From the January 2007 issue of Wealth Manager Web • Subscribe!

When Cup Runneth Over

Most wealth advisors find themselves poorly positioned when it comes to one of their high-net-worth clients' most worthwhile impulses--the impulse to give money away. With $500 billion in assets sitting in private foundations today, the disconnect seems almost absurd. Yet few wealth managers treat philanthropy as a core competency, and many are uncomfortable even bringing the subject up.

"Advisors don't know how to talk about philanthropy. No one is having these conversations, yet families are hungry for them," says Randy Fox, president of the International Association of Advisors in Philanthropy (AiP), a non-profit educational and support organization of interdisciplinary professionals. "There is this vast market of people with $10 million to $50 million--or even $100 million--that no one is talking to, a huge untapped market of people who need this kind of work."

What's keeping wealth managers out of the loop? For starters, experts say, many otherwise perceptive advisors are not comfortable initiating what can sometimes be awkward conversations with clients about the meaning of their money. On top of that, the complexities involved in creating something like a private foundation--a favorite charitable vehicle of the very wealthy, like Bill and Melinda Gates--can be daunting.

As Jarrett Bostwick, an estate-planning attorney in Chicago, notes, "Charitable planning has always been considered more of a side dish to the entr?e of estate planning overall. As one judge said: `Trying to understand tax-exempt rules is like trying to capture a drop of mercury under your thumb.' There are layers upon layers of complexities. The dirty little secret is, if you do it right, it's wildly successful."

Fortunately for advisors, the landscape may be changing.

Over the past few years programs like Foundation Source, the Donor Motivation Program, Philanthropy Now and Philanthropy Coach have surfaced to help wealth managers become expert in a field that traditionally has been tightly controlled by charities. As Fox puts it: "Philanthropy is not targeted at the moment for beginners...But [with the emergence of outsourcing organizations] it's becoming easier and easier to do. There are people out there to do all the hard work. It's no excuse anymore to say the charge is too cumbersome."

Philanthropy Coach founder Jay Steenhuysen goes so far as to say that the industry is in the "early adopter" phase of moving philanthropic planning advice to professional advisors--and away from the non-profit sector. His message to advisors: Get ready, because here it comes.

Clearly, wealth advisors still have an uphill battle. A study of high-net-worth philanthropy from Bank of America released last October showed that only 16.6 percent of 30,000 surveyed households contacted their "financial/wealth" advisor when making a charitable decision in 2005. The study defined HNW donors as having incomes greater than $200,000 or assets in excess of $1 million--representing 3.1 percent of total U.S. households. Their average annual giving totaled $120,651, and the majority of wealthy families--41.2 percent--consulted a non-profit to make those gifts.

Dan Schley, CEO of Foundation Source, says firms like his are greatly reducing the barriers to entry for wealth advisors by providing them and their clients with the back-office services it takes to run a private foundation. "Families and wealth advisors are looking for a better, faster, simpler way to run a foundation. Fundamentally, running a private foundation is like dropping a corporation into a family's lap," he says. "What we've done is take the administrative burden off the back of the family." At the moment, Foundation Source, which launched in 2002, operates 500 foundations ranging in size from $100,000 to $240 million.

"To some extent, there's been a knowledge gap," Schley continues. "Many wealth managers don't want to embrace philanthropy because it seems like a non sequitur. Their primary mission is to grow assets, protect them in difficult times and distribute them to the subsequent generation. The majority of advisors are uncomfortable even talking about it. They don't quite recognize that philanthropy is as much a part of the wealth-management matrix as asset allocation. I think the leading thinkers have started to recognize strategically that it is important, if not essential."

And why not? Philanthropy, particularly when executed through a private foundation, is a collaborative process that is often piloted by the wealth advisor. By its very nature, the private foundation is that coveted multi-generational vehicle savvy advisors seek. Some foundations have "junior" and even "pee-wee" advisory boards that reach down to children as young as eight. And conversations with wealthy clients about rediscovering their dreams, modeling their values for their heirs, identifying the causes they care about, making amends--only deepen the advisory engagement.

