Increasing diversity has been widely touted as a way to improve decision making. Aware of the purported benefits, many investment firms have put more emphasis on diversity in recruitment. But experts say these efforts may not produce the desired results because diversity is more complex than many people recognize.

Moreover, small or mid-sized wealth management firms may face practical challenges that differ from those of larger firms or other sectors of the industry. For leaders of smaller firms, trying to increase diversity may require alternative approaches. But regardless of size, how can firms gain the benefits of diversity?

Researchers use formal categories to describe diversity, but the concept is intuitive. “Diversity is pretty simple,” says Margaret Neale, the Adams Distinguished Professor of Management at Stanford Graduate School of Business. “It’s just about differences, and those differences come in a variety of ways.”

Race and gender are examples of what researchers describe as social or demographic categories; other categories include age, ethnicity, religion, and sexual orientation. These are visible, identifiable characteristics (some more identifiable than others, of course), and we frequently define diversity by these categories. For example, most sources who responded for this article highlighted their efforts to hire women and minorities.

But demographic categories are only one way to diversify, and they might not be the most effective way to capture diversity’s benefits. Another approach focuses on what’s called cognitive or informational diversity. Here, the emphasis is on assembling teams whose members differ from each other in several key internal attributes, such as the information or expertise they have accumulated, their functional knowledge, and how they form mental models when working on problems. Broadly speaking, the goal of cognitive diversity is to improve teams’ decision making by combining members who bring different perspectives and approaches to the work.

To understand how different types of diversity might work in practice, consider a thought experiment. A firm’s leaders are aware of the reported business benefits of diversity, so they decide to focus on diversity in their recruiting efforts. One year later, they judge the hiring plan to be a success. The firm’s professional staff now includes two more women (one of whom is African-American) and a young Asian-American man. Each earned an MBA in finance from the top-ranked local business school and had prior wealth management experience. Two of them are CFA ^® charterholders; the third has passed Levels I and II of the CFA Program and is working on Level III. The new hires have meshed seamlessly with their respective teams and have been excellent additions to the firm. But will the firm’s diversity efforts pay off in terms of improved decision making and innovation in the teams?

In this example, the firm’s focus on hiring across social categories doesn’t automatically increase cognitive diversity. It’s true the new staff members’ perspectives have been shaped by their life experiences and those differences can lead to increased cognitive diversity. But the new hires’ educations and professional experiences closely resemble those of current team members, which may lead them to think like existing team members. Consequently, there is a risk the firm could derive less cognitive diversity than one might expect based on the increased social category diversification. The outcome could be the same groupthink the firm was trying to avoid.

Scott Page, the Leonid Hurwicz Collegiate Professor of Complex Systems, Political Science, and Economics at the University of Michigan and an external faculty member at the Santa Fe Institute, notes that everyone brings a set of given assumptions to their thinking. Regardless of the professional discipline, “there’s a set of things we take as given, and when you bring in a set of people or a person who is trained in a different way, their givens may be different than your givens, so then they question your givens,” he explains. “And if they question your givens and you unpack your givens, oftentimes you see flaws in your logic.”

The result of mixing divergent viewpoints is similar to the risk-reduction effect of combining uncorrelated assets in an investment portfolio, according to Page. “The crowd’s prediction will be more accurate than [that of] the average person in it,” he says. “The amount by which it’s more accurate depends on the diversity of the predictions, how much they differ, how much one is too high, the other is too low. That’s always true. So, the question is then, where do these diverse predictions come from? It’s got to come from different models of the world, different information, that sort of stuff.”

In a team setting, these differences help create what Neale calls cognitive conflict. Properly managed, such conflict improves groups’ outputs. She cites a study in which ethnic Asians and Caucasians were given information and asked to use that information in predicting stock prices. Each cohort (Asian only, Caucasian only) made its own estimate, as did a set of mixed groups. The mixed groups made significantly more accurate stock price predictions.

The researchers determined that the main reason for this result was that participants in the single-race groups were much more likely to “just go along,” Neale explains. In the mixed groups, however, participants were much more likely to question assumptions and push back. This type of conflict, assuming it can be managed toward a shared goal, is critical in deriving a cognitive-diversity benefit. “This is what you want when you’re trying to problem-solve or you’re trying to innovate,” says Neale.

Another potential benefit of recognizing diversity is improved interactions with clients and prospects. Advisory firms usually benefit from a degree of homogeneity between themselves and their clients, according to Neale, so firms that lack diversity are potentially missing out on the opportunity to connect with other demographics. “Your organization might be ignoring a huge population of people who would be great customers because nobody even thinks about them as being good customers because that’s not your model of what a good customer is,” she notes. Without diversity, “You don’t have people there who actually will have that notion of similarity or connection with those customers, so you’re less likely to get them.”

If arguments in favor of diversity are so strong, why don’t we see more of it in small and mid-sized wealth management firms? There are practical reasons and psychological biases that impede its implementation. Smaller wealth management firms have often been located in predominantly white, upper-middle-class parts of the country because that’s where the wealthier prospective clients lived. This geographic concentration made it more likely that job candidates who lived within a reasonable commute would have similar social characteristics. Also, private wealth management firms often started when two or three professionals decided to set up shop, so diversity probably wasn’t a conscious consideration when forming the partnership.

The attraction of similarity is another hurdle, Neale explains. The technical term is homophily, which means people tend to like other people who are like themselves because they share common experiences, languages, and interests. “They’re just easier to be with because we are alike,” says Neale. “They’re more likely to be my friends. And so, those are the kinds of people I like to hang out with. So, why not have them at work?”

Teams of similar members may have better interpersonal relationships within the group, but similarity is not good for group learning and decision making. “Organizations composed of similar others reduce the capacity of that team or organization to learn because we don’t like to learn,” says Neale. “Learning is hard; learning is a problem. Learning requires huge amounts of cognitive resources. So, we only learn when there’s a clear discrepancy between what we observe and what we expect. The more we surround ourselves with familiar, similar others, the less likely we are to see that discrepancy.”

Although diversifying by social category is an imperfect method for improving cognitive diversity, it’s not a wasted effort. Page points to strong empirical evidence that a person’s knowledge base correlates with identity characteristics but also cautions that social diversity is defined by group characteristics, not by individual cognitive traits.

Consequently, in a team setting, it’s possible to increase cognitive diversity by combining individuals with different skill sets and experiences. “You want to think of people as sort of vectors or sets of tools and experiences, and when you’re putting together teams and you’re hiring people, you want to ask, ‘Is there someone who has a skill I don’t have?’” Page suggests.

It’s also possible to measure individuals’ attributes that correspond with cognitive diversity traits, according to Geil Browning, founder and CEO of Emergenetics International in Centennial, Colorado. Her firm has developed an “Emergenetics Profile” to measure three behavioral attributes (expressiveness, assertiveness, and flexibility) and four thinking attributes (analytical, structural, social, and conceptual). The profiles are intended to provide useful information to improve communicating with clients and managing teams of employees.

Informal diversity approaches based on hiring applicants with non-traditional backgrounds also can work, provided there is a clear organizational goal driving the process. One example comes from Leon LaBrecque, CFA, managing partner with LJPR Financial Advisors in Troy, Michigan. He commented by email that his best hires have resulted from seeking applicants who prioritize client service. “Yes, we want more women, more ethnicities, more cross-culture,” he wrote. “But we want people that think differently but serve a common goal. So to us, the essential characteristic is the willingness to serve the clients and do the right thing. We find that the gender or ethnicity is not as important as the attitude of the server.”