(Note: This is the second of two articles based on a study of affluent clients and planned giving that encompasses the way they give now, how they want to give and how financial advisors can best partner with them. The research was commissioned by Merrill Lynch and conducted by Prince & Associates.)
In last month's article, we saw how affluent Americans want to donate more money to charity. They are also very interested in planned giving and the tax and estate planning benefits it can provide. Our research revealed that relatively few high-net-worth households have made planned gifts, however, largely because their financial advisors have not given them the guidance they want or because those advisors have mistakenly emphasized a single sale over an ongoing program of planned giving.
This time around, we will look at the advisors' side of the story and see how focusing on the philanthropic process rather than a one-time product sale can generate significant revenue through ancillary sales, result in a greater number of unsolicited referrals and even give the advisors themselves a sense of personal satisfaction for having directed money toward charitable causes.
Charity Today
No matter how you measure it, there is certainly a bull market for giving in America right now. According to the American Association of Fundraising Counsel, more than $200 billion was contributed to charity in 2000, an increase of 6.6% from 1999, and three-quarters of that total was donated by individuals rather than corporations or foundations. Despite the current recession, that total is expected to continue to grow over the next decade as the parents of baby boomers die and leave trillions to their heirs-and to charity.
Given the amount of money in play, it is not surprising that there is also a record number of nonprofit organizations in the United States today-some put the number as high as one million. And those organizations are increasingly sophisticated and proactive about marketing themselves and offering informational resources to donors and advisors alike. At the same time, thanks to the outsized profits that many people have made over the last quarter century in the stock market and the looming specter of capital gains taxes on those profits, there also has been a proliferation in the number of ways to give and the benefits they offer, further complicating the issue for affluent donors who are hoping to find the most effective way to give, both for themselves and for the charities they favor.
Our Research
To find out how the affluent approached planned giving, the many charitable options and the role of their advisors when it comes to charity, we surveyed 519 households with estates worth at least $1 million, exclusive of their primary residence. We found that, despite the considerable interest in planned giving and an awareness of the significant tax and estate planning benefits of such a program, most donors continue to practice "unplanned" giving or "checkbook philanthropy" as it is sometimes called, donating what are usually small sums of cash on an irregular basis and without the guidance of an advisor. Indeed, barely a third of the affluent households we surveyed had made a planned gift, and those that had tended to stick with the gift with which they are most familiar, the bequest. They have yet to adopt any of the other planned-gift options that might increase their giving while adding financial flexibility, such as a donor-advised fund, gift annuity, or trust. Furthermore, most bequests are cash rather than other assets, and donors may not be taking full advantage of the benefits of planned giving, missing the chance, for example, of donating highly appreciated stock without paying capital gains taxes.
Looking For Guidance
When we asked respondents about their interest level, however, the bequest didn't even make it into the top five: 89.8% wanted to know more about private foundations, largely because of the cachet, and 35.1% wanted to learn more about charitable lead trusts. Overall, according to our research, 81.7% of the households surveyed wanted to give more to charity, and 76.2% wanted to learn more about their charitable options. They want to do more, and they are counting on their financial advisors to show them the way, especially because they are nervous about the potential impact of giving on their lifestyles or their plans for their heirs. Those would-be donors may in fact be losing sight of the fact that planned giving, by reducing income taxes, estate taxes and capital gains, can have the opposite effect.
A New Donor Profile
Finally, today's donors are very different from their parents and grandparents when it comes to charity. While their primary motivation is benevolence, they are in many ways more financially savvy than previous generations, and they well-understand that there are tax and estate benefits to be enjoyed. Further, they are often wealthy at an earlier age and struggling to come to terms with their wealth and their values, particularly the way in which those values can be supported through charitable giving and passed on to their children. In addition, today's donors are by and large more interested in taking a hands-on approach and more likely to be skeptical of large charitable organizations.
Relying On Advisors
Despite the fact that financial advisors have not given them the direction they're looking for, the majority of those households in our survey nonetheless relied on their advisors for guidance. Excluding cash gifts and charitable bequests, the respondents in our study said they were motivated to make charitable gifts by:
Financial Advisors 67.7%
Professional Fund-raiser 11.8%
Nonprofit Volunteers 7.6%
Attorneys And Accountants 5.4%
Peers 4.3%
Family/Self 3.2%
(Sample=519 high-net-worth households. Source: Prince & Associates)
Still, donors are not getting what they want from their advisors. Recent research by The Philanthropic Initiative Inc., showed that even among those clients who had made planned gifts, advisors were in some cases so under-or ill-informed about planned giving that the clients were unlikely to want to do it again. Our own research showed that the move from a transaction-based to a fee-based, consultative business may not have made its way to planned giving: 79.1 % of the households who had made planned gifts reported being "sold" charitable products and perceived the sale as a one-time event that was not part of an overall financial plan and quite possibly unrelated to their values.
The Latest From Advisors
To learn more about planned giving from the advisor's perspective, we also surveyed 256 financial advisors, each having at least five years experience and each having generated at least $400,000 in fees and/or commissions in each of the last three years.
To begin with, we learned that charitable giving was quite prominently promoted, with every advisor we surveyed reporting that at least 40 % of his or her marketing efforts were devoted to charitable giving. But based on the results of our study, only 42 of the 256 advisors, less than a quarter of the total, could be defined as "philanthropic planners," despite the marketing thrust. The remaining 214 concentrated on single-product sales.
We defined a "philanthropic planner" as an advisor who took a consultative approach to planned giving. As such, the advisor positioned planned giving within the context of a client's overall financial profile, reviewing all the options, benefits and consequences. Philanthropic planners also tended to take the conversation to a more personal level, understanding that helping their clients come to grips with their values was as important as the form of giving the client chose. In short, they fully un-derstood the extent to which charitable giving can serve the best interests of the client and the charitable community.
New Business And Referrals
Facilitating charitable giving also benefits the advisor, of course. For starters, the philanthropic advisors were satisfied because of having been part of the process. Furthermore, philanthropic planners on average made as much as five times more in ancillary business than their product-oriented peers during the first year in which planned giving was broached, even if a planned gift was not made that year. Finally, philanthropic planners received 12.9 unsolicited client referrals for every 100 clients, as opposed to 0.8 such referrals for the other advisors.
The Next Steps
Research conducted by nonprofit organizations shows that those financial advisors who can effectively partner with their clients when it comes to charitable giving stand to benefit by expanding their relationships and getting more referrals. Our research bears this out. That begs the question as to how advisors can best become philanthropic planners. First, they can become more educated about the many charitable options available today. Thankfully, between nonprofits and financial services firms, there are now more outlets for such information than ever before.
Second, no matter how educated advisors become, they are not going to be able to cover all the bases when it comes to giving. That is why also it is essential to have the key resources in place by putting together a qualified network of specialists-accountants, attorneys, insurance agents, and financial planners-who can field any question. Clients do not expect their advisors to have the answer to every inquiry about giving; but they would like to think that those advisors have the resources to come up with an answer.
Finally, and this may well be the biggest stretch, advisors need to talk to clients on a more personal level when it comes to charity. Extensive research by nonprofits shows that this is the biggest hurdle for advisors who fear they may be intruding when asking clients about the ideals and values that are, in fact, the starting point for charity. In almost every aspect of their financial lives, today's clients have a greater need for connection on a more intimate level, and the advisors who are most comfortable there will be more successful, particularly when it comes to a topic as personal as charitable giving.
Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.