Given the tough economic times and the condition of many bear-battered portfolios, it is not unreasonable to assume that a talk about charitable giving is not what clients want from their rep. But that's an assumption that could deal you out of an opportunity to provide advice that investors need and can help advisors strengthen client relationships.
While it's true that donations to charities around the globe are off, Americans remain generous givers and, more important, they are not waiting until their golden years to make substantial commitments to philanthropies that they care about. “The average age of the donor has dropped dramatically,” says Virginia Esposito, president of the National Center for Family Philanthropy (NCFP) in Washington, D.C. “When I first came into this field, the youngest donors would be in their 60s and 70s. Now the bulk of the audience is in their 20s to 50s — people who are saying ‘I want to do this in my lifetime.’”
What's more, according to surveys by NCFP and The Philanthropy Institute (TPI) in Boston, donors want their financial advisors to talk about charitable planning because it helps to bring their goals into focus. Reps can help evaluate charities and suggest alternative ways to give, including tactics that are most tax-friendly. Advisors who develop these skills can develop greater client loyalty. In addition, the discussion of philanthropic goals often leads to connections to the next generation of a client's family.
Certainly, this part of the financial advisor's repertoire requires tact — and many reps have avoided the subject of charitable giving for fear of overstepping their relationship or appearing to push a particular cause. “It's a very intimate kind of conversation that advisors may feel uncomfortable with,” says Stephen Johnson, director of philanthropy promotion at TPI.
Another hurdle for advisors is that talk of philanthropy has traditionally been raised in the context of estate planning — a discussion of what happens after the client dies. Esposito says that advisors can push aside that preconception by “making giving about living.”
“Why should your clients earn all this money and leave it to others to give?” she says. “Most find philanthropy creates a wonderful opportunity to use their business skills differently or to help them raise children to be more conscious of issues in the world.”
In interviews conducted by NCFP, most clients said they were grateful to advisors for raising the subject. “Without exception, donors agree that philanthropy is no more personal than the other decisions advisors help them make,” says one NCFP report. Moreover, experts say reps are doing their clients a disservice if they neglect to mention charitable giving, because any good financial plan involves exploring a person's passions and goals as well as current spending habits.
Esposito suggests adding questions about charity into the regular conversations advisors have with their clients. For instance, if an advisor is going to ask a client questions like, “What do you want for yourself, your spouse and your kids?” and “What do you want for your retirement?” It is hardly jarring to add, “What, if anything, do you want for society or the institutions and organizations that have been important to you?”
“If a person doesn't respond to the last question, you pass no moral judgment and move on,” she says.
Ann Marie Etergino, a senior vice president at RBC Dain Rauscher in Washington, D.C., says she raises the subject of charity as a natural part of the overall financial planning process. She presents clients with a spreadsheet called the “big picture” — an organizational chart of financial planning opportunities, including the issue of heirs and charitable trusts. “We have found it a painless way to say, ‘Here are some other potential areas of concern,’” she says. “Often, just putting that in front of them opens up discussions about who they give to now.”
Carol Price Glazer, a financial advisor at Morgan Stanley, sees the philanthropy discussion as part of knowing what motivates her clients. “I really try to get into clients' heads and point out the things that drive them. I ask: ‘What is your passion? What do you love doing?’”
Glazer brings up charitable giving in the context of the ongoing financial plan, as well as the estate plan. She asks clients which organizations they belong to. “They might tell me they're part of the local symphony or support a medical charity because a relative is ill with a disease,” she says. “I generally say that this could be an opportunity for you to be more active in your organization, and I drop it at that because I'm not going to tell them what to do until I know what they want.” Glazer says she generally gets a very positive reception and always learns more about her clients' wishes.
Filling Knowledge Gaps
Once the advisor is involved in the client's philanthropic planning, he can make sure that gifts are made in the most effective and tax-advantaged ways. For example, a rep can help a client decide whether to give appreciated stock (thus avoiding a capital gains hit) and choose which securities to sell. One client of Glazer's had a highly concentrated position in his company's stock with an extremely low-cost basis. When Glazer asked him if he had ever considered gifting some of that stock to charity, she discovered that he was already writing checks to 32 different organizations. She helped him transfer his appreciated stock directly to the charities instead of having to sell the stock first.
“He's happy and the charities are happy, and of course, that makes me happy,” says Glazer. “If you're creative and enthusiastic, people are open to ideas.”
Reps have to realize there are many motives involved in giving money to charity. Some clients want to use philanthropy as a tax management tool, while others want to pass on family values to children and grandchildren. Still others view charity as a way to improve their standing in their communities.
Another Glazer client, land-rich but cash-poor, needed capital but was reluctant to sell family property because of its low cost basis. By putting the land into a charitable trust, the client was able to liquidate some of it tax-free and create income for the older generation. The charitable donation went to funding capital improvements in the family's hometown.
“The children were initially uncomfortable with the concept,” says Glazer. “They saw the money going out and not coming back in. But the donation allowed them to establish themselves as valued business people in the community, and they got it back tenfold.”
