Many Canadians are putting their money toward worthwhile causes such as fighting climate change, tackling homelessness or supporting international development. But are they aware of all the ways they can have an impact and do so in a way that integrates with the rest of their financial plans? That’s where financial advisors can help – and addressing clients’ philanthropic goals makes good business sense, too.
According to Ellen Remmer, senior partner at The Philanthropic Initiative (TPI) in Boston, “advisors who can talk about these issues with their clients and prospects develop deeper relationships.”
She points to results of a recent U.S. Trust study conducted in partnership with TPI that found 71 per cent of high-net-worth investors say it’s important to discuss philanthropy with their advisor.
Yet, the same study revealed that many advisors aren’t confident about their own knowledge in this area. Only 53 per cent of U.S. advisors surveyed described themselves as very familiar with charitable trusts, 42 per cent said they were familiar with donor-advised funds and 38 per cent said they were familiar with private foundations.
“It’s incredibly valuable to get smart on this,” Ms. Remmer says.
Ruth MacKenzie, president and chief executive officer of the Canadian Association of Gift Planners in Ottawa, echoes that message and issues a warning for advisors.
“There are increasing numbers of advisors providing philanthropic advisory services. If you’re not providing those services, you may risk losing your clients,” she says.
Becoming more in tune with philanthropy requires getting a good grasp of the various types that exist. At the most basic level, there’s chequebook philanthropy and strategic philanthropy.
Ms. Remmer describes chequebook philanthropy as a straightforward response to a charitable need: write a cheque to support an issue or an institution.
In contrast, with strategic philanthropy, “you’re looking at specific outcomes,” she says. “It’s often more long term, more systemic. Sometimes, people refer to it as problem-solving philanthropy.”
Getting strategic with philanthropy may mean bringing additional vehicles into play.
“Clients are looking at things like a donor-advised fund, a private foundation and even life insurance as a way of giving back to charity,” says Lydia Potocnik, vice-president and director of philanthropic advisory services at BMO Wealth Management in Toronto. “Sometimes, they’re combining some of these vehicles, so it’s not just choosing one.”
Private foundations versus donor-advised funds
The traditional approach for wealthy families wanting to give back is to form a private foundation, but to make that work, Ms. Potocnik says clients typically need a net worth of $10-million or more. That’s because a foundation generally requires a minimum deposit of $1-million, from which it disperses at least 3.5 per cent a year to registered charities in Canada.
However, donor-advised funds require much less of a financial commitment. “You can create a donor-advised fund with as little as $10,000 through a community foundation or through a number of financial institutions,” she says.
In a donor-advised fund, clients get a donation receipt as soon as money goes in, but they don’t have to make an immediate decision about which causes will receive the funds, Ms. Potocnik adds. Like foundations, donor-advised funds are generally expected to grant at least 3.5 per cent a year to registered charities in Canada.
Given their various benefits, Ms. MacKenzie says, “We’re seeing huge growth [for donor-advised funds] in Canada. I think it’s something that advisors see as a really important piece of the tool kit [and] it provides a long-term, sustainable stream of finances for charities as well.”
Responsible investing versus impact investing
A 2019 Morgan Stanley study found that 85 per cent of U.S. investors and 95 per cent of U.S. millennial investors are interested in sustainable investing – another way to make a positive difference with money.
There are different ways to address this interest. Responsible investing is well established in Canada, with many options that screen out certain types of companies to help investors do good while growing their assets.
Impact investing takes this approach to the next level, directing money toward organizations that are actively doing good themselves – sometimes with the expectation that investors won’t see a return on investment or even a return of capital.
“A good entry point for a lot of people has been responsible investing, but if you’re really trying to amplify and have as big an impact as you can, you have to be more intentional and more specific,” Ms. Remmer says. “That could be investing in a private fund that’s oriented [toward a defined goal], individual companies or social enterprises.”
She says discussions need to be had to match a precise philanthropic objective through impact investing simply because there aren’t as many products available yet, “but the field is evolving rapidly, so that’s exciting.”
Values-based discussions can engage entire families
With the variety of solutions available for clients who want to donate to causes they feel passionate about, advisors can feel more comfortable starting values-based discussions with clients. And the process of developing and implementing a strategic philanthropic plan is a good way to get to know clients’ children and grandchildren in the process.
The U.S. Trust-TPI study found that 61 per cent of advisors said that discussing philanthropy had helped them build relationships with clients’ extended families.
“Getting to know your clients at a more personal level by engaging them in a conversation about philanthropy … allows advisors to have a discussion with clients about issues that they care deeply about, their personal motivations and even their relationships with their family,” Ms. Potocnik. “Philanthropy opens up those types of conversations, so advisors have an opportunity to get to know their clients and the next generation better.”