Without data collection, improving diversity remains steep climb

The first step in improving diversity within the asset management industry is to shine a light on what's actually happening, industry experts said.

That means more forcefully pushing or outright requiring money managers, institutional consultants and other stakeholders to disclose their diversity data, they said.

"There's only one way to know if there's a problem … and that's to collect the data," said Gilbert Garcia, Houston-based managing partner of Garcia Hamilton & Associates LP, a minority-owned fixed-income money manager with $16.5 billion in assets under management.

"If you start collecting the data, we in the minority community already know what you'll see, which is a lot of the largest consultants they themselves have very little diversity in their ranks … and therefore no wonder minority firms are not getting through their processes."

In many asset owner relationships, consultants are the "gatekeepers" to which money managers are selected, said Shelly Heier, Seattle-based president of Verus Advisory Inc.

Ms. Heier in 2020 was a founding member of the Institutional Investing Diversity Cooperative, a collective of institutional plan sponsors and institutional investment consulting firms responsible for the stewardship of more than $43 trillion in assets that aims to promote greater diversity in the asset management industry.

Through its data provider eVestment, a Nasdaq company that provides global institutional investment data, analytics and market intelligence, the IIDC has started asking money manager clients to provide diversity data, but is not having much success.

"The challenge that we've had is that getting the data is hard," Ms. Heier said. "We're still struggling to get asset management firms to disclose this data."

Ms. Heier added that there's "still a lot of fear and a lot of uncertainty by the asset management industry to disclose this data because they don't know how it's going to be used. Naturally, consultants will create a benchmark with it, I think that's the presumption. And we're already looking for measures of what's good vs. bad. I think there's a lot of fear from firms to provide this data."

She did note that money managers are now reaching out to consultants "at a higher pace than in the past to engage one-on-one to discuss their diversity practices. They know we want to hear this information, so they are responding, but with each consulting firm on an individual basis."

The reason why many money managers and other stakeholders don't want to publicly disclose their diversity data is because the numbers are likely bleak, said Robert Raben, Washington-based executive director and founder of the Diverse Asset Managers Initiative, a consortium of financial services professionals, institutional investors, corporate and philanthropic board members and trade associations that aims to boost the number of diverse-owned asset management firms and increase their assets under management.

While there's been a change in consciousness among the number of professionals who recognize that the lack of women and people of color in the industry is a problem, "The majority of white people in leadership in asset management believe that diversity is important, but that it sacrifices returns," Mr. Raben said.

"They essentially believe that women and people of color don't manage money as well as white men. And as long as that remains the dominant belief, then all of the changes that you can see in institutions is around the edges," he added.

A study commissioned by the John S. and James L. Knight Foundation published in December found that only 1.4% of $82.24 trillion in U.S. assets were managed by U.S. investment firms owned by women and/or minorities as of Sept. 30, 2021. That figure has been the same for roughly a decade, with there being only a 0.1% increase in AUM entrusted to diverse-owned asset management firms since 2011.

The data came from 31,763 investment funds managed by 10,008 firms.

"We don't have a supply problem of talented white women and people of color managing money, we have a demand problem," Mr. Raben said.

In July 2021, the Securities and Exchange Commission's Asset Management Advisory Committee approved a series of recommendations for the SEC to consider on diversity and inclusion.

The recommendations include enhanced disclosure in SEC filings by registered investment advisers on the racial diversity of their workforce, officers and owners. Consultants who recommend investment advisers and investment funds also would be subject to enhanced diversity disclosure.

Since then, the SEC has adopted two of the recommendations, including issuing guidance on Oct. 13 stating that investment advisers can consider factors relating to diversity, equity and inclusion when selecting or recommending other investment advisers.

Mr. Garcia, who chaired the committee's Diversity and Inclusion Subcommittee, is disappointed the SEC has only implemented the committee's "least impactful" recommendations and wants to see all the recommendations implemented in short order.

Sen. Robert Menendez, D-N.J., pressed SEC Chairman Gary Gensler on the issue during a Senate Banking Committee hearing in September.

"I appreciate that you're giving some of these recommendations serious attention, but at the same time I must say that I'm disappointed," Mr. Menendez said at the hearings. "In so many other areas the SEC under your leadership has taken bold steps to protect consumers, to strengthen oversight of markets, such as your proposed climate risk disclosure rule. However, when presented with AMAC's non-controversial, unanimous recommendations that would promote diversity in the asset management field, you haven't been as aggressive."

In a joint statement Oct. 13, SEC Commissioners Caroline A. Crenshaw and Jaime Lizárraga said that while the staff guidance is "a step in the right direction, we believe all of the recommendations laid out in the AMAC report deserve our prompt consideration."

Verus' Ms. Heier said it's important for the SEC to approve the other recommendations and thereby improve transparency.

"The SEC's job is fair and transparent markets," she said. "We feel that bringing transparency to an organization's diversity practices can help institutional investors or consultants make better investment decisions. We'd love to see that transparency improve."

On the subject of transparency, the SEC in 2018 and 2020 asked its regulated entities, including money managers, to voluntarily disclose their diversity policies, practices and workforce data. And although more firms responded to the "diversity assessment report" in 2020 in the wake of George Floyd's murder, the SEC still only garnered a 13.5% response rate from the roughly 1,300 regulated entities that received the survey, up from 5% in 2018, according to SEC data.

The SEC asked firms to complete the diversity assessment report again this year June through September, though results have yet to be published.

Mr. Raben has called on SEC commissioners and senior staff to publicly say they will not meet with any SEC-registered entity that has not responded to the agency's diversity assessment report.

"I want the SEC commissioners and senior staff to use their bully pulpit to stop expressing rhetorical interest in diversity but to actually enforce it," he said.

The SEC did not respond to a request for comment.

Several related bills have been introduced in Congress in this area, though none have been signed into law.

Notably, the House in June passed a package of bills aimed at promoting racial and economic justice throughout the financial services sector, including a bill requiring regulated financial firms with more than 100 employees to disclose diversity data.

The Financial Services Racial Equity, Inclusion and Economic Justice Act was approved in a 215-207 vote largely along party lines with all Republicans and three Democrats voting no. The Senate is unlikely to consider the package this year.

A separate bill that would require public college and university endowments to disclose information about their investments with women- and minority-owned asset managers was introduced in the House on Oct. 26.

In June, the Knight Foundation published a report revealing that only 16 of the 50 colleges and universities it surveyed elected to disclose the percentage of endowment assets managed by diverse-owned firms.

"What we have learned is that you can't improve what you're not measuring and keeping track of," said Ashley Zohn, Miami, Fla.-based vice president of learning and impact programs at the Knight Foundation. "I think it's important for endowments to look at their own statistics and we are hopeful they will be transparent with our research in order to try to help the broader field understand where we are as a community."