Facilitation, Not Actuation
Experts say it is important that reps realize they do not have to be experts in philanthropic vehicles to discuss giving with clients. What is most important is part of the process by determining client needs and helping them reach the people who can help them.
“The broker's job isn't to be an expert in charitable giving,” says Glazer. “Your job is to be able to identify the issues and look for solutions from the right people.” She adds, “Technically, we're not allowed to give people tax advice anyway.”
While some reps may fear that means turning over clients to the competition, it in fact has the opposite result. In interviews with donors conducted by the NCFP, donors were more loyal to advisors who were able to quarterback and refer them to the right people.
“One hundred percent of clients said, ‘I am far more likely to be loyal to an advisor who makes it their business to find the resources I need than one who tries to protect me from the outside world, because they have my interests at heart,’” says Esposito.
Before you bone up on charitable vehicles, bear in mind that donors are far more interested in talking about their philanthropic goals and coming up with an appropriate giving strategy than being sold philanthropy through a tax-wise product. Some reps tend to take a mechanical, lecture-like approach to selling the one or two vehicles they may understand, while the donor may want you to tailor a philanthropic strategy to his individual style, just as you would an investment strategy.
“Don't try to come up with one-size-fits-all solutions,” advises Esposito. “Ask about the donor's giving style.” Younger, entrepreneurial clients, for example, may prefer the control involved in a private foundation. And many wealthy donors use the whole gamut of vehicles for different purposes.
Reps in wirehouses can refer clients to their firm's wealth management or estate planning teams — or go outside their organizations to lawyers or accountants who have impressed them with particular skills and integrity. They will build a stronger alliance with clients and make more professional contacts by including the clients' own lawyers and accountants in discussions with charitable experts.
Financial advisors also can turn to one of many philanthropic organizations, such as the Philanthropy Institute and the Council on Foundations, whose Web sites are packed with useful articles and other resources for educating advisors and their clients. Donor-advised funds offered by financial institutions, community foundations and Jewish federations often offer ongoing educational seminars and information to advisors and potential donors.
However you approach giving, make sure you do approach it. To ignore it is to ignore an opportunity to strengthen ties to clients and gather some fees while facilitating good works. What could be better than that?
Popular charitable vehicles
CHARITABLE REMAINDER TRUSTS: The basic trust structure that allows donors to give up ownership of assets but continue to live off the income generated by them until a specified time when the remainder goes to a charity. The donor gets a significant tax deduction when the trust is funded by and the assets are removed from the donor's estate. Contributions of appreciated stock or property may be sold by the trust without capital gains liability.
CHARITABLE LEAD TRUSTS: The reverse of CRTs in that the income goes to charity and the remainder goes to the donor's family when the trust ends. CLTs have been growing in popularity because of favorable interest rates. The remainder gets taxed using interest rates from when the trust is set up. Because the donor gives up both the income stream and the remainder, he must have significant wealth reserves to use this trust.
DONOR ADVISED FUNDS: These are gaining popularity fast because they are relatively cheap, easy to set up and recently got a boost when financial services companies started offering them. DAFs allow donors to contribute money to a large fund, take an immediate deduction, and dole out the funds whenever and, within limits, to whomever they want. Some DAFs are commercial, run by brokerages and fund companies. Others are regional community foundations targeting the needs of a state or geographical region. DAFs can serve many of the same functions as a family foundation, allowing donors to set up a family fund within the larger fund. While services vary, some (usually for a fee) will provide donors with all kinds of grant-making advice and services.
PRIVATE FOUNDATIONS: The main challenger to DAFs, private foundations have doubled (to 56,000) since 1985. These can serve as a family memorial and provide an ongoing opportunity to involve the family in long-term charitable giving agenda by using the tax-free buildup of assets. Private foundations let donors retain control over the assets, employ family members on the foundation staff and design unique giving programs if the family has an agenda that is not being met by existing charities. The downside is that they are fairly expensive to set up and maintain. They are recommended for people with at least $1 to $3 million in expendable assets.
POOLED INCOME FUND: Various unrelated donors make irrevocable gifts to a fund. Each donor in turn receives a proportionate share of the net income earned each year. At the death of the donor, his share passes to the charity. The higher the rate of return, the lower the charitable deduction. But, as with other charitable trusts, appreciated assets can be sold with no capital gains liability to the donor.
CHARITABLE ANNUITY: A more direct arrangement with a charity than a CRT, in which the donor makes a gift and gets a charitable deduction. The charity, then pays him an annuity, which may be immediate or deferred — until retirement for example. A portion of the annuity is tax-free to the donor as a return of the original investment.
SUPPORTING ORGANIZATIONS: These endowments are set up by a family to serve the needs of a specific charity, such as an alma mater or a particular research lab. While the supporting organization bears the donor's name, charity members sit on the board.
Beware of Phony Philanthropies
How to determine a charity's worthiness.
