Planned giving hasn't cut advisors
out of the picture.
Donor-advised funds have experienced rapid growth
the past several years-in large part due to flexibility and simplicity
they offer for those with more than just a casual interest in
charitable giving. These funds are so easy to use, in fact, that one
might wonder if they nullify the need of a financial advisor when it
comes to planned giving.
Well, according to advisors involved in their clients' charitable planning, we can all stop wondering. Advisors are needed as much as they ever have been in the area of charitable giving, they say, adding that the need of advisors may be increasing because of the many options available to philanthropic clients.
"Deciding on a vehicle-that's the easy part," says Joshua Itzoe, principal of Greenspring Wealth Management in Towson, Md. "What's harder is helping clients flesh out what's really important and what matters to them-helping them come to grips with what their wealth means."
Transforming capital gains into charity has of course been a hot topic lately, with Warren Buffett and Bill Gates-two of the richest men in the world-having teamed to create one of the world's richest charities.
But while the enormity of the Buffett and Gates gifts may be unprecedented, the tale of successful investors diverting their gains to charitable causes is not. Charitable planning has become an increasingly important part of financial planning, advisors say, adding that this has been particularly true since the run-up of the technology market in the late 1990s.
Perhaps the most visible sign of the way investors have turned to philanthropy is in the growth of the donor-advised fund market. Once a gift-giving device that was largely used by donors to community foundations, donor-advised funds have become a mainstream financial product in recent years, with many national companies offering funds of their own.
Fidelity Investments, for example, has seen its donor-advised fund grow into one of the nation's largest charities since it was founded in 1991. The company recently announced the fund has surpassed $6 billion in charitable grants. Since the fund was created, it has received more than $8.3 billion in contributions from more than 39,000 donors.
"Driven, in large part, by the [baby] boomer generation's desire to give back, we expect the 'living giving' trend to continue," says David L. Giunta, president of the Fidelity Charitable Gift Fund. "In fact, of the contributions made to the Gift Fund half are donated by boomers."
Other companies have also reported rapid growth. The Franklin Templeton Charitable Giving Fund, for example, reported that its assets were up 75% in the nine-month period ending March 31. Vanguard's charity fund reported making $300 million in donations for the 2006 fiscal year ending June 30, up 37% from 2005.
Underscoring the rise in assets they're experiencing, a number of national donor-advised funds have also recently reduced their administrative fees. Vanguard slashed its fees 45% on accounts of $1 million or more in July. Charles Schwab reduced its fees on the first $500,000 deposited in its gift fund from 1.75% to 0.6%. Fidelity, meanwhile, lowered the fees on most accounts by 40% or more.
Overall, donor-advised fund assets went from $2.4 billion in 1995 to $12.3 billion in 2001, according to the Chronicle of Philanthropy. In 2005, assets reached $17.5 billion, up 15.5% from the year before, according to the National Philanthropic Trust.
The simplicity of these funds and ease of entry-with minimum deposits as low as $10,000-has been a key driver of sales. By offering many of the same benefits of a private foundation-without the donor having to take on the burden and expense of administration-donor-advised funds have become the vehicle of choice for a broad range of clients, advisors say.
This ease of use, however, apparently hasn't lessened the need for financial advisors.
In fact, advisors say they continue to play an important role for clients who utilize donor-advised funds to plan their charitable giving-including plotting out broad strategies, managing investments and clarifying goals. Deciding among the various donor-advised funds is another area in which advisors provide input, with the choices ranging from the large national companies to the more than 600 community foundations that also offer donor-advised accounts.
"I think there will always be folks who have charitable inclinations and they may be uncertain as to how to best fulfill that," says Michael Palmer, principal of the Trust Company of the South in Raleigh, N.C. "I think that's an important role for an advisor to play-to find the most efficient or effective charitable outlet for the client."
One example of what an advisor can contribute to a client is the use of tax planning in a charitable giving strategy, Palmer says. In one case, Palmer was working with a client who wanted to set up an endowment in a donor-advised fund, with her three grandchildren recommending the recipients after her death. Palmer found that the most efficient way to reach the goal was for the woman to name a donor-advised fund as the beneficiary of her IRA account.
Palmer had another client whose favorite charity was his own church, in the form of cash payments. "He'd tell me, 'I just like putting the money in the plate as it goes around,'" Palmer says.
But Palmer, noting the man had highly appreciated stock positions, convinced him that it would be more efficient to give the church gifts in the form of the stock-thereby giving the church money that would otherwise be lost in the form of capital gains taxes. "A lot of folks who aren't working with an advisor sometimes forget about the benefits of gifting a stock," he says.
Placing appreciated assets in a donor-advised fund account is, in fact, a key strategy when it comes to gift-giving, says Matt Syverson of Syverson & Company LLC in Overland Park, Kan. For folks who are givers anyway and they have taxable investments and/or a lot of IRA money, the donor-advised fund provides the tool to give beyond their checkbooks and let the gains do the giving," Syverson says.
In one example, Syverson says he worked with a couple who were writing out checks to various charities amounting to about 20% of their income per year. What Syverson had them do instead was take about $50,000 of appreciated stock-bought through an employer's discounted stock purchase program-and place it in a donor-advised fund. That was enough to fulfill their goal of donating 20% of their income to charity, with the side benefit of freeing up hundreds of dollars in their annual cash flow.
"It allowed us to basically use the assets and let the gains do the giving for him," he says.
Another key role advisors play, whether or not clients ultimately use a donor-advised fund, is engaging clients in a conversation about charitable giving, says Itzoe of Greenspring Wealth Management.
As Itzoe sees it, it's important to have clients distinguish between "the purposeful versus the practical." In other words, advisors need to get clients thinking about why they want to give and then creating a plan of action. "A lot of people have charitable inclinations," he says. "They want to give to organizations, but a lot of times people don't think about how they can focus their giving or make it more strategic. They just write a check."
That's why, Itzoe says, many clients don't even mention their charitable inclinations unless the subject is brought up in a meeting. "Sometimes we'll sit down with a couple and find that one spouse is passionate about a particular cause and the other doesn't even know it," he says.
Wayne von Borstel, an LPL-affiliated advisor who is principal of von Borstel Associates in Portland, Ore., says that 5% of the clients who come to him have charity in their planning. By the time his review process is over, however, about 95% want to include charity in their planning.
For most clients, he says, the charitable light goes on once they realize they can divert tax dollars to charitable causes. "The question is, are we going to do voluntary philanthropy or involuntary philanthropy," von Borstel usually tells clients. "Do you want to control where your money goes in your community, your society and how it affects the ones you care about, or do you want Congress to decide that?"
Another discussion that usually gets clients thinking is the question of how much money they need to pass onto their children-and the potential harm in leaving too much. "I've had three cases of young people inheriting money or winning lawsuits who go out and build a house, but by the time they were through with it, they couldn't afford to live in it," says von Borstel, who also helps charities network with donors with an organization he founded called the Northwest Planned Giving Initiative.
Investment management is another area in which advisors can be closely tied in with their clients' donor-advised funds. Fidelity, for example, recently launched a program that allows clients with gift fund accounts of $1 million or more to designate their own advisors to help manage their investments. The plan also allows the advisors to use investments outside of Fidelity's mutual fund family.
Advisors say that many community foundations also allow some degree of advisor involvement in investment management. The American Endowment Foundation, founded in 1992, is one of the few organizations that allows independent advisors to completely manage the assets of their clients' donor-advised funds. "We take the concept of donor-advised and extend it to investments," says Philip Tobin, president of the foundation.