Professional advisors almost universally agree that philanthropy plays an important role in their high net worth (HNW) clients’ wealth experience, and that engaging clients about their philanthropic ambitions is good for their own business.
However, a recent US Trust study reveals several disconnects between HNW individuals and advisors centring on the initiation and substance of philanthropic conversations. For instance, many advisors underestimate their clients’ desire to discuss their charitable goals and passions, and overestimate the importance of tax benefits as a motivation for giving.
“Discussing philanthropy is an excellent way for advisors to learn what matters most to their clients,” says Claire Costello, national philanthropic practice executive for US Trust, Bank of America Private Wealth Management. “The vast majority of wealthy individuals give to charity, and many cite charitable giving as one of the greatest freedoms of wealth. Philanthropy today is no longer simply what one does with ‘what’s left,’ but rather a pivotal consideration at the front end of the wealth structuring process. For this reason, we are seeing individuals and families rely increasingly on advisors to help them integrate their philanthropic pursuits into their overarching wealth plan.”
To better understand advisors’ approaches to and HNW individuals’ expectations of these discussions, US Trust partnered with The Philanthropic Initiative (TPI) on a nationwide study, conducted in August 2013, of more than 300 advisors – including wealth advisors, trust and estate attorneys, accountants and other tax professionals – and a random sample of 120 HNW individuals with USD3m or more in investable assets who are actively engaged in charitable giving.
The study found that most advisors (89 per cent) discuss philanthropy with at least some of their clients, and 71 per cent make it their regular practice to ask clients about their interest in charitable giving. Meanwhile, only 55 per cent of HNW individuals say they discuss philanthropy with a professional advisor.
One-third of advisors (33 per cent) say they are the one to initiate these discussions with their clients, and that clients initiate them just 20 per cent of the time. However, among HNW individuals who report having discussed philanthropy with an advisor, half (51 per cent) say that they are typically the one to initiate the conversation, and that their advisor brings up the subject on their own just 17 per cent of the time.
What matters more to HNW individuals than who initiates the philanthropic conversation is that it be had in a meaningful way early in the relationship. Advisors indicate that they are more likely to bring up the subject of philanthropy once they have greater knowledge of a client’s personal (40 per cent) or financial goals (47 per cent), or when they are aware that a client volunteers or is active in the community (43 per cent). However, one-third (34 per cent) of HNW individuals feel the topic should be raised during their very first meeting, and virtually all (90 per cent) agree that this discussion should occur within the first several meetings with their advisor.
Among advisors who discuss philanthropy with their HNW clients, nearly all (91 per cent) encourage their clients to give to charity, with 41 per cent of advisors doing so regardless of a client’s asset level. However, half (50 per cent) of advisors prefer to wait until a client has accumulated at least USD500,000 in liquid assets before encouraging charitable giving, and one-quarter (24 per cent) place the starting point at USD3m or more.
The study also found that less than half of HNW individuals (41 per cent) are fully satisfied with the philanthropic conversations they have with their advisors. One reason may be that twice as many advisors (71 per cent) say that they raise the philanthropic discussion from a technical perspective – focusing on tax considerations or wealth structuring, for example – compared to those who do so beginning with their clients’ philanthropic goals or passions (35 per cent).
Once initiated, 41 per cent of advisors say their further philanthropic discussions also centre on technical issues, compared to 38 per cent who tend to focus more on their clients’ charitable goals. HNW individuals report otherwise, with nearly two-thirds (63 per cent) finding that ensuing discussions with their advisor about charitable giving tend to centre on the more technical issues, while just 27 per cent indicate that these discussions centre on their charitable goals, values and interests.
“While philanthropic conversations are taking place, unfortunately they too often fall short of their potential value and impact,” said Jim Coutre, a partner with TPI. “While many HNW individuals rely on the technical expertise of their advisors in this area, they are also seeking conversations that are deeply meaningful on a personal level.”
Despite these disconnects, many HNW individuals (73 per cent) who discuss philanthropy with an advisor still believe such conversations are important, and the majority (82 per cent) still feel that their advisor plays an important, if not very important (33 per cent), role in their charitable giving.
The top three reasons why advisors believe their HNW clients engage in charitable giving are consistent with the top motivations reported by HNW individuals themselves, which are: being passionate about a cause, having a strong desire to give back, and having a positive impact on society and the world.
After that, however, reasons provided by HNW individuals and advisors differ significantly. The next three most cited reasons by HNW individuals were: to encourage charitable giving by the next generation (30 per cent), religious or spiritual motivations (23 per cent), and because they believe giving back is an obligation of wealth (22 per cent). Meanwhile, advisors believed their clients’ next most popular motivations would include: reducing their tax burden (46 per cent), religious or spiritual reasons (41 per cent), and creating a family legacy (30 per cent). The study found that, in fact, just 10 per cent of HNW individuals cite reducing taxes among their motivations for giving.
Further evidence of a disconnect on the topic of taxes was found when advisors cited a belief that 40 per cent of HNW individuals would reduce their giving if the estate tax were eliminated, and that 78 per cent would do so if income tax deductions for donations were eliminated – whereas just six per cent and 45 per cent of HNW individuals, respectively, indicated they would reduce their charitable giving if these tax policy changes occurred.