What motivates high-net-worth (HNW) and ultra-high-net-worth (UHNW) individuals to participate in philanthropy?
Nobody likes paying taxes and since charitable deductions are an obvious and straightforward way to reduce tax bills, most American assume the biggest motivator is tax deductions. However, recent studies suggest that tax savings rank low on the list of motivations for giving, especially among HNW donors. Instead, they’re driven by broader purposes and view charitable giving as a component of their overall wealth management strategy instead of a tax-saving tactic.
The challenge for wealth firms is that, according to studies, advisors are missing the bigger picture behind why clients engage in philanthropy.
The disconnect between advisors and charitable conversations
In a generous nation (the recent edition of the World Giving Index noted that the U.S. has been the most generous nation in the world for the 10 years that the index has existed) where tax avoidance is prominent in financial conversations, it can seem logical to assume that HNW individuals give only for the sake of preserving wealth.
Turns out experts like MarketSmart CEO and Founder Greg Warner say this isn’t true. In fact, Warner suggests that, if wealth preservation were the only thing HNW individuals cared about, they wouldn’t give to charity at all. “No matter how beneficial the act of giving can become from a tax perspective, it is still financially smarter to give nothing,” he says. “So, no one decides to give because of the tax deductions.”
Studies like this one from AssetMark back up Warner’s claims. When the researchers asked HNW and UHNW donors about their motivations for giving, tax planning ranked eighth on their list. Here are the causes ranked in order of importance to this group of donors:
- Personal satisfaction
- Special cause
- Impact
- Give back
- Legacy
- Community-related
- Religious conviction
- Tax planning
Still, many advisors remain focused on optimizing tax benefits instead of the heartfelt aspects, which can allow them to dive into more meaningful conversations with their clients. In conjunction with the Indiana University Lilly Family School of philanthropy, the 2015 U.S. Trust Study of High Net Worth Philanthropy, revealed that 71% of advisors take a technical approach to discussions about philanthropy, focusing on taxes and wealth structuring.
What HNW and UHNW want from financial advisors
It’s not difficult to move beyond the tax planning aspects of philanthropy, but it does require understanding how clients think about giving and what they want from their financial advisors. Here are a few things for advisors to keep in mind:
- Giving is increasing
- A number of studies have shown that giving is up in the wake of the pandemic, with the Foundations Source 2022 Report on Private Philanthropy suggesting that this increase might be complemented by concentrated giving. In other words, bigger gifts to fewer recipients.
- Clients want charitable giving to be part of an overall wealth strategy.
- The 2022 BNY Mellon Wealth Management Charitable Giving Study found that nine out of ten HNW clients feel that a charitable giving strategy should be a part of their overall wealth plan, and the U.S. Trust Study found that 90% of HNW clients believe conversations about giving should come up within the first few meetings between a client and financial advisor.
- Many clients lack a giving strategy.
- Only about half of wealthy donors have a concrete giving plan or budget, according to the 2018 U.S. Trust Study of High Net Worth Philanthropy. The good news is that the BNY Mellon study found that most clients are interested in working with financial advisors, and family members, to craft such a plan.
- Clients want their advisors to know what matters to them.
- The BNY Mellon study also found that 62% of investors with higher assets under management say it is important their wealth advisor understand their values so they can be better equipped to assist in the creation of a giving strategy.
- Women are a growing force in giving.
- The 2018 U.S. Trust study noted that 93% of HNW women give to charity, with many of them supporting causes focused on women and girls.
- DAFs continue to grow as a force in philanthropy.
- As of 2021, Americans have established nearly 1.3 million donor-advised funds (DAFs) with a total value of $234 billion, according to the 2022 DAF Report. Nearly a third of HNW donors surveyed by BNY Mellon use DAFs, although UHNW donors are even more likely to use other vehicles, including charitable LLCs, trusts, and charitable gift annuities. This suggests that, while DAFs lead the way, firms should be familiar with a range of charitable giving vehicles.
Build relationships, build business
HNW donors are motivated more by things like personal satisfaction, supporting causes that are meaningful, and making an impact with their donations than they are by getting tax benefits. Financial advisors who have focused first on the tax advantages of charitable giving would be wise to change course.
Instead, advisors should take time early in a client relationship to learn about the causes and organizations that are important to their clients and, based on their larger financial goals, offer advice about the best ways to support these causes. They need to talk with the client about creating a charitable giving plan that can be reviewed and revised every year, and then, only after they’ve discussed the heart of giving, should they share how these considerations open opportunities for tax advantages.
With this approach, advisors can not only better serve charitably minded clients, but they can also strengthen relationships with clients, create opportunities to increase assets under management, and help make a difference in the world.
