The Role of Wealth Management Firms in Philanthropy
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Amy Clarke, Head of Advisory and Consultancy CAF Philanthropy Services
Philanthropy is not a trend; it is a fundamental part of most affluent people’s financial and non-financial activities. With the volume of HNWIs across the world rising, the global philanthropic sector is poised for long-term growth. Increasingly, HNWIs are focusing more on the impact of their contributions rather than just being concerned with cash and gift donations. Additionally, most global HNWIs are new wealth holders, rather than gaining wealth through heredity. As a result, an increasing number of HNWIs are focusing less on leaving a legacy, and more on the impact of their philanthropy. The need among HNWIs in channeling their philanthropic activity in the right direction has created opportunities for wealth management firms.
Wealth management firms must overcome challenges to achieve success
Opportunities for wealth management firms are growing in the philanthropy sector. Since the next generation has been raised in an age of information their actions are going to manifest themselves in the future. Younger philanthropists are very careful about how they choose their causes. For many, the priority is less about tax and more about a real desire to change something. Once they have acquired their wealth, HNWIs will need to structure their increasingly result-driven approach to philanthropic giving. The banking industry will need to evolve to cater for that demand because those who do not change may risk losing client relationships.
Several wealth management firms are addressing such issues.
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By GlobalDataAdditionally, philanthropic advisory departments are being created within the older and existing bases of wealth management firms. Those who were among the first to introduce philanthropic advice act as an example for the industry. Coutts was the first private bank in the UK to offer philanthropic advice, and today provides tailored advice to clients and their families regardless of their location and level of experience. Barclays’ philanthropic service also plays an integral part of its private banking offering by engaging with clients and families through education and ongoing support. As the banking industry tackles the issue of the loss of trust following the financial crisis, service providers are seeking to build long-term relationships with clients by engaging with them on a deeper level through value-added services.
However, globally broader disconnects currently mar the relationship between wealth management firms and HNWIs. According to a study by US Trust, one of the main issues associated with advisors, as noticed by HNWIs, is their effort to approach philanthropy in technical terms. Many HNWIs feel that advisors downplay their broader philanthropic goals by concentrating more on the technicalities of the funding. Although the structuring of wealth or tax considerations are important parameters for HNWIs prior to funding, these factors are not the most important. HNWIs feel that the approach towards philanthropy should be more value-based, and primary topics of discussion with advisors should be based on a more emotional approach such as the charitable goals of the individual.
As philanthropy is considered a very personal and emotional choice, it becomes necessary for wealth management firms to address the issue and enable advisors to develop a deeper bond with clients. To this end, it becomes clear that firms themselves need to be actively engaging in the sector to attain client trust. Finding an adviser that they can trust to empathize with their cause is an important factor for HNWIs. According to Amy Clarke of CAF interviewed by Ouliana Vlasova in November 2013 for WealthInsight : "Advising on tax structures is easy; advising somebody on how they are going to realize their passion and release that potential is completely different and requires a very different skill set. It is part psychologist, part therapist, part fire starter."
A proportion of HNW donors already know what causes they want to donate to; the role of the adviser will therefore entail helping them structure their giving so it has a sustained impact. For the adviser, this means having dedication to the cause and channeling funds in the right direction, requiring substantial research and networking. As many wealth managers are not equipped in this area, it is important to properly integrate the service within their overall offerings. A number of wealth mangers are utilizing organizations such as CAF (Charities Aid Foundation) to offer philanthropic advisory services.
St James Place launches philanthropy service in conjunction with CAF
In 2013, UK-based wealth management group St James’s Place launched a philanthropy service in partnership with the CAF to help clients make charitable donations. The service highlights the benefits of philanthropic giving, as the company believes many of its 300,000 clients want to make charitable gifts on an annual basis. Some already have ethical or socially responsible investment funds, and the company has created an environment where HNWIs can address their financial and non-financial interests in one place. The service will allow clients to choose their beneficiaries and make donations efficiently and discreetly, supported by the advice of CAF.
The company recognized that philanthropy can also be used as ‘a business development tool’ to attract clients. St James’s Place Wealth Management is itself actively engaged through its Foundation formed in 1992, and has raised over GBP30 million. There is an opportunity for wealth managers to position themselves as credible providers of solutions for people interested in philanthropy and social investments.
