More advisors are talking about philanthropy these days, but it’s still an open secret that the clients are often the ones who have to get the ball rolling. And when a rep can’t find a way to make a client’s charitable urges fit into their existing business on anything but a pure pro bono basis, the conversation gets even harder.
“Advisors see that their clients want a vehicle for their philanthropic activities,” says Rod Zeeb, a lawyer and co-founder of the Heritage Foundation, which trains affluent investors and their advisors to practice philanthropy more effectively. “The clients may want something like a private foundation or whatever. But for the advisor, it can mean going against his or her best interests because all those assets are being sent somewhere else.”
Unless your business already revolves around private foundations, advising your clients to set up a foundation is likely to not only reduce their taxable estate but your AUM as well — once the newly appointed directors steer the assets out of your control toward their own money managers or invest it themselves. If that’s your worry, there’s another type of charitable vehicle out there that can satisfy your clients’ desire to do good things while keeping you in the loop: the donor-advised fund.
A donor-advised fund looks a little like a private foundation stripped down to its fundamentals. Instead of creating a separate legal entity to house donated assets, a philanthropist going this route simply opens a separate account at any of the charitable organizations that support the donor-advised approach. The donor gets an upfront tax deduction and the right to recommend how the charity distributes the assets over time, effectively becoming a “donor advisor.” And speaking of advisors, a growing number of donor-advised funds these days are open to letting a donor’s existing advisor — usually an RIA, but in some cases a traditional broker as well — keep managing the assets in the account.
Plenty of Options
Although the donor-advised model goes back to the community foundations of the Great Depression, Fidelity is the giant and the trailblazer when it comes to the new wave of funds open to advisor participation. The company’s non-profit Charitable Gift Fund launched in 1992 and had gathered over $12.6 billion in assets by mid-2008, distributing about $8 billion of that money to over 124,000 charities. Account minimums start at $5,000 and donors are allowed to recommend outside RIAs to manage their fund assets once their balance tops $1 million.
The fund works hard to court advisors with an array of educational and legal support, says Sarah Libbey, president of Fidelity’s charitable affiliate. “Understanding the nuances makes advisors more comfortable about bringing it up,” she explains. “Since advisors are not willing to bring up the charitable question, it leads us to think they’re not necessarily comfortable with the topic, so we provide newsletters and routinely host seminars to bring our in-house expertise to advisors or their clients overall.”
Plenty of other financial heavyweights have leveraged their platforms to support donor-advised funds, including Vanguard, Calvert, Franklin Templeton, T. Rowe Price and Schwab. Schwab was the first to let outside advisors invest the charitable assets (and earn fees on accounts bigger than $250,000) and Schwab Charitable President Kim Wright-Violich stresses that once her team has vetted an advisor, they’ll stick to executing the donor’s philanthropic requests.
“As long as they don’t charge over 100 basis points and their investment choices are reasonable, it’s fairly straightforward,” she says. “They’re the only entity that really has any contact with the donor. They are managing the whole relationship and only delegate the actual distributions to us.”
For brokers or RIAs alike, completely independent donor-advised funds like the American Endowment Foundation were created in 1993 with advisors in mind, says founder Philip Tobin.
“At the time, there were all these different rules and regulations and geographic limitations on grants, restrictions on who could manage the funds that basically excluded the financial advisor,” he recalls. “Many had in-house asset managers who didn’t want advisors getting involved. Until recently, the only donor-advised fund financial advisors could get involved in was ours, so it was natural that most advisors thought they couldn’t do anything about philanthropy: If a client went to a community foundation, they’d lose that business.”
Unlike platform-specific programs, the AEF simply operates as a separate account on whatever investment platform an advisor is already using — the fund essentially becomes a new client once the donor makes the initial contribution.
“The advisor remains the broker of record and is compensated in the normal way,” Tobin says. “Someone would just set up an account for the American Endowment Foundation on behalf of the Jones family, for example, and then Mr. Jones would get a copy of the investor statements on his retail account and on the donor-advised fund in our name. In essence, the thing is just sitting right next to the retail account.”
Tobin’s son John, an executive vice president in the foundation, says that AEF is truly platform-neutral. “We don’t really have an investment agenda beyond seeing that the assets are well managed,” he says. “We recommend that our donors recommend their advisors, whether they work on an RIA or a broker basis. Either way, the philanthropic aspect becomes a great way to distinguish an advisor from someone who’s just managing assets.”
The platform you choose comes down to personal choice and your existing relationships, Rod Zeeb says. “It’s like everything else. Those that have a good relationship with Fidelity or whatever institutional player, it can be easier just because they’re going to do the investing and you’re not going to have to think about anything. But for the financial services guys who really enjoy that part of the process, independent players like the American Endowment Foundation give them an opportunity.”
Giving is the Glue
If donor-advised funds won’t break your book, encouraging your clients to move at least a piece of their assets into these accounts will only make your relationships with them stronger, charitable experts say. After all, philanthropy is an area where you can literally add value to the conversation — and in doing so, differentiate yourself.
“We often find that even advisors who start out as stock pickers create their most rewarding relationships if they get into the philanthropy side of it,” says Kim Wright-Violich of Schwab Charitable. “Philanthropy makes these relationships very sticky and the advisors who go in that direction seem to be rewarded significantly in terms of multigenerational loyalty to the firm, deeper and more stable relationships.”
In fact, Rod Zeeb of the Heritage Foundation is inclined to think that philanthropy forges the kind of bond between an advisor and affluent families that makes multigenerational relationships possible at all, once the original client has passed away. “There are all these studies out there that show that very few inheritors keep the old advisor,” he explains. “But if you build a relationship through a donor-advised fund, now you’re not the parents’ advisor, you’re the inheritor’s financial advisor. It creates great retention.”
Besides, your clients are already giving to charity whether you’re involved or not, so why not get involved? According to Sarah Libbey of the Fidelity Charitable Gift Fund, 99 percent of millionaires are already contributing to charitable organizations, and about half of them are asking their advisors to weigh in on their activities, but advisors remain reluctant to bring up the topic on their own. “There’s clearly a gap in what they’re doing,” she says. “No matter what’s happening in the market, there are giving markets flowing all the time.”
There are tangible advantages, says Philip Tobin of the American Endowment Foundation. “We have one guy who uses a donor-advised fund approach and whenever he sets it up with a new client, he often finds that after a short period of time, the client is so happy with it that he or she moves all of the family’s investable assets to that financial advisor. That’s right, all of a sudden the non-charitable investment account moves to that financial advisor.”
But you’ve got to have the conversation in order to get those accounts moving.
“About a decade ago, the Philanthropic Initiative in Boston did a survey of financial advisors and wealthy clients,” Tobin continues. “They asked, ‘do you talk to your client about charitable giving?’ The majority said no. In many instances, the perception is that these products are difficult to learn or that talking to clients about their charitable aims might be perceived as an invasion of privacy, so they chose not to do that. Donors really want financial advisors to bring these subjects to them, and they’ll conclude that if their financial advisor doesn’t do this, chances are they’ll find someone who will.”
Compared to the paperwork of getting a foundation up and running, donor-advised funds make it easy. “It’s really an easy learning curve,” Tobin sums up. “Setting up a private foundation is like setting up a bank. This is more like a checking account.”
Robert Scott Martin is a New York-based contributing editor of Research.