Each year, a percentage of wealthy clients leave their current financial advisor for another one. An Investment News survey indicated that 20% of millionaires were thinking of ending their advisor relationship, and an estimated 50% don’t feel confident enough in their advisors to refer them to family members or friends. One strategy, however, that helps strengthen the advisor-client relationship involves clients’ charitable giving. Advisors, who make it a priority to understand their clients’ philanthropic interests and then provide insightful guidance on how to integrate their philanthropy in their overall financial plans, are those that do gain their clients’ greater confidence and referrals.

Start by Asking the Right Questions

To best guide your clients’ charitable giving, it is essential that you gain their answers to key questions, which include:

  • What causes are most important to you?
  • re you currently participating in any charities/non-profit organization(s) as a Board Member, volunteer and/or donor?
  • Are you interested in establishing a Foundation for your family’s charitable giving?
  • In addition to cash, are you interested in donating any other assets (e.g., non-cash assets, equities, etc.)?
  • Is it important that you receive recognition for your charitable giving, or are you interested in making anonymous contributions?

Once you have a better understanding of what is important to your clients regarding their charitable giving, you then can offer options for this purpose. An often used vehicle is a donor-advised fund.

Donor-Advised Fund

A donor-advised fund (DAF) is a charitable investment account which is used exclusively to supporting non-profit organizations. The funds invested in a DAF typically provide favorable tax treatments (e.g., tax deductions) and they can be invested for tax-free growth. They can be used to provide grants to qualifying non-profit organizations.

Private Foundations

For their charitable giving, some clients will prefer to establish their own family foundation. This is an independent legal entity and as such, does require compliance with certain regulations. In addition to meticulous recordkeeping, a primary requirement is having a Board of Trustees to oversee the foundation’s charitable giving to ensure that it is consistent with the foundation’s established mission.

DAFs vs. Private Foundations

When comparing DAFs with private foundations, each has its own advantages and disadvantages. For instance, a DAF is much easier to establish and doesn’t require as much due diligence and regulatory compliance. On the other hand, the DAF places control in the hands of the sponsoring nonprofit organization, whereas a private foundation offers the family and its Board of Trustees greater control. Both a private foundation and a DAF provide the option of allowing donors to appoint a financial advisor to direct investment decisions. Where the foundation has more flexibility than a DAF is in the area of grant-making control. The foundation option gives donors total control over grants to eligible charities, as well as individuals, while the DAF vehicle restricts donors to directing grants only to eligible public charities (i.e., not individuals, or for scholarships or to international organizations).

Some clients benefit from a combination of both a private foundation and a DAF. Advisors should consider this as a possible strategy for clients whose charitable giving goals, and tax/financial situation would make this option the best one.

Charitable Giving and Impact Investing

There has been a lot of focus on impact investing. McKinsey & Company estimated that over $77 billion in assets under management are now in impact-investing funds. That figure is expected to increase as more women and millennials – each of whom have a higher propensity for social impact investing – increase their impact investment activity. In the meantime, financial advisors can serve their clients’ best philanthropic inclinations by informing them about other vehicles such as DAFs, private foundations and/or a combination of both, in addition to impact-investing funds. This, in turn, will help advisors build better bonds, and longer lasting client relationships.

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