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On Diversifying the Asset Management and Financial Services Industry and Changing How Capital Flows: An Interview with Erika Seth Davies

Our BlackHer Shero of the Week is Erika Seth Davies, founder of The REAL (The Racial Equity Asset Lab), an organization working to center racial equity in impact investing and shift capital to close the persistent racial wealth gap. Davies is also a social entrepreneur in residence with Common Future and a fellow with Equitable Access to Capital Markets in the Fair Finance portfolio of the Beeck Center for Social Impact + Innovation at Georgetown University.

Tell us a little about yourself.

I had an eye-opening experience on a trip to The Gambia. I went to Jufureh where Alex Haley traced his roots. It occurred to me that as a free Black woman, I was never supposed to be standing there. I began to understand the impact of slavery and the slave trade on Black people and wanted to honor my ancestors and the freedom they helped me to achieve by deepening my understanding of how racism is embedded in capitalism and by changing the systems that maintain it. A foundational question for me became, “How do I improve the material conditions of Black people?”

Professionally, my background is in fundraising for nonprofits. As a fundraiser, you have to have a holistic understanding of your organization, including its programming, leadership, and governance, and how it’s financed because you touch on all of these issues when you “sell” your organization to funders and donors. 

Through my affiliation as a Connecting Leaders Fellow with ABFE, the Association for Black Foundation Executives, I had the opportunity to hear from a Black asset manager who shared his experience with a large community foundation that was soliciting him for a donation. He turned the entire experience around and asked the foundation representatives, “Who manages your assets? Because if I’m not growing my firm’s assets then I’m not growing the wealth you want me to donate.” A light bulb went off for those of us in that meeting as we started to gain an understanding of the “business” of philanthropy.

Something clicked for me after that conversation. In fundraising, when we think about foundations, we often focus on the grant dollars they make available every year. But foundations and the family offices of high-net-worth individuals are also owners of billions of dollars in assets. For example, the Ford Foundation has $10B in assets under management and The Bill & Melinda Gates Foundation has $41B. I began thinking more about the intersection of asset management and racial justice. And became curious about how foundations were leveraging their enormous wealth to advance equity. 

Your mission in life is to diversify the asset management industry in order to build wealth for Black people. What is asset management and why should we care about it? Can you give us a quick tutorial?

Most of us understand the concept of a financial advisor or someone who helps you build your personal wealth. They work with you to understand your financial goals and recommend how to invest your money.

The same is true of institutions or enterprises like foundations, pensions, hospitals and colleges and universities that are sitting on enormous sums of money. They need help determining how to put their money into the markets to preserve and grow their wealth. They work with investment consultants and institutional asset management firms like Cambridge Associates, Crewcial Partners, Glenmede, and others to do this. These intermediaries conduct research and make recommendations to their clients about whom to invest with and how to preserve and grow their capital. 

The problem is that less than 1.5% of the $70 trillion handled by the asset management industry each year is overseen by Black, Indigenous, and other people of color (BIPOC) and women managers. It’s an incredibly segregated industry.

Black folks should be deeply concerned about the egregious lack of diversity in asset management because we are being left out of the enormous wealth being created as well as where investments are made. 

Why is the asset management industry so segregated and exclusionary?

Eventually, I went to work for a Black-owned institutional asset management firm in Baltimore where I learned that the financial services industry can be a very opaque and relationship-driven space. Many of the investment consultants have been part of the industry for generations. And they have no incentive to work with smaller or diverse asset owners. 

Also, there is bias built into the system. For example, some investors require that the asset management firms that they work with have decades of experience in investing. But most Black-owned investment firms are newer. For example, Ariel Investments, which is led by John Rogers and Mellody Hobson, and Brown Capital Management, founded by Eddie C. Brown, are the oldest and best known Black-owned investment firms. Both were only started in 1983. 

You can’t wake up one day to start a private equity firm. You have to have significant experience in investment banking as well as your own assets to invest, and unfortunately, it is a very hard field to break into. Most Black managers get their start by managing public dollars or pensions precisely because these investors have specific policies or programs focused on managers of color. 

What is The REAL doing to change this situation?

I’m not an investor. I see myself as a weaver and an advocate. I’m good at making connections and bridging the disconnects that I see. When I was vice president of external affairs at ABFE, I started flagging racial equity in endowment management to address how foundations invest their assets not just in how they give money away. To address the issue, I designed the SMART Investing initiative, the first field-wide effort to incorporate a racial equity lens in foundation endowment practice through increased access for minority-owned and women-owned investment management firms. As part of the work, I wrote a paper called, Foundation Investment Management Practices: Thoughts on Alpha and Access for the Field, to address barriers and recommendations for engaging Black-owned asset managers.  I also launched a directory of asset managers of color and made it widely available for free to shatter the myth that BIPOC managers do not exist in all asset classes. That was groundbreaking at the time. I’m really happy to see that Matt McCue at Emerging Manager Monthly has recently released a completely free resource with over 100 small and diverse asset managers. 

I’ve continued this work as an entry point for addressing racial equity in investor decision-making. In early 2020, I was named a Fellow in the Fair Finance portfolio at the Beeck Center for Social Impact and Innovation at Georgetown University where I wrote Hiding in Plain Sight: Racism in the Room Made Visible by COVID-19 and How to Create New Pathways to address the disproportionate impact of the virus on Black communities. The paper exploded in the wake of the uprisings and demands to dismantle racism in all U.S. systems. People are increasingly calling out the fact that the finance industry is one of the least diverse industries in the U.S. We have to do more to change it. 

What is success for The REAL in 2021?

We simply cannot have all of the decision-making about wealth in our country in the hands of white folks. We have to diversify the asset management and financial services industry and change how capital flows. 

In 2021, The REAL will be providing more tools and resources to help diversify the field, change the narrative about capital, and shift resources to Black communities. 

I tell folks all the time that racism is a feature not a bug of the system, which needs to fundamentally change. As advocates, we can put pressure on financial services firms to change the who and how of decision-making. We can also press government agencies, for example, the U.S. Securities and Exchange Commission (SEC), to mandate that financial services firms report data on diversity. That’s an important first step.

We can also help foundations to leverage their enormous influence to change the practices of the firms they employ. For example, they can require their investment consultants to ask and answer the following questions: How many asset management firms did you research? How many are diverse? How many are you recommending to your clients? 

This is just one area of opportunity for The REAL as we work to bring justice to capital. 

Let me ask you the miracle question. You go to sleep tonight and wake up tomorrow and it’s January 2022 and a miracle has occurred for Black women. What happened?

We are globally recognized for our commitments, power, beauty, and leadership. People trust Black women.

Jocelyn

 

 

 

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