For today’s wealth managers, philanthropy is more than an end-of-year tax write-off—it is a growing area of advisors’ practices and an opportunity to engage the next generation of wealth.
The challenge for advisors is to make sure clients getting ready to make donations think of them, industry observers say.
“These clients clearly trust their financial advisors and have a lot of faith and loyalty to them,” Foundation Source CEO Robert Chartener says. “They just aren’t thinking about them when it comes to philanthropy.”
Surveys indicate clients are looking elsewhere for philanthropy advice, which means advisors are being left out of the conversation concerning a significant chunk of assets.
Americans donated around $538 billion to charities in 2014, up 7.1% from the previous year, according to the National Philanthropic Trust. Advisors should also note that, according to the trust, almost every high-net-worth household (98.4%) gives to charity.
On the surface, philanthropy allows planners to connect with their clients on a more personal level while offering financial advice. However, a recent survey from Foundation Source found that most clients are not engaging their advisors in philanthropic discussions. Less than 12% of the 1,200 clients surveyed said they were likely to speak to their advisors about giving, with almost 35% consulting their peers and 28% stating that they sought no advice on philanthropy.
“People think of advisors as someone to talk to about asset allocation or choice of investment vehicles, but the fact is that philanthropy is an important thing that they probably should talk to an advisor about,” Chartener says.
Philanthropic advice is very much in demand, says Jeff Ladouceur, director of Oaks, Pa.-based SEI Wealth Management—even if clients aren’t seeking it from their financial planners.
More than 61% in the Foundation Source survey said it was important or very important that their advisor was knowledgeable about charitable giving.
“At SEI, we spend a lot of time on philanthropy because the demand is there; we wouldn’t be doing it if they didn’t want to,” says Ladouceur. “This is an important topic. There are so many ways to implement these strategies that have different impacts and that require different levels of effort and involvement. But you can’t start on process, you have to discover the client’s goals.”
More than 31% of Foundation Source’s clients said that knowledge of philanthropy influenced the initial selection of their advisor. The same survey found that nearly 54% had actually engaged their advisor for advice on charitable giving.
“Clients may not seek out their advisors on philanthropy, but they’re receptive to having a discussion with them,” Chartener says. “To me, it suggests that advisors should share and understand a little bit more about philanthropy with their clients.”
Almost 42% of respondents said that a planner’s philanthropic expertise impacts their decisions to continue the advisory relationship.
The foundation for charitable advice should be laid during client intake, Ladouceur says.
“Too often the discovery process is investment-focused,” he says. “It’s up to the advisor to expand the conversation to one that involves issues important to the family.”
Many affluent families give in an ad hoc manner, which should be seen by advisors as an opportunity to offer help, says Anne Marie Towle, managing partner at Lincoln, Mass.-based Athena Capital Advisors.
“I definitely don’t think you should wait for the client to come to you,” says Towle. “I think it’s an obligation on the advisor’s part to bring it up. If we don’t plan from the outset, we’re neglecting part of our role as an advisor.”
Jody King, vice president at Fiduciary Trust, views philanthropic advice as having three key components: “It boils down to how to give, where to give, when to give,” she says. “With the wealth plan, you can be giving during your lifetime or you can give after you’ve passed.”
Advice also involves what to give—cash or investments—and which investments to give.
“For the client that is doing regular, annual charitable giving, we will have a conversation with them as to how much they want to give and the organizations they want to give to,” Towle says. “We will give advice as to whether we should be giving cash or securities. We also speak with tax accountants to see what type of asset would be most advantageous from a tax deduction standpoint.”
Independent from their advisors, wealthy families are using philanthropy to teach children about money and their values. Giving offers advisors a chance to connect with these potential heirs. Over 30% of respondents indicated they were interested in engaging the next generation in philanthropy, according to the Foundation Source survey.
“People with young children worry about when and how they talk to them about the money,” says Towle. “Generally, that’s going to be a much older age, but you can start younger.”
Towle helps families create a separate account for a portion of their assets they wish to introduce to their children. She meets with children on a regular basis to discuss how the money is being invested, with the understanding that all of the money will eventually go to charity.
“It’s a two-pronged education,” Towle says. “It’s about managing money and teaching them to start thinking about charitable giving. Then, as they get older, families might get more comfortable exposing them to the larger family wealth. It’s a great way to get them a start, and it’s a fantastic way for us to build relationships with the younger generation when the wealth becomes theirs.”
When younger people are involved in family foundations or donor-advised funds, they can get an education in the technical aspects of finance, says Wayne Johnson, a financial advisor with Des Moines, Iowa-based RIA Syverson Strege and Company.
“Younger generations can learn things like avoiding recognition of capital gains and offsetting income tax deductions in a high-income year to avoid a higher tax bracket,” Johnson says. “That’s what I work with them on in their 20s. I also ask them how they find the right charity to participate in and at what level they want to engage—donor, volunteer or even sitting on a board. Being on a board is a great training opportunity for somebody who is well educated and has some experience.”
Like the larger discussion about philanthropy, it often falls on the advisor to recommend involving children.
“I always try to help them think about including their kids, especially if they’re going to start a family foundation,” says Richard Brown, CEO of Minneapolis-based JNBA Financial Advisors. “It will help them understand responsibility and money and the impact it can have on lives.”
King recommends that families involve young children in volunteerism at charities before bringing them into the financial side of their philanthropic endeavors.
“There are different ways to approach it. Some people are stocking shelves at the food pantry or the shelter alongside their children,” King says. “To others, it means that Grandma lets her grandchildren have $1,000 to give to a charity of their choice.”
Perhaps the biggest advantage to offering clients help meeting their philanthropic goals is the amount of trust it can build between client and advisor.
“When we ask about philanthropy, clients are extraordinarily receptive,” says Preston McSwain, managing partner at Boston-based Fiduciary Wealth Partners. “They thank us for having a conversation that isn’t about making investing a competition, but about how we can take wealth and structure it in a way to produce a multitude of returns, whether they be returns for growth of assets or for impact on the community and the world.”
Thus, for an advisor to truly serve clients’ greater interests, the philanthropic discussion is mandatory, advisors say.
“I think if someone considers themselves an advisor, an advisor on the financial health of a family versus a fund picker or a planner, they have to be in this space,” says Ladouceur. “If they’re not in this space, then they’re missing an important component of people’s lives. People are now looking at their lives in terms of themselves, their family and their community.”
