Supporting your clients philanthropy

Tax-effective giving is something that financial advisors talk to us a lot about. Recently I joined colleagues from Tilney, Smith & Williamson on a webinar to delve into this topic in more detail. Here's a summary of the key discussion points.

How philanthropy can deepen your relationship

Philanthropy talks to your clients core values, their interests, and their passions. If you can open discussions into those kinds of areas it can only help grow client relationships.

Giving and philanthropy aren't just subjects for the principal client. They can become family-wide decisions. So it's an opportunity to broaden your relationship with the next generation and other family members.

When to talk about philanthropy

There are many opportunities for advisers to talk to clients about charitable giving.

Initial decision-making process

Introducing philanthropy can open up discussions with clients around what they want to do with their wealth. For many clients it's something they may not have considered before. They may not be aware of the options around running their own foundation or a donor advised fund. There's a role here for advisors to play in educating clients on the differences.

The point of funding

This is where the advisor would advise clients on the timing of donations, claiming gift aid or tax relief and whether to gift in the form of shares or cash. The opportunity is to add financial value and make a difference to the tax relief clients get and the value of donation the charity receives.

Ongoing management

Working alongside an investment manager, an advisor can help clients grow the value of their donor advised fund.

How a donor advised fund differs from a standalone charitable foundation

A donor advised fund or DAF is a wrapper or a vehicle for charitable giving. It is an alternative to a client having his or her own standalone charitable foundation.

Instead of registering with the Charity Commission and/or companies house, a client can set up a fund with a DAF provider like CAF. This gives the client everything they get from a standalone foundation but it comes under CAF's umbrella. What that means is they don't have a lot of the hassle associated with running their own foundation.

We take care of all that. This lets the client focus on the meaningful side of giving, from working with the charities and talking to beneficiaries to finding out about the impact that their giving is having.

What clients can do with a donor advised fund

We say gift, grow, grant. A client can give all sorts of assets into a donor advised fund.

Gift – they can give cash, shares and we've sometimes taken in gifts of artwork other kind of liquid assets. They then receive the tax benefits of making that gift.

Grow – you can invest the assets in a DAF for the long-term. We often partner with advisors and investment managers. Together we'll design a investment strategy that works for the clients philanthropic plans.

Grant – that's a big part of what we do, we can give to charitable causes anywhere around the world and that's not an easy thing to do. HMRC has quite a lot of rules about using UK charitable funds to support charitable causes outside the UK. We deal with those. We can fund programmes and initiatives, multi-year donations and provide impact investing solutions. We can also make loans to charities and do some of the more complex forms of support that clients may want.

Growing charitable funds through investments

There are some things to consider when designing an investment strategy for charitable funds:

The time scale of the charitable projects

Are they very short? It may be that the project your client is looking to give to is quite short-term so you may want to hold cash rather than invest straight away. Or, if it is a long-term problem they want to tackle is this going to be a perpetual investment? What are the income requirements for meeting these different charitable giving goals?

Environmental, social and governance (ESG) investment

You can often choose investments that are indirectly helping client’s causes. They may be trying to reduce carbon emissions and you may be invested into renewable investments. That's one way you can help once you've got the investment plan in place.

Watch the webinar

Questions from the webinar

So CAF provides the donor advised fund, the tax wrapper, and the underlying investments are provided by an asset manager, like for example Tilney?

Yes. In simple terms, what happens is the client makes a charitable donation to CAF and we put it in the donor advised fund that has their name on it. If the client or the advisor who's also working with us wants that to be managed on a discretionary basis with a particular asset manager then CAF becomes that wealth manager's client and invests the portfolio with the investment manager.

That's the sort of process that we went through with Tilley and we can set up segregated portfolios. There are other ways where if an investment manager has ESG or funds that could be bought on a platform that CAF uses then we can just go straight into those funds at the clients request.
Is there a minimum amount for a donor advised fund to be cost effective for a client?

There isn't really a minimum and I don’t think the cost side of it is really a factor when considering a donor advised fund. The charge is similar to most investment managers, so a sliding scale of a certain percentage of assets under management, which obviously lowers the more there is.

To give you an example, our minimum balance on this sort of DAF that we're talking about is £25,000 pounds and the minimum fee is a few hundred pounds when you're at that kind of entry level. You wouldn't set up a donor advised fund with five thousand pounds but once you're into the low tens of thousands you become eligible to open a donor advised fund and I think that cost is not really a factor.

Likewise at the top end we have some DAFs that are the best part of a hundred million pounds and people think “oh surely once you're at that level you need your own foundation”. It's much more to do with how involved your client wants to be in the day-to-day admin of giving and how directly accountable and liable you want to be for that activity – that's what I tend to say to people at both ends of the scale.