ELITE ADVISOR BEST PRACTICES
Personalized Philanthropy: Fixing the Flaw in Your Business Model - Part One
Doing the right thing for charitable clients does not have to kill your business model
By Steven Meyers
The gift design strategy embodied in “Personalized Philanthropy” is a kind of Holy Grail for charities and fundraisers. It awakens the possibility that donors’ impact and recognition can begin now, and it makes giving while living so much more satisfying than gifts that must be deferred until after death, as is so often the case. Many of the wealthiest donors simply cannot make the larger gifts they’d like to establish during their lives. The “killer apps” of personalized philanthropy accomplish this alchemy by leveraging the concept of endowment spending rate. This article suggests how that technique can also fix inherent flaws in the financial and investment manager’s business plan that might otherwise make charitable giving a nonstarter.
- What’s that flaw doing in my business plan?
- The “dirty little secret” of conventional financial planning is the disincentive to engage in meaningful charitable gift planning because it places at-risk assets under management (AUM).
- Under the conventional business model, why would an advisor actively encourage a donor to give away investment-producing assets—not just the fruit of the tree, but the tree itself—indeed, the entire orchard?
- Personalized philanthropy is leading edge. Could the grail of fundraising also be the grail of financial managers, incentivizing “giving while living” for philanthropic clients?
Note: Steve Meyers’ recently published book, Personalized Philanthropy: Crash the Fundraising Matrix, is helping inspire a number of cross-disciplinary collaborations and “fusions” between philanthropy and finance. One of the most productive is between Steve; Phil Cubeta, dean of philanthropy at the American College for Financial Services; and Timothy Belber, a generational wealth consultant who heads the Alchemia Group. After having read Tim Belber’s most recent article on four essential charitable conversations, Meyers reflects on a recent posting by American College’s Phil Cubeta, in his blog post about philanthropy and AUM.
“Often investment advisors are held back in serving the client’s philanthropy by the fear, partly justified, that the gifts to charity, if significant, will come at the expense of assets under management.” —Phil Cubeta
This observation exposes a basic but rarely acknowledged truth: The deck is stacked against a financial advisor whose clients want to be philanthropic—especially during their lifetimes. Advisors implicitly have to set a balance between serving a client’s desire to be charitable and serving their own model of retaining assets under management. Is there a way to redress any imbalance that might result? I think so, and there’s a growing cadre of advisors, gift planners and donors who agree.
While helping clients part with significant assets to favor their charitable causes may be the basis of a good values-based practice, isn’t it just bad business to give away assets under management? At the very least, you could say there’s a conflict for primacy amongst primary tasks.
Till death us do part
There are plenty of charitable and tax-wise vehicles that defer the moment of parting with assets, charitable remainder trusts, charitable bequests, insurance policies and other strategies to enable donors to make charitable gifts upon their deaths cost-effectively. The charitable elements often facilitate other kinds of transfers for family and business purposes. These kinds of transactions enable the advisor to live from day to day and year to year while continuing the management of the funds. One of the reasons for the success of these investment vehicles is that they perform, upping the size of the “ultimate” gift for charity, even if putting it off for a generation or two, or three.
Confronting your AUM fears
It’s not uncommon for advisors to fear the loss of AUM to charity, even if those assets go to a foundation that might be managed by the same advisor. Still another fear, more potent because it is so well-documented in studies, is that the descendants of the wealth-creator will also depart. They leave in droves to find another wealth manager, if the documentation is to be believed. If you Google the search term--“Studies show that more than 95% of heirs change advisors after they inherit assets”--you’ll receive over 37,000 hits.
So the parting of ways is not only with assets under management, but with clients under management. The standard business model can only do so much to defer it, if not entirely prevent it.
“Values-based” and “fusion collaborations” are gaining favor among clients. These are highly client-focused specialized practices with professionals who want to deliver lasting value and impact to client families and wealth creators. Here, “wealth is more than money.” Advisors consider clients and families with a more holistic and multidimensional approach. A trusted advisor (and there may be more than one) may lead a team in a purposeful fusion practice, gathering around the table with a lawyer, banker, money shrink and philanthropic gift officer, all in the interest of serving a client’s interests. But even this enlightened practice shares the common flaw of the original business model: Divesting client assets, even for charitable giving-while-living, is not consistent with advisor prosperity.
Personalized philanthropy and the leading-edge business model
Perhaps there is model better suited and even designed for advancing philanthropy—one that can help turn “divestors” into “investors.” Phil Cubeta predicts that “we are on the cusp of a major historical opportunity to help boomer business owners in transition from success to significance, and also greatly increase and retain assets under management.”
Under the conventional advisor model, financial planners tend to discourage the divesting of assets to be managed by charity. Under the personalized philanthropy model, planners themselves have the opportunity to manage and control vehicles from which charitable funds are dispensed. That is not the solution itself though. With personalized philanthropy’s “killer apps,” the charitable funds are delivered to the charity in a staged and intentional manner.
The aim here is to connect what’s often called the “social capital” of the client, which comes from good planning, with the societal impact that comes from the client’s connection with engines of philanthropy—the causes that work on the issues they care most deeply about. It’s the staging and distribution strategy that make the difference.
The vehicles of personalized philanthropy are sometimes described as killer apps because they dramatically shift the focus from the institution to the donor with respect to how gifts are created and managed. These personally designed gift applications allow donors much greater impact and recognition during their lifetime than would otherwise be possible. The killer apps are actually flexible endowments variously named “virtual endowments,” “philanthropic mortgages,” and “step-up gifts.” They take shape in the form of “umbrella gift agreements” that use a number of familiar building blocks of philanthropy that are staged over time and that combine current and future gifts in novel ways.
As we’ll see in Part Two, what distinguishes these powerful and flexible strategies—the killer apps of personalized philanthropy—from all that have come before is that each strategy leverages the power of “spending rate.”