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#302 What Wealth Advisors Should Learn from the Philanthropy World

February 26th, 2018

Richard Marker

If you are a wealth advisor [or relationship manager, or any of a myriad of other titles for managing other people’s investments], you have seen the studies. Year after year, they consistently show that your clients may be pleased with the investment service you give them, but, as a rule, they don’t believe you are up to speed with your philanthropy advising. Moreover, they consistently show a disconnect between your self-perceptions and those of your clients.

There are numerous explanations:

1. For many, the simple answer is that it isn’t your job. Your job is to maximize value in a trusted relationship with your client. You make them as much money as you can according to a predetermined risk factor and anticipated longevity. Your compensation is based on money under management. [we’ll return to this point in a moment.]

You have no objection to philanthropy as an objective, and indeed are delighted when wealthy clients establish foundations or trusts so you can provide investment services to those entities, a win-win solution. Thus, you gladly have a “philanthropy” conversation, but all too typically as an investment vehicle.

But ultimately philanthropy is not an investment vehicle but represents money out the door for social good. It isn’t what you are trained or paid to do so it doesn’t occupy a lot of planning time. You may discuss the idea of philanthropy, especially vis a vis taxes [see #2] but your expertise rarely extends to how to spend the money to accomplish a social good. Clients who want a constructive conversation on philanthropy are often disappointed because, for them, philanthropy is what good they might do with the money they have made, not how they invest it.

2. Many wealth advisors do discuss philanthropic vehicles, but all too often only as a tax reduction or avoidance strategy. Where your clients spend it isn’t your concern, but properly structured, philanthropy can certainly reduce the tax burden. Indeed, l have heard multiple wealth advisors brag how they can use philanthropy to get their clients’ taxes down to $0. [Long time readers know how I feel about that!]

Studies have consistently shown, though, that tax savings is not a primary motivator for being philanthropic or altruistic. Taxes and tax savings may influence the specifics of how one structures ones giving, but if one isn’t altruistic or generous, it won’t be any more – or less – satisfying than any other tax reduction vehicle. But those who do want to be altruistic ultimately have a different set of concerns and questions, and whether to set up a trust or a private foundation or a DAF or even an LLC may be real solutions, but only as long as they are solutions to the real questions a client wishes answered. Yes, the vehicles matter, but they satisfy clients only if they reflect the values they want conveyed through them.

Philanthropy is ultimately not about maximizing value but maximizing values. So, as many very well-intentioned wealth advisors and trust attorneys do, simply asking about philanthropic interests and presenting structural alternatives without a deep understanding how philanthropy works is not satisfying to a client.

3. The next challenge is a very legitimate legal and structural issue. You are required to define who is your client and have a legally defined trusted relationship with that client. Often, though, philanthropic planning is a multi-generational matter. Even if the client is the only one expressing interest to you, without understanding the functional dynamics of a family, a perfectly legal and efficient solution may be far from efficacious and even counterproductive down the road.

Don’t misunderstand. I am well aware that many of you do try hard to establish relationships with the others in a family, some very successfully. But even then, most members of the family know to whom you are ultimately responsible and can sense your primary loyalty. [After a lot of years in this business, I can report that there are many foundations and trusts that handcuff or disempower or even antagonize surviving family members because the founder’s attorney did what was legally required but strategically flawed.]

This structural dilemma matters because only a very few people of wealth ever look beyond their wealth advisor or estate attorney for philanthropy advice. As one who speaks frequently at conferences for family offices and wealth managers, I regularly find myself meeting those of wealth or their advisors who express surprise that there are those of us whose expertise is philanthropy per se, and not money managers who happen to specialize in managing philanthropic assets.

Which brings me to the two key takeaways of this piece:

4. What do philanthropy advisors do – and how wealth advisors can collaborate with them?

Philanthropy advisors help their clients [individuals, foundations, families, and other entitles that distribute money] make good, informed, and ethical decisions. A philanthropy advisor can help determine what a funder’s goals and values are, whom they want involved in their decision or legacy, what style of giving is most consistent and meaningful, and what impact they want their giving to have, and for whom. Some advisors are “full service” – supporting every stage in the process including decision making and back office support; others are specialists in one or another area along the continuum such as strategy or family systems or evaluation or are specialists in a particular content area.

Very rarely do philanthropy advisors manage a client’s money.

Therefore, philanthropy advisors are rarely your competitors. On the contrary, they can be partners or collaborators who can help you do your job better. That collaboration can work so the services provided to a client can be seamless.

Most philanthropy advisors define a “client” as the entire family or the entire foundation. It is quite common that, to do their job, a philanthropy advisor may need to challenge the stated priorities and assumptions of the “founder”. It may not always be comfortable – for the founder or the other professionals, but it may be the optimal long-term way to go.

Experience has taught me to add a caveat to wealth advisors: philanthropy advisors are usually at the end of the financial food chain and rarely are they a source of investment business for wealth mangers. The reason for collaboration is not to get new business but to serve your clients’ full range of needs and interests more effectively.

5. What can wealth advisors learn about their investment approaches from the philanthropy world?

For well over a decade, the philanthropy/foundation world has been absorbed by the idea of “impact.” Why spend money, however well intentioned, if at the end of the day it doesn’t reduce poverty or illness or illiteracy or homelessness…? Results matter.

A derivative corollary to that is that there can and should be an alignment between how one spends one’s money and how one earns it. If one wishes to reduce illness or pollution, it is surely very dubious that investments in fossil fuels or tobacco make very much sense.

In the philanthropy sphere, this is not new. It has been discussed and finely honed for quite a while, and there are robust answers at every philanthropy, family office, and investment conference. There is now a maturity of the field, a growing range of credible options, and a conviction that impact and values-based investing need not be an outlier in any viable philanthropy investment strategy.

Here is the emerging news: What works for funders and foundations can work for individual investors as well. Many, especially but not restricted to younger funders, are beginning to ask about values-based funds or approaches beyond the philanthropy realm. Far too many money managers still think of these approaches as financial compromises or outside of mainstream investing. If a money manager resists, you may be sure that others are eager for the business. [In our own case, we made it clear to a money manager with whom we were working that that we were prepared to change because she tried to dissuade us from values-based investing. She studied up, learned a bunch of things that surprised her, and withdrew her objections.]

Those of us in the philanthropy sector have been at this for over a decade. Impact investment isn’t a panacea, and not every approach is a slam dunk, but alignment of values and investment should be a no brainer for every investor. And if you are a wealth advisor and need help understanding how this can work for your clients, I know a lot of folks in the philanthropy sector who would be happy to help.

Afterward:

A number of readers have asked for more specific recommendations how wealth advisors and philanthropy advisors can collaborate. Please contact us directly for a “how-to” list of several proven ways..

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