It's no secret that mutual funds catapulted stock market investing. Mutual funds provided an easier way for the average consumer to participate in and manage their stock investing. They served as a catalyst for the stock market boom of the '80s and '90s. Many will argue that donor advised funds are having the same effect on charitable giving, making it easier for charitable individuals of all sizes to get involved and take action. As an advisor, are you getting in on the opportunity, or standing on the sidelines?
Donor advised funds are not new. In fact, they've been around, in some shape or form since 1931. Donor advised funds are the fastest-growing charitable giving vehicle in the United States today, and their rampant growth over the past decade should have advisors taking notice. The four largest donor advised funds alone had over $15 billion in assets as of May 2012. That's an impressive figure considering approximately 20% of the assets are paid out in grants to worthy charities every year. If you do the simple math, the top four donor advised funds in the U.S. paid out over $3 billion in grants in 2011 and received tax-deductible gifts of even more than that throughout the year. If you are an advisor wondering whether or not this is a worthy endeavor for you, here's five reasons why you might wish to incorporate them into your practice.1. Tax impact.
If you aren't familiar with how a donor advised fund works, consider the following example:
Jon and Susan are your clients. They have $500,000 in IRA accounts with you, and another $500,000 in non-qualified accounts with you, diversified between stocks and bonds. Each year, Jon and Susan donate $10,000 to three different charities. They do so by writing checks from their checking account. Let's suppose Jon and Susan choose to set up a donor advised fund (DAF). Rather than writing a check to their DAF, Jon and Susan could transfer one of their highly appreciated stock positions into the DAF. Let's suppose there is a $5,000 cost basis, and Jon and Susan transfer $10,000 worth of stock. Once the positions are transferred to the DAF, they can liquidate the position without a taxable consequence. In fact, they'll receive an immediate tax deduction of the $10,000 market value of the stock. They can freely make grants to their respective charities with this liquid $10,000 in their DAF. Meanwhile, instead of writing a check to their charities, they write a check to purchase $10,000 worth of the same stock they just transferred. What happened here? From a financial standpoint, they have the exact same amount of holdings, except they've wiped away the embedded capital gains they were facing. They'll receive the same amount of tax deductibility as they normally would for their $10,000 charitable contributions, except they are now in a much better tax position.2. Simplicity.
The average charitable consumer might support three to five charities throughout a year. Tax time becomes cumbersome as they need to track down receipts, etc. With a DAF, all of the deductibility aspects are handled on the front end, and they can make their charitable grants online by pointing and clicking.
3. Costs and ease of
Most advisors who dream of being involved in the charitable planning arena have experienced the pain of going through multiple appointments, explaining elaborate schematics of CRTs, CRATs, and CRUTs, and dealing with attorneys. More often than not, the complexity of the planning turns a client off and ignites the procrastination fire in the client. DAFs are the easiest accounts to set up, involve very little paperwork, and no major legal hoops to jump through (read: you don't need attorney involvement). Generally speaking, there is an ongoing administrative fee for the account and most DAFs are set up without any upfront costs. They are as easy to open as a bank account.
Want to be different? Then do something different. Having a charitable conversation with your charitable clients and prospects will differentiate you from every other advisor with whom they've ever met. Stop talking products and investment solutions. Talk about values-based things like charitable giving. Sure, there is a huge tax benefit, and you'll make their life easier, but when the conversation shifts from investments to charitable giving, you'll see a different side to your client. And they'll see a different side to you.
5. Carve a niche.
Your entire practice doesn't need to be devoted to charitable giving, but if clients and prospects begin to see you as a charitable giving advisor, the word will spread. When churches, charities, accountants, and attorneys hear about the work you do in the charitable giving arena, they'll be clamoring to have you at their next function or introduce you to their clients and donors. It doesn't happen overnight. It starts with you having a conversation with your charitable-minded clients and prospect.
There are likely a few more reasons why you may wish to integrate donor advised funds into your practice. Once you've come to grips with "why," you'll need to consider "where." The four largest donor advised funds are the Fidelity Charitable Gift Fund, the Schwab Charitable Fund, the Vanguard Charitable Endowment Program, and the National Christian Foundation. Fidelity, Schwab, and Vanguard are secular, for profit organizations. The National Christian Foundation was one of the first Christian-focused donor-advised funds.
You'll want to carefully evaluate the pros and cons to any DAF program with whom you consider getting involved. Some advisors may appreciate the name brand recognition that Fidelity, Schwab, or Vanguard offers. Others may like the non-profit, Christian-focused tie-in of the National Christian Foundation. Evaluate them each carefully. Introducing DAFs into your practice can be a great way to enhance the client relationship and further differentiate you from your competition. Your clients will thank you for it.Mark Mersman is CMO of the Wealthnetic collection of companies and may be reached by email at [email protected] or online at www.wealthnetic.net. Wealthnetic subsidiaries include Portformulas, a formulaic trending money manager; USA Financial, a broker-dealer and registered investment advisor; AnnuAssure, an insurance and annuity wholesaler; and Plug-N-Run, a cross-platform marketing and technology firm.