Lower number of family offices in emerging markets negating the impact of philanthropy
According to WealthInsight, the US and Europe account for a significant proportion of more than 5,000 family offices globally, with the US alone accounting for nearly 60% of this total in 2012. Their popularity is low in other regions due to the fact that the majority of the wealth created in emerging economies is new wealth. Additionally, the HNWI communities in these regions are less involved in philanthropic giving. Therefore philanthropic investments are generally unstructured and have a limited impact.
However, with the rising population of HNWIs in emerging markets across Asia-Pacific and Latin America, the trend is beginning to change. A proportion of private banking and wealth management firms are establishing offices in the region to offer philanthropy services. According to Jose Isidro N (Lito) Camacho, managing director and vice-chairman at Credit Suisse Asia-Pacific speaking at Credit Suisse Philanthropists Forum in Singapore in 2013:
"We are actively doing this because our clients are demanding it. There is a want and an awareness coming out of our HNW clients around the world, to do philanthropy. It’s a service that allows our relationship to become stickier to start their journey of philanthropic needs."
Wealth management firms facilitating the philanthropic aspirations of HNWIs
In line with wider developments in the philanthropic sector, a broad range of philanthropy services offered by wealth management firms are beginning to support structured philanthropy among HNWIs across the world. Value-based investment products such as investment management solutions, impact investment and thematic investing solutions allow HNWIs to channel their funding towards desired socio-economic change. Additionally, wealth management firms are beginning to offer a series of platforms such as strategic advisory platform and knowledge exchange platforms, which enable HNWIs to take sound decisions with regards to philanthropy.
Wealth management firms to focus more on venture philanthropy
Venture philanthropists have made their mark in philanthropic circles all across the world. However, the trend is largely visible in the emerging markets of the Asia-Pacific region. Although a new segment, HNWIs in the region are increasingly directing funds towards this type of philanthropy. One of the primary reasons for the increasing market of venture philanthropy is its ability to positively affect the core issues of poverty, education and health.
Additionally, direct funding to micro-enterprises enables them to improve their production and profitability, and results directly in creating a new form of employment for a significant proportion of the population. Consequently, it is important for wealth management firms to adapt to the changing dynamics of the philanthropy sector. Advisories can be formed to help philanthropists in selecting the right business for investments and managing the micro-enterprises in developing a profitable and growing enterprise.
Global Snapshot: Overview
The world economy is under duress, primarily due to policy constraints and structural flaws in developed nations such as the US, Japan and the UK. Additionally, the crisis in the eurozone has further enhanced economic pressure. With the slowdown resulting in the depletion of employment opportunities, the global economy is expected to grow at reduced rate in the coming years. On the one hand, developed markets are struggling to keep up with the demands of their weak economies, while emerging markets have been demonstrating consistent growth.
In contrast to the faltering global economy, some European countries such as Germany, UK, France, Russia and Switzerland, as well as the US, Canada, Japan, China, India, Brazil, and Mexico have demonstrated strong growth in terms of their HNWI populations.
Global philanthropic activity demonstrated steady growth during the review period, and HNWIs have played a significant role in achieving this. However, the global trend of giving among the HNWIs varies by region and country, depending on demographics, culture and traditions. Accordingly, each region has its own drivers and challenges. There is no denying that tax benefits are among the reasons for philanthropic giving, yet younger philanthropists are exhibiting a desire to make real changes within their lifetime.
The Current State and Scope of HNWI Philanthropy Worldwide
Result driven approach energizing modern philanthropy
While a decline is being observed in spontaneous HNWI contributions in the philanthropy sector, structured philanthropic contributions are growing. Rather than contributing to qualify for tax deductions, the focus of HNWIs has increasingly been concentrated around the impact of their philanthropic investments. Many HNWIs are willing to become actively involved in their cause by volunteering.
Innovation is playing a key role in expanding the reach of HNWIs’ philanthropic impact through micro-finance and venture philanthropy. With the growing activity of HNWIs in the sector, private bankers and wealth management firms are demonstrating signs of transforming their philanthropy services portfolios in to a core sector. A surge in HNWI philanthropic activities has led to growth in the number of HNWI philanthropists.
