Diversifying investment firms’ supply chains poses challenges

Despite long odds, Kristin Hull launched the Nia Impact Solutions Fund in late May. The fund is made up of publicly held companies that deliver robust returns in no small part because they benefit women and girls as leaders and manag ers or via products and services.

Few women-owned funds manage to contract with the likes of Charles Schwab & Co., JPMorgan Chase & Co., Fidelity Investments and other major firms that offer the Nia portfolio. Women-owned asset management firms capture a minuscule 0.57% of the money spent by the largest investment firms on asset management subcontracting, according to data compiled by the House Committee on Financial Services.

Minority-owned firms win even less: 0.50% of the asset management subcontracting spend.

“People don’t even know they have a chance to invest in women,” said Hull, who also directs a community investment portfolio in Oakland, California, where she is based. “Nia makes sense to women and people of color because it lets them invest in the economy that works for them. Now, we’re part of that supply chain of retirement fund options.”

Large investment firms make big diversity promises but overall, fail to convert those promises to structured spending with women and minority-owned firms. Intractable cultural barriers, sometimes masquerading as fiscal responsibility, are largely to blame, say firms, funds and advocates.

“The first thing is [to] stop thinking of women as beneficiaries. We are actors.”

Patience Marime-Ball, CEO, Women of the World Endowment

Now, progress appears to be taking root, albeit under escalating pressure from lawmakers, investors and business partners. Advocates assert that the business case for diversified asset management applies directly to today’s economic challenges, which means that managers who ignore diverse contractors and consultants increase risk and potentially undermine performance — invalidating the fiduciary argument against diversity. Firms, funds and advocates say that the investment industry has a rare opportunity to blend proven practices honed by traditional supplier diversity operations with metrics and strategies uniquely suited to investment.

“If we change who sits in asset allocation, all kinds of things downstream will also change. The first thing is [to] stop thinking of women as beneficiaries. We are actors. We bring solutions,” said Patience Marime-Ball, who started her investing career in 1996 with the International Finance Corp., a division of the World Bank, and subsequently started and now runs the Women of the World Endowment. She co-authored the just-published book, “The XX Edge,” about translating women’s strengths to competitive advantage.

“Traditional supplier diversity is grounded in who do we want to benefit rather than who do we want making decisions,” she said.

NOT EXACTLY TOP DOWN

It’s a cliché that diversity efforts must be “led from the top,” meaning that the C-suite sets the tone and priorities for diversity of all sorts, from the board to interns.

At investment companies, asset managers appear immune to corporate directives.

Last December’s report from the House Committee on Financial Services spells it out: The committee’s report was based on data submitted by 31 investment firms, each managing $400 billion or more in assets. Not all the firms submitted all the requested data.

Every firm had a formal diversity plan in place, and two-thirds had supplier diversity programs. The plans and programs did not translate to a substantial amount of money spent with women and minority-owned investment-related professional firms.

Average Percentage of Money Spent on Procurement or Suppliers with Women-Owned or Minority-Owned Firms in 2020

Source: House Financial Services Committee staff analysis of investment firm data

Collectively, the big firms spent 11.63% of their nonprofessional procurement dollars with women-owned firms and 1.24% with minority-owned firms. Human resources managers spent 7.73% of their contracting spend with women-owned firms and 17.13% with minority-owned firms.

But diversity spend nearly disappeared when it came to asset management subcontracting, which bestowed less than a single percent with either women-owned or minority-owned firms. Underwriting was uneven, with women-owned firms landing 0.30% of the contracted dollars and minority-owned firms, 9.47%.

“You’re telling me we cannot use a diverse manager program to source 10% of the capital to women and diverse managers, but we can source 100% of the capital to white males. Where is the fiduciary responsibility to a balanced portfolio and prudent risk?” said Robert L. Greene, president and CEO of the National Association of Investment Companies, which represents diverse-owned private equity firms and hedge funds. “Isn’t it an outsized risk to source all your money to one group of people instead of considering the very best of others, to whom you do not source? If you don’t consider diverse managers, you are in breach of responsibility, because they perform as well or better than the norm.”

TRADITIONAL PROGRAMS

Traditionally, supplier diversity is tracked by corporate procurement departments, whose officials find qualified women and minority-owned companies for routine spending on landscaping, catering, staffing and commodity goods, said Constance Jones, senior director of field services with the National Minority Supplier Development Council. And traditionally, managers of departments that hire professional services — such as marketing and legal — take the lead in finding, qualifying and hiring such services, with an assist from procurement, Jones said.

Efforts to Promote Diverse Suppliers

Source: House Financial Services Committee staff analysis of investment firm data

Contracts with diverse professional services firms might or might not end up in procurement officers’ tallies of diverse suppliers, making it hard to know how much money any company might actually spend, enterprise-wide, with all types of diverse firms.

In broad terms, more financial services spending is flowing from corporations to minority-owned businesses, according to the NMSDC, which aggregates data from its members. In 2021, finance and insurance was the seventh-largest corporate spending category tracked by the NMSDC, with a collective $9.3 billion flowing from companies in that category to minority-owned firms. That’s up from 2019, when finance and insurance was the ninth-largest category, accounting for a collective $4.4 billion in collective spend.

