Our Diversity Problem

In 23 years as a financial advisor with Merrill Lynch, George McReynolds says he has never worked with more than three African American brokers at one time. He says the firm has publicly belittled blacks, himself included, in meetings attended by brokers in his Nashville, Tenn., branch. In one meeting, he says, a human resources representative announced that there was a disproportionately large number of African Americans in the bottom quintile of brokers at Merrill Lynch — a remark that McReynolds says was intended to emphasize that blacks were incapable of competing as brokers.

These allegations are included in a class-action suit that McReynolds brought in November on behalf of over 60 African American brokers at the firm. Merrill, while declining to comment on the specifics of the suit, issued the following comment from Robert McCann, president of the firm's Global Private Client Group: “We understand that our firm, and the industry, must do a better job of recruiting, developing and retaining diverse employees. We are encouraged by plaintiffs' counsels' desire to discuss this with Merrill Lynch, and we anticipate talking with them in the near future.” Lawyers for both sides are currently negotiating, and on March 13 both sides are scheduled to update the court about the progress of the case.

At UBS Financial Services, Sylvester Fleming and Freddie Cook are two of three lead plaintiffs in a similar class action (they both are now at H.D. Vest in Bowie, Md.). They say their branch office in Largo, Md., was opened as a segregated office with a majority of African American advisors serving an African American community, and was shut down three years later because UBS did not provide basic support for it to be successful. One former UBS employee recalls jokes made about the Largo branch by regional and division managers, who referred to it as the “diversity office” and consistently belittled the branch's capabilities. In addition to hiring a highly inexperienced operations manager and sales manager, UBS also employed the branch's BOM as a producing manager — a manager who is responsible for the sales activities of the entire office as well as establishing his own book of business. As a result, the newly recruited African American advisors were left with inexperienced or unavailable managers, the plaintiffs say. They allege that UBS failed to follow through with their minority recruiting strategy by racially segregating reps. Cook and Fleming say they were treated as “second-class advisors” as a result of UBS's systemic discrimination and eventually felt compelled to resign. UBS declined comment on the case.

In Good Faith

For the industry's part, firms want to know what else they can do. The industry has offered an increasing number of diversity initiatives over the years. According to the SIA, all of its large member firms have diversity training included in their employee orientation programs. Morgan Stanley, Wachovia, Merrill Lynch and UBS have diversity plans that involve recruiting from historically black and Latino colleges; they also tap ethnic associations and women's organizations for recruits. Internally, the companies all sponsor events and training to raise awareness and teach the importance of tolerance. Merrill Lynch, for example, recently announced that it will now include diversity hiring to assess its branch managers' annual performance, which affects their compensation.

The push to recruit minorities is stronger than ever, especially at the retail brokerage level, recruiters say. One veteran recruiter, who is contracted by some large brokerages, says the industry truly is doing everything it can to diversify its ranks. “Stan O'Neal has had us looking for minorities for years,” he says. “Even before he got there, Merrill was very committed to diversity. But you can't get minorities interested in this profession.” A minority who went to an Ivy League school “can get any job he wants. Why would he take a job in this industry with its heavy sales pressure when he can go to an Oracle or a Procter & Gamble in a nonsales role?” Even minorities from second-tier schools don't seem to be interested in the retail brokerage business. Then he adds, “If I can find a black broker, I can get him a maximum deal; no, I can get him a double maximum deal.”

So, what gives? Is there rampant discrimination on Wall Street or is it just a few bad apples giving the industry a bad name? Or is the intense sales culture of Wall Street hardwired to produce and attract crass, bigoted people who have to show internal fortitude by crudely insulting others? Or is it that individuals take small, inconsequential comments and blow them up into an inflammatory lawsuit to make a little dosh off of companies that generate lots of cash?

