4 Rules: Wharton’s Professor Keith Weigelt on Investing in the Neighborhoods

Good friends introduce you to good people. This week, we chat with Professor Keith Weigelt, thanks to an introduction from DCIIA’s Dominika Turkcan. Sometimes when you’re walking to work, you see something you can do something about. In this case, it involves money – and intergenerational wealth. Not all of us would start a financial empowerment program if we saw racial wealth inequality, but one man did. Here’s how it’s going.

Professor Weigelt, what got you into this?

I have been a professor at the Wharton School for about 30 years now. My training is in game theory, I apply it mainly to competitive strategy and negotiations, which is what I teach at The Wharton School.

About 10 years ago, I would walk to school through the neighborhoods around Wharton, and it's an urban school surrounded by underserved neighborhoods. And I thought maybe the university should do more for the community, so I thought,” Well, what could I do?” Financial empowerment seemed like a natural subject.

I went to churches in the neighborhood to recruit my first financial empowerment cohort. From that initial cohort, we created an organization, Bridges to Wealth.  Bridges to Wealth has taught financial empowerment to over 7,500 participants, including both high school students and adults. Over 95% of our participants come from historically underserved households.

Our courses are different in two ways: One, we are more focused on showing participants how to invest while controlling risk.  About 80% of our participants would not be in the stock market if they weren't in our program. Over 2,000 participants have opened market accounts with over $400,000 invested in mutual funds.  In our free one-on-one counseling sessions, we have helped participants more efficiently allocate over $4.5 million in retirement funds.

Two, we build in long-term engagement. Most people don't make good financial decisions. To change financial behavior, you have to change an individual’s way of thinking.  This takes time.   We offer long-term support through continuing education.  Some of our participants have been with us for over eight years now.

Let’s talk about the kids. Who are they?

Most of our teaching is in high schools; we are currently in about 15 Philadelphia high schools.  I also have a community service class at Wharton where we train our students in financial empowerment and entrepreneurship, and we send them out to high schools to help the high school instructors teach. More than 150 UPenn undergraduates have mentored over 1,200 Philadelphia high school student participants.

We think wealth is intergenerational, so we felt it was important to get parents involved. We started a parent group at each high school, and that’s how we've built up our adult program.

We also have programs at several middle schools.  In Brooklyn, we partner with the Shawn Carter Foundation for both an adult and student program.  Encouragingly, we've had students who started with us in high school and then joined us as adults.

We asked about savings rates and you shared some of the challenges your program participants face. What are some common challenges?

70% of our participants are women, most of them are single mothers and the head of the household.  Empirically, women are better investors than men, though cultural stereotypes tend to differ.  When you ask women who's a better investor, nine out of ten will say men are. We try to build investing confidence and competence in women by empowering them and explaining why their investing decisions are as good as those of most men.

Another myth we try to dispel is that investing is only for the wealthy.  Our participants’ median salary is about $36,000. Most individuals invest around $20 a week.  We use mutual funds where they can put in as little as $1. We're talking about these small amounts of money that are at the same time life-changing.

While many balances are small, there have been rare instances of individuals, particularly long-term city employees, accumulating millions of dollars in their retirement funds. Unfortunately, many individuals misallocate their resources by keeping investments in stable funds due to a lack of guidance.

We also address the issue of scattered retirement savings resulting from frequent job changes. Many participants have multiple 401(k) accounts, leading to high fees and disorganization. We assist them in consolidating and rolling over these accounts into a single rollover IRA, reducing fees and streamlining their retirement savings. It is essential to emphasize that even a 1% reduction in fees can potentially provide 10 additional years of retirement income. Therefore, we prioritize educating participants about fees and focus on low-cost investments, such as index funds, aligning with our four rules of investing.

Oh! What are your Four Rules of Investing?

We try to simplify investing by telling participants they need to follow four simple rules.  The four rules of investing in our program are designed to help participants be more efficient with their money and achieve greater wealth:

1.       Increase efficiency: We teach individuals how to optimize their spending by creating budgets, making smarter shopping choices, and avoiding unnecessary expenses. By being more efficient with their money, participants can allocate even small amounts towards investments.