Parallel data for women-owned firms are not available from the NMSDC’s corollary, the Women’s Business Enterprise National Council.

“It’s easier to hire minority security firms — guns, gates and guards — and resellers of office supplies. Supplier diversity is replete with that,” NAIC’s Greene said. “But investment diversity — no chief procurement officer has insight into the capital investment pipeline.”

That’s why advocates say finance departments get away with excepting their operations from supplier diversity goals, citing the particular qualifications and requirements they must apply to potential outside contractors, including experience, scale (especially, assets under management), certifications, licenses and other criteria.

INSIDIOUS RESISTANCE

Technical qualifications intersect with embedded culture to perpetuate resistance, say firms and advocates.

The clubby nature of the investment industry has subtly undermined well-intentioned firms from even exploring newer, smaller and diverse-managed or owned firms and funds, said Greene. “The C-suite says, ‘We want you to invest some of the pension money in minority-owned companies.’ Well, the chief financial officer says, ‘I don’t know of any, and if I don’t know of them, they must not be any good.’”

An artificially stringent application of fiduciary responsibility has also been used as a defense against investigating diverse-owned firms, which tend to be younger, smaller and with an emerging track record, Greene said, rattling off a greatest-hits list of excuses: “‘It’s not within my fiduciary responsibility.’ That has been invoked over and over again as a reason not to invest. ‘Don’t give me any quotas.’ ‘We shouldn’t be engaged in any set-asides.’ ‘As trustees, we should be investing for the purposes of gain.’” 

Resistance rings hollow as evidence mounts that greater diversity of investment management and, subsequently, strategy, better achieves long-term financial goals, Greene said.

The argument that diverse sourcing within money management is at odds with top returns stems from the outdated zero-sum perspective, said Greene and others.

RETOOLING DIVERSITY

“If what we want from diversity is to fuel growth of differentiated solutions to problems we are trying to solve, it’s really about hunting for solution drivers and actors in whatever situation you want to address,” Marime-Ball said. “You want innovation in your toolbox.”

Change won’t happen on its own, said Jason Tyler, executive vice president and chief financial officer at Northern Trust, which is why the bank purposefully replaced its prior definition of supplier diversity with a holistic framework.

In preparation for a $1 billion debt issuance announced in May, Northern Trust examined five candidate investment banks for diversity in their leadership, engagement teams, philanthropy and suppliers. The bank applies the same prism to all business partners, regardless of ownership, to detect how diverse staff, perspectives and values align.

“It’s quantitative, and it’s fact-based and broader than ownership of the firm,” said Tyler. “Ownership matters but what also matters is further down in the organization.”

Sometimes, that means rethinking the bank’s perception of risk to hire or invest in a firm or fund that is short on experience but long on capability, he added.

The Financial Services Committee report noted that Northern Trust was in the lead with professional services contracting with women and minority-owned firms, with 72% of its consulting spending with women-owned businesses and 50.8% of its legal spending with minority-owned firms.

The industry has a chance to convert one of its strongest elements of culture to a powerful driver for diverse startups, said Emlen Miles-Mattingly, CEO and founder of Gen Next Wealth. When he and Dasarte Yarnway had the germ of a winning concept for a new type of network for under-represented advisers, they worked their networks, as investment professionals do.

“We talked directly to the CEOs because of relationships in the industry. If we didn’t have a relationship, we used social media and we found out who to contact or network with,” said the co-founder of The Onyx Advisor Network, which launched in May. Expanding opportunities for diverse funds and firms is synonymous with genuine inclusion in ongoing networks and relationships, he said.

Large firms can draw motivation from their outsized power to catalyze small firms’ growth, pointed out Michael Pugh, president and CEO of Carver Federal Savings Bank, one of the largest Black-operated banks in the country.

That’s a role in line with the investment culture and due diligence, he said, especially as stable contracts help small firms qualify for other types of capital. “And money managers can highlight small suppliers as part of the story of how they do their work,” Pugh said

PROCUREMENT PAYS OFF

Investment operations can learn from the success that legal, marketing and IT have had in blending technical requirements with a thoughtful search for diverse firms, said Pamela Prince-Eason, CEO of the Women’s Business Enterprise National Council, which certifies women-owned businesses.

“Money managers feel strongly that their understanding of what it takes to find the right investments is something that a procurement person doesn’t have, and in a lot of cases, I agree. It has to be a practice-based thing,” she said.

Applying due diligence to diversity is one way to go, Prince-Eason said: “At least once a year, money managers need to look at how they might find different suppliers. The only way to change things is to be deliberate.”

Pressure for change continued in March when the House Financial Services Committee directed large property, casualty and life insurance companies to deliver the same type of data that it released in December  2021 about major investment firms, and in 2020 about major banks.

Substantial change will only happen from the top down and the bottom up, as the priorities of corporate leaders and individual investors meet in the middle, where portfolios are crafted and rebalanced, said Hull, Greene and others.

“If we only do what we’ve done in the past,” said Greene, “we’ll only get change in the margins.”

Related Topics: Carver Federal Savings Bank, Northern Trust, Onyx Advisor Network