We're fast closing in on the holiday season, and barring a miracle fourth-quarter rally, it will be the first time since 1941 that the stock market has been down for three years straight.
Few portfolios have gone unscathed, but how will the long downturn affect the giving spirit of those clients who have been in the habit of making charitable donations at or around year's end?
The odds are good that it won't. Those who have traditionally been generous will still have the charitable impulse. But given the state of the stock market and their portfolios, they may be more circumspect than they have been in the past about how much they want to give, and perhaps even more important, about the manner in which they give. Their financial advisors will need to help them find the right way to be charitable.
Americans Are Still Giving
Even with the downturn, Americans set a new standard for giving in 2001. According to the American Association of Fundraising Counsel, $210.89 billion was donated to nonprofit organizations in 2001. Though that represents a slight decrease from the year before when adjusted for inflation, the dollar total is still formidable and represents a new high. In fact, total giving in 2001 accounted for better than 2% of GDP, about the same rate as when the market was booming in the late 1990s. And individual donors gave an estimated $160.72 billion, accounting for 75.8% of all giving.
Over the past few years, we've conducted extensive research among the affluent regarding their feelings about charitable giving, and we have made a number of consistent findings. First, the inclination to give is there; almost every person in every survey has a record of giving and the desire to continue to do so. Second, the majority of affluent donors give in a random way-"checkbook philanthropy"-by dashing off a series of checks as the year ends. Most of them, however, want to move toward a more structured way of giving that reflects their values and also takes into consideration their financial picture and estate planning needs; that is, planned giving vehicles such as charitable trusts, will bequests or donor-advised funds. Even with their interest in planned giving-and the potential tax benefits that will be very much in play this year-few affluent households have made any such gift, and they are daunted by the number of planned giving options. They are counting on their advisors to help them, our research tells us, but few advisors have done so, despite the promise of a better relationship and the opportunity to help their clients leave a lasting legacy.
Control And Complexity
So how can their advisors help them out? In research conducted on behalf of GivingCapital, a firm specializing in philanthropic solutions for high-net-worth individuals, we found that the affluent could be best matched to a specific planned gift by considering two factors. The first is their appetite for control, the extent to which they would continue to have a say in how their charitable donation was used after having made it. Second was their tolerance for complexity, how complicated or simple a given planned gift was. It's an assessment that an advisor is well suited to undertake.
For GivingCapital, we surveyed 2,642 households with at least $100,000 in investable assets. Based on an examination of their control and complexity preferences, we were able to divide them into four groups. The largest percentage, Group A, comprising 53.4% of the total households, wanted a measure of control but were put off by complexity. Group B, those who wanted to avoid both control and complexity, made up 22.2% of the total. The 19.6% in Group C sought control and had no problem with complexity (and might even relish it). Finally, there was Group D, those who were not interested in control but wanted complexity, which accounted for just 4.8% of the 2,642 households.
The Right Planned Gift
We then matched each group to one or more planned gifts based on variables such as how easy or difficult the gift is to make, monitor and control. Those in Group A were best suited to will bequests, life insurance and donor-advised funds, planned gifts that were easy to make and also allowed the donor the option to stay involved. Pooled-income funds, charitable-gift annuities and supporting organizations were ideal for those in Group B, while Group C households would be most satisfied with charitable remainder trusts, private foundations and charitable limited partnerships. Those in Group D matched up nicely with the mechanics of charitable lead trusts.
Of course, the fit always isn't going to be this smooth; there are always enough shades of gray when it comes to a client's expectations and preferences that will lead to surprises and adjustments. What matters is that clients know their advisors are involved, informed and patently interested.
It also helps if advisors have a working knowledge of the various planned gift options such as the pros and cons, the tax benefits, and the costs. No client will expect his or her advisor to be an authority on every form of planned gift. Clients will, however, expect the advisor to have the resources and network to fill in the blanks and take care of the fine print. As a result, an advisor can help a client fulfill his or her charitable intentions, save on taxes, and improve their relationship. Not a bad package for the holiday season.
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.