Alas, the argument is destined to continue, with people agreeing with whatever side they are presupposed to believe. More likely, it might be impossible to draw a broad conclusion except on a case-by-case basis. For example, between 1995 and 2005, there were over 3,000 claims made to the Equal Employment Opportunities Commission alleging violation of Title VII of the Civil Rights Act of 1964 in the securities industry. Fewer than half of the total allegations, 43 percent, ended in at least one charge made against the firms. The industry can crow about that, but even that number might be considered high, and, anyway, all agree that most cases never make it to the EEOC in the first place, because the parties usually settle them privately.

The Trend Continues?

And yet complaints, even salacious suits, continue to pop up — up and down the Street, from trading operations to investment banking. Theodore Eppenstein, a securities lawyer at Eppenstein & Eppenstein in New York, says he gets the same amount of calls from people with discrimination claims as he did five years ago. “Just recently, I had a woman call saying she was fired from a major firm because she wouldn't have sex with her boss. I don't see any change, and these claims are pretty consistent,” Eppenstein says.

The industry's efforts to hire — and promote — women and minorities have not produced impressive results. The Department of Labor says that women made up 29 percent of securities, commodities and financial services sales agents in 2005. By comparison, women comprise 46 percent of all U.S. workers. African Americans comprise 6 percent of the industry and 10 percent of the U.S. work force. Hispanics and Latinos make up 7.6 percent of the securities workforce and 13 percent of the national workforce. By contrast, Asians have done far better — they represent 5 percent of the securities workforce, higher than their 4 percent slice of the workforce. And, according to the Labor Dept. statistics, which are derived from monthly household surveys that include information on the employment and unemployment experience of the nation's population — classified several ways including race — the percentage of African American securities brokers has plunged from 2000 when the group represented 9 percent of the industry. But it begs the question: What should that percentage of minority employment be?

David Thomas, a professor at Harvard Business School, says retail banks have made significant progress in accommodating a diverse workforce. He says the major challenge is in the investment brokerage industry. “If you look at any of the top 20 brokerage houses, they have a pretty poor record in diversity. This portion of the financial services lags about 20 years behind the rest of corporate America.” In his numerous studies that examine the effects of a diverse employee base, Thomas finds that diversity for the sake of diversity has no impact. “In the top-tiered financial firms, you see a revolving door of minority brokers. They have a problem retaining them, and when people don't feel comfortable about their differences they leave. It's a leaky bucket and firms are just barely replacing minorities as fast as they lose them.” Sales teams within firms are self-organized without the help of management, and minorities are less likely to be chosen, he says. Managers have to be savvy about differences and act as matchmakers for minorities and women when teams are being formed.

One African American broker, who worked for Morgan Stanley for three years, agrees with Thomas about the lack of informal mentoring for minorities. “A lot of the issues that we are seeing with lack of diversity are not because people don't have desire to hire minority brokers, but that the culture in the firms is not conducive to minorities succeeding. The natural tendencies people have that draws them to other people like them is harder on minorities because they don't look like most of the industry.”

Linda Friedman, a partner at Stowell & Friedman in Chicago, says quite simply, “The industry has failed.” Friedman has represented plaintiffs in discrimination cases, including Hydie Sumner, who was awarded more than $2 million for gender discrimination in 2004. “You could point to any one of these firms and criticize them on the number of women and minorities they have, but the criticism is better aimed at the industry as a whole,” says Friedman.

Yet even Friedman gives the firms points for trying. “Ten years ago I would have said Wall Street is behind 30 years. Today I say it is 10 years behind,” Friedman says. “Some might call that progress, but it's not fast enough.” She says firms are much more cooperative about resolving claims today than ever before, and they realize they are just as vulnerable as the rest of corporate America to discrimination suits. “They used to stick their fingers in our faces and tell us there is no problem with the way things are. They had the support of the NASD and NYSE, and knew getting a jury to hear our cases was a long shot,” she says. If there was no fear back then, there is certainly some today.

In Search Of A Rainbow

Not only are companies more responsive to complaints, but they are also aggressive about recruiting minorities and developing relationships with diverse professional organizations, according to Michele Holton, chairwoman of the SIA's Diversity Committee and head of Edward Jones' diversity efforts, which assists its member firms in developing diversity initiatives. “They have worked hard for the last number of years and we have seen a dramatic growth in the number of programs that have been developed,” she says.

