentiated client experience by leading in a holistic and bespoke way.
One last thought to help you develop the courage to overcome your initial discomfort or unease: The potential productivity increases will translate into improving your firm's enterprise value. Whatever valuation method you use, what will become crystal clear is that your firm's ultimate value can be amplified by your efforts to practice DEI successfully.
Is this guaranteed? No. Does it require real work? Yes. Is it possible that you could struggle at this effort? Of course.
In the end, do it for the right reason--that it's great for colleagues, clients, and your firm. Or do it for the less noble but nonetheless worthy reason--that the potential payoff will be huge in terms of medium-term profitability and long-run enterprise value. But by all means do it. Stop just checking the box and embrace the DEI opportunity fully.
Walter K. Booker is the chief operating officer of MarketCounsel, a business and regulatory consulting firm for registered investment advisors. Prior to joining MarketCounsel, Booker was a senior operating executive in both the institutional and individual investor sectors of the financial-services industry. He is chairman emeritus and a board member of Sponsors for Educational Opportunity and a board member of the AAAA Foundation. The views expressed in this article do not necessarily reflect the views of Morningstar.