Cultural diversity is often misunderstood, and how to deal with it is becoming increasingly important. Cultural diversity is focused around language, religion, race, sexual orientation, gender, age and ethnicity. As the level of immigration increases and social norms are changing rapidly, Canada’s cultural diversity is increasing exponentially and creating a very dynamic financial consumer market.
Thus, financial planners and financial advisors must create a cultural diversity strategy to maximize upon the growth opportunities within these various cultural segments. This will offset the unconscious cultural biases that can affect the way that they provide services to their clients
Financial planners and advisors can develop a strategy based on two pillars:
- They can evolve their practices into a cultural diversity model by hiring people who reflect the cultural demographic they’re trying to attract.
- They can learn the nuances and financial behaviours of the various cultures within the diversity groups.
Combining these two strategies will most likely deliver the best outcomes.
To construct a strategy, let’s consider the various categories and some related considerations within cultural diversity.
The most obvious is language. First- and second-generation immigrants face several hurdles, including communication and language barriers. It goes beyond just the language, but the nuances. Having someone bilingual in the culture and language will certainly gain their trust.
Another factor is age. We know from many studies that intergenerational wealth transfers will cause the biggest inheritance boom ever. Many of these heirs are of a younger age and a different generation — specifically, millennials and Generation Z — and more than 90% of them have indicated they would likely change advisors when they receive their inheritances. Understanding their behaviours, attitudes and patterns, and attracting advisors from these generations will deepen the relationship with clients’ children and grandchildren.
Under the factor of sexual orientation, the lesbian, gay, bisexual and transgender (LGBT) community is an underserved area. T. Rowe Price Investment Management out of Baltimore conducted a recent study on the financial needs of LGBT investors They found that they place a high value on advice, but feel underserved despite their willingness to work with advisors. By being supportive of the LGBT community, financial planners and advisers can win the hearts and minds of this community and earn the trust of a group that’s amassing wealth and feels underserved.
Meir Statman, professor of finance at Santa Clara University in California, has done extensive research on how cultural differences influence investor behaviour. He specifically analyzed how a person’s country of origin and gender affects the person’s propensities for risk, regret, maximization, happiness and trust. Each of these factors will affect the investment strategy that a financial planner or advisor will create for these investors greatly.
Statman discovered that in the area of gender behaviour, women are less willing to take risk, have a lower propensity for “maximization” (desiring a good financial outcome, but not necessarily the best, which is difficult to achieve), and are less trusting than men. The taking risk and trusting preferences are closely correlated as those who trust less are more averse to risk taking.
In the area of country culture differences affecting investor behaviour, he found the following additional compelling data:
- Risk-taking: Investors from China and Vietnam were the most willing to take risk while those from Germany and Switzerland were the least willing. Statman further extrapolated that immigrants from countries with lower “income per capita” are more willing to take risk to increase their economic status in life, although, they don’t necessarily like risk.
- Regret: This centres around the idea that investors regret a certain investment decision and believe an alternative decision would have done better. The study found that the propensity of regret was highest in Italy, Malaysia, Estonia and Israel, and lowest in Vietnam, China and Thailand, which correlates to these countries’ risk appetite.
- Maximization: Investors from Estonia and Israel wanted the best financial outcome whereas those from Taiwan and China didn’t.
- Happiness: Investors from the U.S., Switzerland, Holland and Norway rated their satisfaction with their lives the highest, in general, while those in Japan, Malaysia and Vietnam rated their satisfaction with their lives the lowest.
- Trust: Investors in China gave the highest rating to agreeing that most people can be trusted, which again correlated with their propensity to take risk.
Other research shows the relationship between debt tolerance compared with personal savings rate by country and culture. For example, Canadians carry high credit card debt levels and have lower personal savings rates, whereas people from France carry low credit card balances and have one of the highest personal savings rate in the world.
Although it will be difficult to understand all these detailed cultural biases, an appreciation for them will go a long way toward helping you form a cultural diversity strategy.
There are many challenges coming to the financial services sector. Thus, it’s important to understand that the market of financial consumers also is changing rapidly, and one of the disrupters is cultural diversity. Financial planners and advisors should be proactive in seizing opportunities that increasing cultural diversity create by developing an effective strategy.