We talk to Wingspan Legacy Advisors, a US firm which works with families on important conversations. Philanthropy is one such topic.
FWR: We hear that lots of HNW families could be giving much more to philanthropy than they do. What in your view should the advisory industry do to address this and how can and should advisors start conversations with clients?
Bell: While most high net worth families are very generous and want to give back (90 per cent of HNW investors give to charity), giving away money is more difficult than it appears. To whom do you donate? How much? Is it a one-time gift or multi-year? How do you evaluate success? These are shrewd businesspeople who have been successful in their pursuits, but measuring success in philanthropy can be very different. As an example, Warren Buffet has chosen to give more than $36 billion to the Gates Foundation rather than give it away himself because he thinks they are better suited to make the most of the money. “I don’t think I’m as well cut out to be a philanthropist as Bill and Melinda are. What can be more logical, in whatever you want done, than finding someone better equipped than you are to do it?” he told Fortune magazine in 2006.
This is where advisors come in. It is absolutely appropriate for advisors to bring up the topic of philanthropy with their clients and help them design a plan. At Wingspan, we believe successful founders and families have an important responsibility to give back to society so discussions about philanthropy are part of every engagement. Most HNW families have some experience of giving but often without a designed plan. This can lead to less engagement and less satisfaction.
We begin the conversation about giving by asking the family to define themselves first: what is the family identity, what do they believe in, what are their core values, and what legacy do they want to leave? These can be powerful multigenerational discussions that have the added benefit of helping to create family unity and harmony. These discussions provide a perfect lead-in to what do they want to do with their wealth.
Today’s younger generations have a strong sense of responsibility to both community and environment. Younger people seek philanthropic opportunities that align with this priority and also apply that same sense of responsibility in their investing. The move toward impact investing dovetailing into their philanthropic goals is important for advisors to understand and an opportunity to discuss investing and giving holistically. Providing a platform for these conversations and genuine agency for all generations to provide input can animate families' sense of identity and unity.
Sometimes it might be said that advisors are wary of
philanthropy because it is "too complicated" and as a result it
can be an afterthought. Do you think that is a genuine issue?
Also, in your experience, are advisors shy or defensive about
bringing in outside experts to give advice to
Philanthropy can be complicated, but that should not be a reason for advisors to shy away from it. Families are looking for solutions from their advisors – that is why they hired them in the first place. A successful philanthropic program generally requires the coordination of financial advisors, accountants, lawyers and tax advisors. A good advisor should be willing to admit what they don’t know themselves and bring in outside experts in any of the disciplines for which they themselves don’t have the credentials.
Most HNW families already have experts in place in each of these areas; it’s just a matter of coordinating resources. Advisors that want to build trust and longevity with their clients should be proactive about working collaboratively with the family and their other advisors to create solutions for their clients.
Philanthropy can be a way of deepening connections
between advisors and clients, and yet advisors might be ignoring
or unaware of this. To make the point more concrete, this can
make revenues stickier and make clients more loyal. What can be
done to raise awareness?
As mentioned previously, the role of an advisor is to solve problems for their clients. The more proactive and solution-oriented an advisor is, the more likely their clients will consider them invaluable and want to continue working with them. HNW families often find designing and executing giving programs inspiring and harmonizing, and ultimately integral to creating the family legacy. Advisors that help guide them through that journey engender trust and are deeply appreciated.
We see a lot of data about donor advised funds and the pros and cons for foundations. I suppose the structures depend on what a client is trying to do. Can you provide some ideas about that?
Both donor advised funds (DAFs) and foundations are platforms used by HNW families. Each has pros and cons, and the family should consider goals of giving, convenience, administration, and tax when selecting what is best for their family. DAFs are simple and quick to set up and administer, and are used increasingly. According to the 2022 DAF Report from the National Philanthropic Trust, from 2020 to 2021, the total number of DAFs increased by 28 per cent and contributions to DAFs increased by 47 per cent. Even more impressive, grants from DAFs to qualified charities have increased 400 per cent in the last decade. The IRS has no requirements for annual payouts for DAFs compared with foundations where the IRS requires a 5 per cent payout annually. (And we have known families who have had to pay penalties for not reaching the 5 per cent required payout.) Another factor to consider is anonymity.
It is easier to make anonymous donations through a DAF because private foundations must disclose contributions. Alternatively, private foundations have the benefit of managing their own funds and have more flexibility in grant making. Some families garner identity and pride from their foundation and use it as an important way to articulate the family legacy.