2.       Start early: We emphasize the importance of starting investments as soon as possible to take advantage of the power of compounding. The longer the money is invested, the greater the potential for wealth accumulation.

3.       Use low-cost investments: We encourage participants to choose investments with low costs, avoiding trading fees and commissions. By minimizing expenses, more money can be directed towards the actual investments.

4.       Diversify your portfolio: We stress the significance of diversification, spreading investments across different asset classes and industries. Diversification helps manage risk and enhance potential returns.

By following these four rules, participants can improve their financial outcomes and increase their wealth over time. Our program has witnessed the positive impact of these rules on our participant pool, validating their effectiveness.

And you’re getting folks to begin as investors for the first time.

The wealth gap is a major social issue in our country. On average, white households accumulate over 10 times the wealth of Black households.  The wealth gap keeps increasing for a lot of reasons, but one reason is that low wealth families only put their money in banks, while high wealth families have their money in the market.

Our goal was always to reduce the wealth gap by increasing wealth generation in Black households. For us, that includes getting people into the market and helping them understand it for themselves. We focus on index funds, which are very simple, very inexpensive strategies.

Part of changing people's mental model is also having them see themselves as long-term investors. It's a big thing in our group that we're buying when the markets are going down -- we're not selling, we're buying -- because we know the markets are coming back up again.

The social aspect of getting people to change their financial behavior is very important. It's like going to a gym because going to a gym and working out by yourself is difficult, but, when you're with a group, it becomes much easier. It’s the same thing with changing your financial habits: when you see other people taking these actions, you have more confidence they will work for you. Naturally, we’re not just talking about investing. We show people how to manage their credit score, how to manage their debt, etc. We are working on both sides of the net worth equation.

One of the biggest rewards you get from the program is having families come up to you and thank you.  They tell you they have lived in poverty their entire lives and you have finally shown them a path out of it.  People are so appreciative of the information you've given them.

Let’s talk about your intergenerational approach and your thoughts about lasting impact.

Yes, we think of the wealth gap as a family issue.  We wanted to start a parent program so the entire family could talk about the importance of financial empowerment.  And that turned out to be true. Our Parent Program is specifically designed to foster conversations about finances between students and their parents. We’ve had a lot of participants open investing accounts for their children after joining our program. If you understand the mathematics of compounding, their best investment years are during the middle and high school years.

Often, when we go into urban high schools, I show a slide that says, “How many of you believe you'll be worth a million dollars by the time you're 60?” Often, you won’t get anyone raising their hand. But if you understand compounding, it's not that difficult to have a million dollars by the time you're 60 if you start investing when you're in high school. In fact, it's really pretty easy.

What people cannot visualize, they won’t accomplish. Part of our job at B2W is to create and communicate the vision that generating wealth is not that difficult.  “Hey – this is possible. You can get out of poverty. You can really provide for your children if you start investing now.” We have found this to be a very powerful motivator. For example, we have extended families who attend, and over time you can see how they are growing wealth for their entire family. 

Much of what we do is simple education.  It’s not rocket science.

You’ve had some naysayers.

When we started the program, people said, “Oh, yeah, they'll put money in, but then they'll pull it out. Because that's what they do in these savings programs”. Our experience shows otherwise. We've retained 97% of the money invested – it’s still there.

When people see their money growing, they don't take it out. They understand it once they see it growing, and they'll keep contributing to it. That growth in value is a huge motivator. One of our participants was a 45-year-old single mother, who had never invested in the market prior to joining our program in 2015. She started to invest $5 per week in index funds and increased that amount over the years to $20 per week. She also opened investing accounts for her two children. I recently met with her to discuss her investments. When we looked at her account, she has more than doubled her investing dollars. She was overjoyed to see the scale of her returns. She also remarked how she feels more secure about both her financial future and those of her children.

One thing you did that many don’t: you started in churches and by engaging with the community.