As Melanie Schnoll-Begun, managing director of Citigroup Philanthropic Services, observes: "These conversations can be raw; they're emotional. I have one colleague who says he has not had a successful meeting unless a client has cried. I don't know how a client leaves [the advisory relationship] after having these kinds of conversations. Philanthropy brings on questions of health, religion, politics, world peace, ethics--every taboo question under the sun," she continues. "Advisors who are truly wealth advisors recognize that if they don't bring up these questions, someone else will."

The Bank of America study found that close to 98 percent of high-net-worth households donated to charity in 2005. By far and away, the three top motivating factors were: helping to meet critical needs, giving back to society, and reciprocity. In a listing of 13 motivations for giving, "makes good business sense" ranked eleventh.

According to Scott Keffer, a Pittsburgh wealth advisor and creator of the Donor Motivation Program, a training program for financial advisors: "Surveys of the affluent would suggest they are looking for help in how to responsibly and wisely integrate philanthropy into their planning--not because they care about the tax benefit, but because they care about being a good steward of what they have and making a difference. They appreciate the opportunity to have accumulated it and inherently understand that they need to give back,"

How does the wealth manager access that impulse?

Rick Harig, CFP and a personal strategist for estate planners in Northbrook, Ill., typically deals with clients with a net worth of $15 million to $35 million. Harig's first move is to build a financial model that quantifies a family's surplus income and surplus assets. After that, the conversation starts.

"People who aren't philanthropic become philanthropic once they identify their surplus. Once they see the magnitude of the surplus, they are aghast," Harig says. "The question then becomes: What do I want to do with the rest?"

Next, Harig, who has created philanthropic plans for 84 families in 16 states, conducts a day-and-a-half "legacy interview," helping clients identify the impact they want to make with their philanthropy. He also takes clients on "vision trips" to the inner city, introducing them, for example, to groups involved in building schools or operating soup kitchens.

A graduate of the Philanthropy Coach program, Harig also suggests that advisors themselves engage in philanthropy. "You can't take somebody someplace you've never been yourself," says Harig, who supports an organization that has built more than 105 schools in post-civil war Angola over the last three years. "The more advisors get involved with these things themselves, the easier and more thoughtful and more creative these conversations will become."

The year-old Philanthropy Coach offers participants a number of tools to help advisors open a dialog. In one "discovery exercise," clients who are unsure about their charitable intent are asked to mark up a newspaper, indicating what stories make them mad, elicit their concern or please them. Then the advisor helps them link their passion to a charitable cause. The program also helps with nuts-and-bolts issues such as creating a charitable mission statement, crafting guidelines for giving and starting a foundation.

Philanthropy Coach's Steenhuysen says, "Most professional advisors come from the left-brain world. They don't want to have the conversation. It's the kind of conversation that doesn't have right answers. It's open-ended. There isn't closure. It's the kind of conversation that allows the client to express emotion--and not be able to know where to go with it. The very best advisors are actually great at this. They know how to connect with their clients, and they have other people do the quantitative stuff. People don't buy results; they buy relationships."

At Citigroup, Schnoll-Begun offers this advice: Talk to your clients about what they do in their free time. Do they volunteer or sit on a non-profit board? If so, why? Use a significant event in a client's life--the birth of a child, death of a parent, marriage, divorce, sale of a business--as a springboard to a conversation. "Advisors are always telling me, `I've had this client for 15 years and never talked philanthropy. How am I going to bring it up now?' This is a way to do that," she says. "They're usually a little more reflective and interested in exploring opportunities they might not have looked at before."

She also suggests sending cards at Thanksgiving, a time of gratitude, to tell clients how much the advisor believes in "giving back." In an accompanying note, the advisor might offer to follow up with a call about charitable planning. Or, in advance of Valentine's Day, an advisor might send a card suggesting that instead of opting for chocolates or flowers or a dinner out, the client volunteer with his or her spouse at a soup kitchen or read to the elderly at a long-term-care facility. "It's a soft way to get into it," says Schnoll-Begun, who assists wealth advisors whose clients' net worth starts at $25 million.

Bostwick's law firm, Handler, Thayer & Duggan, specializes in philanthropy-focused estate planning. Many of his clients, whose net worth ranges from $80 million to $150 million, already have a philanthropic trigger. This is particularly true of entrepreneurs, he says, who are setting up private foundations, funding them and treating them as research and development or venture capital organizations. Among their missions: Providing supplies to distressed schools in Chicago, developing vaccines, and training migrant workers across the country to read and write in English. In fact, the Bank of America survey identifies entrepreneurs as the biggest givers, donating an average of $232,206 a year.

