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Diversity, Equity & Inclusion Insights
COVID Exacerbates Financial Planning Issues in Underserved Communities
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These underlying causes are complex, but can be partially explained by the prevalence of high-risk factors like obesity, respiratory diseases, and diabetes, as well as economic factors such as lower rates of health insurance and inadequate hospital resources.
A COVID-19 illness can be significant and prolonged, causing financial hardship to families due to loss of the income usually earned by the patient while they’re ill, permanent loss of income if they pass away, and incurred debt from medical costs related to any treatment. In addition, while the long-term health effects of COVID aren’t yet fully known, the Mayo Clinic reports that the permanent organ damage suffered by many COVID patients increases the likelihood of developing significant illnesses in the future, such as heart failure or other heart complications, pneumonia and long-term breathing problems, stroke, seizure, Parkinson's disease, Alzheimer's disease, and a higher probability of developing dangerous blood clots.
Financial advisors should be mindful of the impact of the effects of the pandemic, particularly to provide strategies to protect lower-income families against financial ruin. Advisors, who are well aware of the risks of failing to plan, should be mindful that those risks are more pronounced at present.
The potential for financial insecurity is staggering: More than half of adults under age 64 don’t have a will. In lower-income communities, the numbers are even lower, with only 55 percent of families with household income $75,000 or greater having a will, and only 31 percent with household income under $30,000 having a will. For minority populations, only 28 percent of non-white adults have wills compared to 51 percent of white adults.
These statistics are more cause for concern among low-income populations, who, without a financial plan, are at higher risk of negative financial impact from the long-term illness or death of an income earner and related medical expenses.
Financial planning does not need to be a costly endeavor. The following are some low-cost planning strategies that can be implemented to protect clients. If your client is also a member of a minority population, cultural sensitivity, including multi-lingual offerings, will also be necessary to integrate into an advisory plan.
Healthcare planning. If your clients are young and healthy, they should explore options for obtaining health insurance. In addition, the long-term health impacts of COVID-19 bring long-term care planning to the forefront. Long-term care insurance adds another layer of protection to protect against overwhelming debt due to costs from a prolonged illness. Such insurance covers costs that may not otherwise be covered by health insurance, such as nursing home costs, custodial care, and care for assistance with daily activities like bathing and getting dressed.
In addition to insurance coverage, clients need to plan for incapacity. This includes formalizing a client’s wishes about their medical care in the event they are incapable of making those decisions. In the most severe COVID cases, the patient is put on a respirator or ventilator and may be sedated or unable to speak, in which case a predetermined plan of action would be critical. A living will, also known as an advance medical directive, is a document that details the client’s wishes about treatment options for end-of-life care. Similarly, a Physician’s Order for Life Sustaining Treatment, or POLST, is a document created between a patient and physician discussing end of life treatment options. A springing durable power of attorney for health care appoints an individual to make healthcare decisions for the patient during the time when they may be incapacitated. Lastly, a Do Not Resuscitate Order (a DNR) advises emergency healthcare providers to avoid resuscitative measures. An attorney must be consulted for preparation of the will and powers of attorney.
Income protection. Income protection measures should be taken to protect against a long-term illness or death of an income earner. The loss of income is particularly impactful in lower income communities for a couple of reasons. Research by the NY Fed shows that higher density households have markedly higher rates of COVID-19 cases. Moreover, where the number of individuals living in each household is higher, more individuals may rely on the income earners, multiplying the financial loss of one death.
Disability insurance. Short- and long-term disability insurance can protect against some loss of income if a person suffers a long-term illness from COVID. Disability insurance is particularly important for single-parent homes or one-income homes.
Life insurance. A whole life insurance policy or a term policy can provide financial security if the income-earner passes away from COVID. There are several planning goals that can be accomplished with a death benefit, including:
- A term policy can provide a “safety blanket” while an income-earner may be exposed to COVID, particularly for essential workers and healthcare workers.
- A term policy can replace lost income for an income-earner who is caring for minors for the time period until they reach the age of majority or graduate college and can gain employment.
- A term or whole life policy can provide funds to care for dependents in the event that the primary caretaker passes away.
- A term or whole life policy can provide funds to satisfy the debts of the decedent, including funeral costs and debt related to the decedent’s last illness, which may be prolonged and significant due to COVID,
Estate planning for property. A low-income individual may not have significant assets to pass wealth, but that doesn’t mean estate planning for property is irrelevant. A will can protect the decedent’s assets against estranged family members who may have a legal claim under the state’s intestacy laws. In addition, if the client has minor children or dependents, a will can name a guardian and establish a financial foundation to provide care for the children/dependents. The primary residence is typically the most significant assets that individuals own, and in fact, 54 percent of wealth owned by Black households is made up of home equity, so planning for the transfer of the home is crucial. If the client is not married but has a partner they would like to provide for, a will can provide assets for the surviving partner or ensure they can remain in the home for the remainder of their life or for a term of years, after which the home can pass to the client’s children or other family members. Unmarried partners would otherwise be ignored under the state’s intestacy laws. Lastly, a power of attorney for property can be created so that another individual can access bank accounts to pay expenses in the event that the COVID patient is incapacitated.