Building trust is crucial when you are dealing with people's finances. For example, when I first started recruiting participants, pastors allowed me to speak to their congregations. When you’re in churches, you already have some trust and this helped us recruit early participants. It helps that we’re not trying to sell anything and we don’t charge them a cent. We have no products. They see us as neutral party who is really trying to help them.

We find they believe in us more than they do banks and other financial institutions. They have to get over this sort of hump and learn to work with financial institutions with the benefit of some help and experience.

You are largely in Philadelphia – and you’ve got programs and supporters further afield. Tell us more for the interested readers.

We are always seeking new sources of funding and support for various aspects of our programming. Currently, we have exciting partnerships underway with the Shawn Carter Foundation and Toyota, as we work on expanding the program nationally. We are also working closely with HBCUs to launch a pilot program focused on teaching students about financial empowerment and entrepreneurship. The plan is to gradually expand the program through HBCUs enabling students to share their knowledge within their communities.

In your view, what might be essential for those seeking inclusive financial services and broader savings prospects?

I must say the financial industry has a poor record, in terms of dealing with diversity and inclusion.  Part of the reason we have this wealth gap that keeps widening is because of the actions of the financial service companies.

For example, most financial service companies have some financial empowerment program, which they fund.  It is educational, but the companies are also trying to sell their products.  In a perfect world, they might pool this money through an organization like FINRA who would contract with neutral third parties to teach financial empowerment without pushing company products.  I think it would be much more effective and reach a lot more individuals within the diverse community.

The message we generally receive in the press and on television is that the stock market is for wealthy people.  This is the conventional wisdom.  But most people do not get wealthy and then invest in the market, they are wealthy because they invest in the market.  So, conventional wisdom is backwards here and that's one of the ways we try to change people's financial behavior. The stock market is not just for wealthy people. They got wealthy because they're in the stock market. You can start very small and build your wealth over time.  But you have to start.

Beginning tax advantaged accounts, like a Roth account, for your children is a practice that has been used by wealthy households for a long time. When we tell people “You can do this too”, it's often a revelation for them. There are numerous advantages to setting up a Roth account for your child instead of opting for a 529 savings plan, but many people are unaware of this option because they have never been informed about it. When they discover the possibilities, they realize that they can take advantage of these strategies just like the wealthy do. It's not a complex concept; it's simply providing people with information and opportunities. By offering them support through our social group, we can help individuals access this knowledge and make the most of it.

What haven’t we touched on today?

We have a program in partnership with the Philadelphia District Attorney's Office that focuses on diversion for juvenile offenders, particularly those convicted of car theft. Instead of going to jail, they have the opportunity to participate in our financial empowerment program. This initiative has been highly successful, with positive feedback from both the students and the DAO’s office.

Addressing the needs of returning citizens is crucial. We emphasize entrepreneurship and help them understand the importance of investing, even during their time in prison. One idea we have tried to advocate for is to let those serving long sentences to invest their earnings in mutual funds or other investment options. This way, when they are released after 10 or 15 years, they have some resources to start their lives anew. Many returning citizens come out with no financial resources, and this is a way they can put themselves on better footing.

Keith and Dominika – thank you for sharing your experience with this work in an important space. Information in action, making a difference – we couldn’t ask for more.

Want more? You can connect with Prof. Weigelt directly by email.

Professor Keith W. Weigelt is a renowned management expert at the Wharton School, University of Pennsylvania, where he holds the Marks-Darivoff Family Professorship. With a background in economics and decision sciences, he specializes in strategic management, negotiations, game theory, and behavioral decision-making. Throughout his impressive career, Professor Weigelt has made significant contributions to the field through his impactful research and exceptional teaching. His studies delve into decision-making and competitive strategy, examining the complex dynamics between firms, markets, and individuals. He is widely recognized as a leading scholar, with his work published in top-tier academic journals. His nonprofit, Bridges to Wealth, is  part of Wharton’s Coalition for Equity and Opportunity in partnership with the Sean Carter Foundation and Toyota.

This piece was featured in the July 13, 2023, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here