Wealth Management & Philanthropy

This article appears in the November issue of Wealth Manager magazine. It chronicles the way that I think the wealth management industry is currently underserving their clients when it comes to philanthropy and social investing.

This is Part 1 of 3. Please read part 2 and part 3.

The Next Wave: Part One
By Sean Stannard-Stockton
Originally Appeared: Wealth Manager Magazine, November 2008

In 1975, the SEC deregulated brokerage commissions and set the stage for Charles Schwab & Co. to create the discount brokerage business model. By unbundling the sale of advice from execution, Schwab fundamentally changed the wealth management business. Today, the intertwined worlds of philanthropy and finance are undergoing a similar shift that is transforming the wealth management industry.

Using a model similar to the full service brokerage business, community foundations have long bundled philanthropic advice with execution. In 1992, the Fidelity Charitable Gift Fund—in a comparable move—unbundled philanthropic advice from execution. By eliminating advice on which nonprofits to support, it was able to offer a low-cost product that competed with community foundations.

This seismic shift is just one indicator of the way the lines between wealth management and philanthropy are blurring. Today we are in the early stages of making philanthropy a core wealth management service.

Over the past 30 years, the wealth management industry has been radically reconfigured to serve the needs of the Baby Boomer generation. For much of that time, Boomers themselves focused on the process of saving for retirement. The Center on Wealth and Philanthropy at Boston College predicts that the next 40 years will see a $41 trillion wealth transfer between generations—the largest transfer of wealth in history. Over $6 trillion of this fortune is expected to go to charities.

Even while this shift in priorities marches forward, some wealth managers remain stubbornly focused on helping clients retain their wealth. The business is structured to encourage advisors to discourage philanthropy, and many financial professionals lack the tools needed to assist their clients with charitable giving.

In many cases, advisors simply hand off the responsibility of dealing with the client’s philanthropic impulses. While collaborating with lawyers, community foundations, CPAs and nonprofit planned giving officers might seem like a good solution, the fact is that investment management of philanthropic assets has specialized needs.

Interest in philanthropy among high-net-worth individuals has been growing for some time. But it was events of 2006 that truly introduced the modern approach to philanthropy into the consciousness of the affluent. In that year, Bill Gates announced he would be stepping down from his full time role at Microsoft to work on the Bill and Melinda Gates Foundation. Warren Buffett quickly followed with the announcement that he would give the bulk of his wealth to the Gates Foundation. This event was the tipping point in what I call the “Second Great Wave of Philanthropy.”

This phrase describes the resurgent interest in philanthropy that follows in the footsteps of Andrew Carnegie and John D. Rockefeller, who created the First Wave. While Carnegie and Rockefeller did much of their giving posthumously and thought of it separately from their business life, the Second Great Wave is characterized by the trend of giving while living. Modern philanthropy follows the leads of people like Gates, who decided to quit business to focus on philanthropy, and Buffett, who decided not to wait until his death, but to give away the vast bulk of his fortune now.

But the importance of Gates/Buffett is not simply the amount of assets in play. Instead, the Gates/Buffett announcement will come to be seen as a clarion call that encouraged people in all walks of life to embrace “giving while living” and ended the traditional decision to give to charity only at the end of one’s life.

But apart from “doing good,” both Andrew Forrest, Australia’s richest person, and Buffett cited another trend: The desire not to harm their children by plying them with too much wealth. Buffett’s mantra is to give your children “enough so they can do anything they want, but not so much that they can do nothing.”

One of the major concerns of today’s high-net-worth families is the worry that too much wealth will spoil their children. Today many families are seeking to give their children the “right” amount of wealth. There is plenty of evidence such as that presented in the book Philanthropy, Heirs & Values, by Roy Williams and Vic Preisser, (2005, Robert D. Reed Publishers) demonstrating that the best way to pass assets on in a way that preserves the wealth but does not spoil the children, is for the entire family to engage in philanthropy together.

The result is to shift philanthropy away from being a concern primarily of estate planners, who, since most giving was in the form of bequests, traditionally played the role of philanthropic advisor. “Giving while living,” on the other hand, shifts the philanthropic advisory role squarely onto the shoulders of wealth managers. And so we see that philanthropy is a core element of wealth management in a post-Gates/Buffett world.

Why, then, have some wealth managers been so slow to respond to their clients’ growing interest in philanthropy? The primary issue is that large wealth management firms see philanthropy as a secondary customer service offering rather than a primary question of asset allocation. These still view philanthropy as akin to the touchy-feely family office/concierge service that some very high-end wealth managers offer. At the same time, major donors are not accustomed to paying for philanthropic advice. These two facts combine to create an environment where wealth managers view philanthropic consulting as a cost center with no associated revenue.

In a world where most families with investable net worth above $10 million give $50,000 or more per year to charity, clients are being deeply underserved. They are paying far more in taxes than they should, and they are missing out on the opportunity for their giving to have far more impact. In the coming decades, failure to offer philanthropic advising will be akin to a wealth manager professing ignorance of retirement planning.

However, simply understanding private foundations, donor advised funds and charitable trusts will not be enough. At least some wealth managers already have this expertise. But simply helping clients set up these vehicles is nothing more than tax planning. True philanthropic planning must embrace the growing convergence between financial products and giving opportunities and help their clients navigate the philanthropic landscape.

This is Part 1 of 3. Please read part 2 and part 3.


  1. Dan Pallotta says:

    Great topic Sean. If the expansion of this navigating guidance can include, or indeed focus on, non-traditional destinations for giving – destinations that leverage, instead of annihilate the giving, then the opportunity here is really far-reaching. In other words, if the giving goes to typical program funding then it wouldn’t have near the potential that it would if it goes to experiments in revenue generation, which next to no one is funding. When you hit on that wheel, a $100,000 gift could turn into a perpetual annual revenue stream of many millions. Funding for the study and development of, say, a stock market for charity could have leverage in unfathomable multiples. These are things traditional funders are unlikely to finance.

  2. Great topic, indeed. I’ve always respected Warren Buffet for this. He even went as far as loaning his son money for a farm instead of outright giving it to him considering that he had already cashed in his Berkshire shares despite Warren’s advice. I wonder if there is room for strategic partnerships here. For example, if wealth managers partnered with another firm that provided philanthropic advice, they could stretch their investment and tax advice without setting up new departments.