Half of Bostwick's clients now devote almost all their time to the business of philanthropy. The other half? "They're getting there," he says.

The concept of private foundations earned a media boost last summer when Warren Buffett pledged $31 billion to the Bill & Melinda Gates Foundation, whose goals include preventing malaria, creating an AIDS vaccine and fixing problems of public schools.

As Schnoll-Begun notes, "When the second wealthiest man in the world wants to collaborate [philanthropically] with the wealthiest man in the world, when each could buy their own countries, it gets your attention."

For decades, private foundations have been the vehicle of choice for the very wealthy to carry out their philanthropic desires. The longstanding rule of thumb was, it takes $5 million to start a foundation, given the costs of operations and infrastructure. But no longer, according to Foundation Source's Schley, who says $250,000 is all that's needed to run a private foundation efficiently and effectively.

As a result of outsourcing firms, "You no longer have to be a Ford to have a foundation," says Schley. In fact, when he formed his own foundation years ago, it took three months and cost him $30,000. Foundation Source can set up a foundation in three days for under $5,000.

Still, the private foundation appeals to the wealthy on a number of levels, according to Bostwick. First, unlike donor advised funds, the founding family retains total control over assets and disbursements. It's also a tremendous vehicle for inter-generational activities. Because it can last in perpetuity, it sets the stage for multiple generations to become involved in philanthropy. Typically, family members serve on the foundation's board.

Steenhuysen, a former managing director of philanthropy services at myCFO, is an avid fan of private foundations. "I often tell people that the biggest shame in this whole thing is that somebody gave you a jet fighter and taught you how to drive it like a car. You can fly, and you don't even know it. Private foundations can add so much more value beyond being a checkbook for philanthropy," he says. "But people refuse to have the conversation about anything other than two-dimensional transport. They're afraid of flying."

As an example, he points out that foundations can be used to train succeeding generations about money management, the hiring of professional advisors, grant-making. Schnoll-Begun knows teenagers, or junior board members, who as part of their training give 100 hours of service to the non-profits the family foundation supports. In the case of "pee-wees," kids as young eight learn how to speak kindly, wait in line, show respect. "There's really a tremendous amount to be said for families that start these practices very, very young," she says. As Yale Levey, a managing executive with Royal Alliance in Roseland, N.J., puts it, philanthropy is "a great buffer zone that can bring families back together; it's a feel-good medication." Levey, a CFP and a charter- and board-member of Advisors in Philanthropy, also earned the Chartered Advisor in Philanthropy (CAP) designation from The American College.

Of course foundations are subject to strict regulations and compliance issues.

Tom Spychalski, a partner in New York-based accounting firm Weiser LLP, says the foundation first must establish itself as a non-profit in the applicable state. Next, it must file for tax-exempt status from the Internal Revenue Service. "You've got to explain to the government what you're setting up and for what purpose," he says. "Without that, any income would be taxed." Typically, an attorney sets up the foundation and accountants file the annual 990PF. With a private foundation, there is a tax of 1 to 2 percent on net investment income. There is also an annual requirement that the foundation pay out to charities at least 5 percent of the fair market value of its investment assets. There may also be sizable income tax deductions.

But in most cases--because the wealth advisor manages the investments--a private foundation positions the advisor front and center.

As Harig puts it, "Quite honestly, the need out there is enormous. I've never had anyone go through a legacy interview and say I shouldn't have ever darkened their door. What the high-wealth market wants is fewer relationships and deeper relationships. If that's the value, this certainly is a pathway to getting there."

By The Numbers: The Wealthy

o 42.1 percent have a provision in their wills for charity.

o 19.5 percent have established a foundation.

o 15.9 percent have established a donor-advised fund.

o 79.9 percent volunteer with a non-profit.

o 70.3 percent discuss their philanthropy with their children.

Source: Bank of America

Ellen Uzelac [] is a financial writer and former national correspondent and West Coast bureau chief for The Baltimore Sun.

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