Fraudulent charities are such a problem in the United States that 34 states have recently launched “Operation Phony Philanthropy” to educate the public about fraudulent charity pitches. It's so bad that the Better Business Bureau says donors have a hard time deciding which charitable organizations to trust (70 percent of respondents to a 2001 BBB survey said they have difficulty telling whether a charity soliciting their contributions is legitimate).
Obviously, reps should perform due diligence on any charity that they will recommend to clients. But that doesn't mean reps have to be pros in philanthropic due diligence — there are some simple ways to check out a charity.
One way is to obtain a charity's IRS form 990, its audit statement and its annual report. All charities are listed with the IRS, but only non-religious ones with revenue over $25,000 must file an IRS form 990 for 5013 tax exempt status. Form 990 shows the charity's tax status, its income, how that income was spent and some other information, such as the compensation of top executives. Form 990 is a public document and can be obtained from the IRS, the charity itself, or the state — often, such documents are posted on Web sites that evaluate charities (see next page).
Charities with over $250,000 in revenue are required to have a financial audit statement in accordance with GAAP. Many charities also can provide some form of annual report, outlining their programs and achievements.
This report is “probably the only item produced by a charity that includes a detailed narrative summary of what was done in the past year,” says Bennet Weiner, chief operating officer of the Better Business Bureau's Wise Giving Alliance in Arlington, Va. Any donor seriously interested in a charity should ask for all three documents.
You probably can't go wrong consulting other donors either. Community foundations work on a grass-roots level with charities within a given geographical area. Often they are staffed by former members of local charities, who know the ins and outs of these organizations. Community fondations exist in all regions — for example, the Community Foundation for South Central New York or the California Community Foundation, to name just a few. Similarly, regional associations of grantmakers (RAGs) are groups of private foundations, community foundations, charities and individuals organized to foster more philanthropy in a geographical area. The Web site givingforum.org can direct donors to the RAGs in their area.
Four other Web sites that contain data on numerous charities:
Guidestar.com Includes all 850,000 charities listed with the IRS, but passes no judgement or ranking on them. Some 500,000 of the listings provide rudimentary information, such as name and address. For the 250,000 to 350,000 of them large enough to be required to file form 990, Guidestar provides a statement of programs, the four most heavily funded programs, a listing of the charities' leaders and basic financial information. Some 70,000 organizations have also contributed information about their goals, leadership, mission and achievements.
Give.org Sponsored by the Better Business Bureau's Wise Giving Alliance, this site provides perhaps the most comprehensive information on some 500 to 700 charitable organizations and whether they meet the Bureau's standards (68 percent do). These assessments are based on four areas: governance (board attendance, salaries and potential conflicts of interest), how the charity's money is spent (the charity should spend at least 65 percent of its money on philanthropic activities vs. fundraising), the accuracy of information and the willingness to disclose information to the public.
Charitywatch.org This site is sponsored by the American Institute of Philanthropy in Bethesda, Md. It grades 500 national charitable organizations based primarily on financial criteria, such as whether a charity is claiming overhead or fundraising costs as costs of running its charitable programs. “We'll be critical of a group with lots of assets that's asking for lots of money,” says AIP president Daniel Borochoff. “Any group that has more than five years of available assets gets an automatic F.”
Charitynavigator.org Charity Navigator is run by a group out of Mahwah, N.J. It has a database containing 2,361 charities categorized by financial well-being. Charities are grouped by focus — environment, animals, etc. — and by region.
GuideStar Tips for Smart Giving
Verify an organization's charitable status. If a charity is not on GuideStar, a national database of charitable organizations, ask to see its letter of determination or, if it is a faith-based organization, its official listing in a directory for its denomination.
Get the cold, hard facts. A reputable organization will define its mission and programs clearly, have measurable goals, and use concrete criteria to describe its achievements.
Avoid charities that won't share information. Ethical charities are willing to discuss their programs and finances.
Avoid charities that pressure you. Reputable nonprofits don't use pressure tactics and are willing to provide literature or direct you to a Web site discussing their activities.
Trust your instincts.
When Talk Ain't Cheap
Would-be donors are most vulnerable to fraudulent appeals made over the phone and in person. Here are five tips to look for in any appeal.
- Know It by Name
Many charities raise money for the same cause, and sometimes that can conceal an intent to deceive donors. For example, you may get an appeal from the Human Society rather than the Humane Society and think it's the same thing. Look at the name carefully.
- Take Your Time
The charity that wants your money today will welcome it next month. Never be pressured to make an on-the-spot decision about a donation.
- Check Your Emotions — At Least Temporarily
Watch out for overly emotional appeals that make you cry instead of think. Emotion can be used as a ruse to get you to give without looking into what the organization actually does.
- Beware Vague Program Descriptions
If an appeal says the charity is raising money to help the homeless, ask how. Do they have a shelter and where is it? What do they do there?
- Don't Assume it's a Charity
Many different types of organizations raise funds, and you may want to make sure you can get a deduction. Most appeals will refer to the tax status of donations, but do not simply assume they are tax-exempt.