Though the peak charitable giving season occurs in the fourth quarter, many financial advisors find that it is ideal to engage their clients in the charitable planning conversation at other times and not in Q4 when some clients are making their donations. Often advisors initiate the discussion in the months leading up to the fourth quarter, while others have the conversation soon after the clients made their year-end contributions or during or after the spring tax season.
Increasingly, advisors have found that having the discussion is beneficial to them and their clients, and that clients welcome the conversation since they and the charities they support benefit as well. Those advisors who previously had not incorporated the charitable conversation realized that not doing so hurt their practice as well as their clients.
The advisors who have not yet made it part of their ongoing conversations with their clients, or only do so occasionally or with certain clients, can face the following negative consequences with clients or prospects should they not:
- They can miss an opportunity to meet, engage and retain the client’s spouse and children as clients after the death of the client(s), especially if the other family members are philanthropic.
- Advisors can lose potential business to another advisor who does talk about charitable planning with prospects. One Florida advisor shared that “I realized that if I don’t talk about it, another advisor will.”
- Clients could move to a different advisor or firm if philanthropy is important to them and the other advisor already works with a philanthropic friend of the client.
- Clients may donate cash or other assets when there are other more tax-efficient assets that should be donated instead.
- Clients may donate assets that the advisor manages instead of unmanaged assets outside of the advisor’s control. Furthermore, should these unmanaged assets be donated to a donor-advised fund (DAF) sponsor at which the advisor can manage the investments, the advisor can then increase AUM.
- Clients have a liquidity event from which they could have donated the stock or asset before the sale and resulted in lower taxes, more philanthropic impact, and client concern upon learning afterward that they could have donated before instead of after.
- Clients may donate the same amount every year when bunching donations every several years, especially in a high-income year or in which there was a liquidity event, may be more appropriate especially after the recent tax law changes.
- Staff is burdened at year-end when clients donate stock in December instead of earlier in the year.
- Staff needs to donate stock to many different charities instead of to just one DAF sponsor, which may be the ideal solution for many clients.
- Clients need to keep track of numerous tax-receipt letters from different charities instead of just the one from the DAF sponsor to which they made a donation.
- Clients’ attorney or accountant may recommend DAF sponsors or other solutions that leave financial advisors unable to select and manage the charitable assets. Some DAF sponsors allow the advisors to manage the assets, though many do not.
- Some clients on their own may hear about and select a DAF sponsor that the advisor is not able to work with. Some advisors are concerned that some DAF sponsors compete with them because they advertise directly to donors to open accounts and invest in their own pools of funds, leaving the financial advisor out of the picture.
- Clients may be upset because their advisor may only offer one charitable solution which is more costly, complex, or restrictive than another that they learn about elsewhere.
- Clients may receive improper charitable advice from relatives, friends, other advisors or fundraising professionals.
- Clients on their own could enter into a legally binding pledge.
- Clients could have made charities or a DAF sponsor the beneficiaries of their IRA at death, but instead, the IRS was a major beneficiary.
- Some clients remain frustrated with the complexity, expense and burden of running a private foundation while a DAF may be an ideal replacement that would allow them to enjoy their philanthropy.
Some advisors are still hesitant about initiating the conversation, even though they know that their clients are charitable. By engaging in the discussion, they will demonstrate to their clients that they are interested in them and are not just interested in managing their assets, thus deepening the relationship and bringing in additional AUM from the clients and their referrals.
Advisors increasingly realize that nearly all of their HNW clients are already donating to charity, and that if they do not discuss charitable planning with clients, another advisor will. These deeper conversations help many advisors retain clients even when investment returns may not be as stellar as before. And finally, understanding clients’ charitable plans during and after lifetime will enable advisors to provide clients with the best guidance that will help them have a greater impact.
Ken Nopar is the vice president and senior philanthropic advisor for American Endowment Foundation, the country’s sixth largest and the leading independent donor-advised fund. AEF works with donors and their financial, legal and tax advisors in all 50 states.