The global philanthropic sector has recorded an increase in the number of family offices, foundations and donor-advised funds. Donor-advised funds are among the fastest-growing giving vehicles with around US$30 billion as combined assets under management (AUM)
A shift in philanthropy towards collaboration
Increasingly, the global philanthropic sector is demonstrating traits of collaboration. The prime factor responsible for this trend is the shifting priority of HNWIs to focus on their philanthropic impact rather than personal glory. A growing number of HNWIs are contributing directly to foundations and charities that are run by other HNWI philanthropists. A donation of US$44 billion by Warren Buffet to the Bill and Melinda Gates Foundation is a prime example of such collaboration. Many HNWIs are teaming up to help a common cause, rather than opening up foundations or family offices themselves. A leading example of this is the growing number of philanthropic circles and networks across the world. The Zawadi Giving Circle, Dining for Women, Lunar Giving Circle, Cherry Blossom Giving Circle AVPN, and Kew Giving Circle are just a few examples.
Micro-finance and venture philanthropy are spreading among HNWIs
In developed Western economies, philanthropy generally revolves around the donations of large amounts of money, time or both towards charity. These two parameters also play an important role in the Asian philanthropic sector. However, innovation also plays a significant role. For instance, HNWI philanthropists in India have been forerunners in the world in micro-financing healthcare benefits for the poor. Narayana Hrudayalaya, a leading hospital for cardiologic disorders, developed a micro-financing scheme. The HNWI owner of the group, Devi Shetty, is among the leading cardiologists in the region. Through the scheme, large campuses with more than 5,000 beds were built for people suffering from disorders of the heart. Working on a large-scale offers economies of scale for the foundation. The scheme has been extremely successful and various hospitals are replicating the model.
Global philanthropists remain inclined towards cultural, academic and health causes
Worldwide, HNWIs demonstrate an affinity for cultural, academic and health causes. According to WealthInsight study, 18.7% of the global HNWI population preferred engaging in cultural causes, while 18.4% prefer contributing towards academic causes and 17.8% preferred contributing towards health causes. The global HNWI population is also interested in philanthropy related to humanitarian, political and environmental causes. While almost 16% of HNWIs surveyed stated humanitarian as their preferred cause, 7.6% and 5.3% respectively identified political and environmental causes.
Health and culture are the preferred causes for HNWIs in developed markets
Health and culture are the most preferred philanthropic causes among HNWIs in the Americas and Europe. In 2013, while 20.1% and 19.7% of HNWIs in the Americas preferred giving to health and cultural causes respectively, these figures were 17.5% and 20.3% respectively in Europe. However, HNWIs in Asia-Pacific, and the Middle East and Africa demonstrate an increasing affinity for contributing to academic causes. Around 27.4% of HNWIs in the Asia-Pacific region contributed towards this cause, as did 29.6% of HNWIs in the Middle East and Africa.
Male HNWIs show greater affinity towards academic philanthropy than females
Variation exists between the philanthropic choices of males and females. Male HNWIs are more inclined towards contributing to academic causes than their female counterparts. While almost 20.3% of male HNWIs in the world contribute towards academic cause, only 9.2% of their female counterparts contributed towards the same. Conversely, female HNWIs prefer philanthropic engagements in health and humanitarian causes, with 22.8% and 20.7% of female HNWIs preferring these causes.
Wealthier HNWIs inclined towards academic causes
Philanthropic contributions vary across wealth bands and billionaires and centimillionaires are more inclined to donate towards academic causes, while affluent millionaires, mid-tier millionaires and lower-tier millionaires are more inclined to contribute to cultural, humanitarian and health causes.
Billionaires in Asia-Pacific demonstrate preference for political causes
Billionaires across the Asia-Pacific region demonstrate a preference for political philanthropy. Philanthropy for academic causes is the primary cause for billionaires across all regions. More billionaires in the Americas and Europe engage themselves in cultural and environmental causes than in other regions.
Academic causes primary for centimillionaires in Asia-Pacific, the Middle East and Africa
Centimillionaires across all regions demonstrate more inclination towards philanthropy for academic causes than other causes. However, the trend is more visible in Asia-Pacific, the Middle East and Africa. Health, culture and humanitarian causes were also preferred by HNWIs across all regions in 2013. However, for centimillionaires across the Middle East and Africa, humanitarian causes ranked highly. Centimillionaires in the Americas are more inclined to give to political, environmental and youth causes than other regions.