Lanta Evans-Motte, president of the Association of African American Financial Advisors in Bethesda, Md., says the most common forms of discrimination her members come across are institutional. “Some of the biggest detriments include where the company recruits from, how they hire and, once you get in, how accounts get assigned and reallocated. In most organizations, the people in power give assignments to those they know, like and love,” she says.

Northwestern Mutual, the Milwaukee-based firm with over 7,000 reps, is making efforts to change its recruiting habits. The firm started by targeting women reps, but, about two years ago, expanded the program to bring in Hispanics and other minorities. The decision was based partly on business concerns. Karen Lindsey-Lloyd, director of Field Diversity at Northwestern Mutual, says, “We see this as an opportunity to increase the number of minority reps and clients. The buying power of African Americans and Hispanics is growing, and they are starting smaller businesses at a faster rate than ever before.” According to the Selig Center for Economic Growth at the University of Georgia, the buying power of blacks will increase by 27 percent by 2009, and Hispanic buying power will increase by 29 percent.

To fill its training classes with blacks and Latinos, Northwestern recruiters visit historically black and Hispanic colleges across the country. Representatives from the firm meet college advisors and discuss the details of the industry, which are then passed onto students. Lloyd says diversity is not a problem to be solved but rather an opportunity to be realized.

Edward Jones also believes the minority pool is a huge business opportunity. It also establishes relationships with black and Hispanic colleges like Hampton University in Virginia, and gender and minority focused organizations like the Hispanic Alliance for Career Enhancement and the National Association of Black Accountants. Price Woodward, recruiting principal at Edward Jones, acknowledges that the lack of minorities and women in the sales force is a marketing problem. “The brokerage sales force is white dominated,” he says. “The challenge that Edward Jones faces is that probably 55 percent of brokers are referred to us by existing brokers. Most people tend to refer people that they know and hang out with, people they play golf with and those people end up looking like them. But that doesn't help you develop a diverse workforce.” In response, the company developed its Community Based Organization programs that educate its sales force on how to recruit people that are not like them. The CBOs are just one of the diversity strategies the firm has in place, but it is the one that puts recruiting into the hands of actual brokers.

The point is to have the right reps in place to compete for clients. “It's pretty well documented that investors want to work with people who are like them,” says Woodward. He points to a Taiwanese-born broker in Vancouver, B.C., who has built a successful practice among that city's 35 percent Asian population. “I don't think as a white American male that I have a good opportunity to go in and succeed the same way. It's partly human nature to do things and business with people like ourselves.”

Furthermore, some recruiters believe you can't get into minority marketplaces without minorities. But others believe the idea of black advisors for black investors, Hispanic advisors for Hispanic investors defeats the purpose of diversity, and is actually racist. The suit filed by Fleming and Cook claims the discrimination against blacks reflects UBS's stereotype that black Americans can only sell financial products to other blacks and that white investors will not trust blacks to invest their money wisely. According to the suit, as of March 2002, just 1.2 percent of the firm's 8,615 brokers were black and, the plaintiffs say, there has been only one black branch office manager in the system since that time. In response, UBS supplied the following statement: “UBS believes a diverse workplace is a critical component to success. UBS promotes a nondiscriminatory work environment in which the rights of all employees are respected.”

Merrill Lynch, which has had its fair share of discrimination claims, is facing yet another one. In 1998, Merrill settled with more than 900 women who sued for sexual discrimination. The firm agreed to pay over $100 million to the women. Once again, Friedman's firm is hitting Merrill with a discrimination case, this time representing a class of African American brokers who say the firm engages in systemic racial discrimination and retaliation against blacks as well as unequal pay practices and opportunities. This includes McReynolds' claims of discrimination in his Nashville branch.

Still Friedman and Thomas both acknowledge that the industry has changed its attitude in addressing the problem. “There are some good people who care about these issues and want to change the industry, but the message is not reaching down beyond the initiatives. Hopefully, in five years Wall Street won't be behind at all,” Friedman says.

The Numbers According to the Department of Labor