There is a cost to providing this security, which can be an obstacle for lower-income families to seek professional advice. Even for small estates, an estate planning attorney’s services can run between $1,000 to $5,000. However, many states offer pro-bono community services through legal aid or state bar associations.
Some community organizations offer services to help advance financial education and access to resources relating to financial planning – as the AKArama Foundation did recently with a free webinar targeted to help Black people in the context of the pandemic threats. Partnering with communicating organizations could help advisors develop stronger relationships and establish trust with individuals new to financial planning.
Diversity, Equity & Inclusion Insights
Small Business Advisory Services in Diverse, Underserved Communities
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The Centrality of Small Businesses in the U.S. Economy
According to the Small Business Administration’s 2020 Small Business Profile, there are 31.7 million small businesses in the United States, including six million from communities of color. The small business sector has a significant impact on the economy, comprising 99.9% of all business and employing 60 million people. Small businesses' survival and growth is vital to the growth and sustainability of the U.S. economy.
COVID’s Impact on Small Businesses and Especially Minority Owned Firms
Additionally, McKinsey Consulting reports that Black and minority owned business have a much higher failure rate than the national average, mostly due to undercapitalization of the business. A working paper from Fairlie (2020) reports recent data from the National Bureau of Economic Research indicating small businesses have been hard hit by the pandemic. Active business operations dropped by 22% during a two-month period between February and April 2020, with black-owned businesses down 41%. Other minorities were also harder hit than the average. Data from the New York Federal Reserve paints a similar picture. The Small Business Credit Survey found minority business owners hit much harder than average. Overall results indicated 57% of firms characterized their financial condition as “fair” or “poor”. Unfortunately, this figure jumped to 79% for Asian-owned firms, 77% for Black-owned firms, and 66% for Latin-owned firms.
While we don’t yet have data on the connection between small business survival rates and access to a personal financial planner, one area of further study should be whether financial advisory relationships have improved outcomes for small business owners. Moreover, studying the characteristics of those relationships, such as the length of advisory services, whether services began prior to small business formation, and how comprehensive the advisory work was could provide qualitative research details to facilitate small business sustainability.
Financial Planning is Important for Entrepreneurs and Small Business Owners
Entrepreneurs have unique qualities that set them apart, whether it's family relationships, personal and business goals, economic and noneconomic goals, and behaviors and attitudes. Providing financial planning services for entrepreneurs and small business owners can be both challenging and intellectually fascinating at the same time. The intertwined business management, personal relationships and firm ownership issues and goals create financial planning complexities, rendering the advice of an advisor particularly valuable. Indeed, researchers that study this topic found that women entrepreneurs' access to capital was predicated more on the quality of their personal finances than the assets of the business.
Central to theirs and other findings was that a significant contributing factor in the failure of entrepreneurs was the inadequacy of their personal capital, personal liquidity shortfalls, and poor personal tax planning. This finding could lead small business lenders and those who serve women entrepreneurs to include personal financial planning services as part of the portfolio.
Small Business Advisory Services as a New Market Opportunity
The guiding assumption in financial planning and counseling is that those who use the help of a financial professional to build and implement a goals-based plan will ultimately achieve success. Most would agree that's best done by working with a financial professional that understands the business and personal goals and objectives of the individual or entrepreneur. Many financial planners are looking for ways to build their client base, and opportunities to market to potential client segments that they feel might be lucrative.
From a business standpoint, entrepreneurs (family and non-family businesses, and solo operators) can be an important source of business for planners, mostly due to their complex situations. Most practitioners and researchers point to the intertwining nature of an entrepreneur’s personal goals, such as retirement and estate planning, coupled with business goals such as firm leadership and business development. Many financial planners are also looking for ways to contribute to societal value. Advising underserved individuals and communities would advance these dual goals.
What You Can Do Next
- Keep in mind that many small businesses, especially minority owned, are struggling right now just to keep their doors open. If that’s the case, find some businesses in your community and help them by being a cash-flow thought partner to help them stay afloat until things improve. Don’t underestimate your abilities as a business person. You may not know their business, but being available to help them make good decisions could open new doors and pivot opportunities. As the economy recovers, long-term planning services can be integrated into the relationship.
- Most communities have non-profit organizations that serve small businesses and entrepreneurs, such as the Small Business Development Centers, sponsored by the Small Business Administration. Some specialize in underserved groups. Establish relationships with these associations to offer financial planning or education services to their members. Services could include group-based education seminars about the importance of financial planning in their business. Some accept volunteers to serve as mentors (for example, Pacific Community Ventures). Small steps such as establishing an emergency fund, or finding a good CPA to help with taxes can reap big rewards.
- Consider beginning with Pro Bono services, and once the business recovers and starts to grow again, then slowly develop a trust-based long-term relationship that enables mutual financial benefits.
Conclusion
Small business survival and growth are vital to the sustainability of the economy. Improving access to personal financial planners could be an important factor in the mission to help close the racial and gender wealth gap. Advisors can play a vital role, and simultaneously develop a new market at the same time.