North America
HNWI philanthropic activity in the US to grow
HNWIs in the US are expected to increase their philanthropic activities over the forecast period. The country, home to one of the largest pools of HNWIs in the world, is already among the largest contributors to global philanthropy. Over 90% of HNWIs in the US are engaged in philanthropic activity. Additionally, volunteering activities are also expected to rise among the HNWIs. For instance, around 87% of the HNWIs involved in philanthropic activities in 2011 also volunteered for philanthropic causes as against 77% in 2009 according to a study conducted by The Center of Philanthropy at the Indiana University.
Canadian HNWIs spend less on philanthropy than their US counterparts
Canadian HNWIs are expected to increase their philanthropic contributions over the forecast period. However, the combined wealth of all HNWIs in Canada is just 7% of the total wealth of US-based HNWIs. Additionally, the growth in the HNWI population has been slowing due to the dwindling nature of the country’s economy since 2008.
Although more than 90% of Canadian HNWIs believe in humanitarian causes and contribute towards them, the contribution of HNWIs, as a share of their total income, falls short of the share offered by the lower-income groups in society. For instance, charitable contributions from the wealthiest 20% of Canadians as a percentage of their total income is less than the contribution of the poorest 20% of Canadians as a percentage of their total income. Furthermore, the average donation of Canadian HNWIs as a percentage of their annual income is almost half of the contributions of HNWIs in America.
Increasing preference for impact-driven philanthropy among US HNWIs
US-based HNWIs are moving from spontaneous giving towards impact-driven philanthropy. While spontaneous giving has primarily been driven by cultural and religious beliefs, HNWIs in the region are becoming increasingly concerned about the impact of their giving. HNWIs are showing more interest in the causes that they support, and analyzing the overall impact of the funds that they contribute. The greater involvement of HNWIs in philanthropic organizations is also being observed, which is inculcating a sense of professionalism in the philanthropic processes of various charitable organizations, foundations and family offices.
Economic slowdown shifts focus towards volunteering
Economic slowdown has led to a change in approach towards philanthropic investments among HNWIs. While spontaneous contributions declined, impact-oriented funding gained popularity. Rather than contributing monetarily, the trend of being involved with a cause is making progress among HNWIs. On an average, US HNWIs contributed more than 175 hours of their time towards philanthropic causes in 2012.
In 2011, around 94% of US HNWIs contributed to at least one cause according to a study conducted by the Center of Philanthropy at Indiana University. This value is very high when compared to charitable activity among the general population, which stood at 63%.
Asia-Pacific
Asia-Pacific: the state of the economy
The Asia-Pacific is the fastest-growing region in the world. The region’s economies have demonstrated consistently high growth rates since the turn of the century, compared to other regions. Despite the prominence of Japan, China and India have dominated economic activities in the region.
Since fiscal reforms by the Indian government in 1991, the country has recorded rapid growth in economic activity and development. Increasing economic activity has also been observed among Southeast Asian economies such as South Korea, the Philippines, Thailand, and Singapore, resulting in a trade surplus. Although China and India recorded declines in growth during the last two years of the review period, the trend is expected to reverse in 2014.
Due to economic growth in major developing nations, a significant rise in disposable income has been observed. As consumer purchasing power grew, business activities intensified. This economic boom, especially in China and India, has resulted in rapid growth in the volumes of millionaires and billionaires.
Australia’s economic outlook is expected to remain stable. Between 1992 and 2013 it grew at an average rate of 3.3%. The Australian economy remained largely unaffected by the financial crisis, however its growth is lower than that of the region’s emerging markets.
China leads the Asia-Pacific region in terms of volume of HNWIs. In 2012, its HNWI population exceeded 1.45 million; and the number is expected to exceed 2 million by 2017. India’s HNWI population is also recording rapid growth. In 2012, India had more than 290,000 HNWIs, a number that is expected exceed 337,000 in 2013, and 641,000 by 2017. In 2012, Australia’s HNWI population was just over 300,000. In 2017, the total HNWI population is expected to reach 400,000.
Philanthropy a growing sector for Asian HNWIs
The growth of HNWIs, primarily in India and China, has changed the dynamics of the region’s philanthropic sector. Funds from developed economy-based international organizations dominated philanthropic activities in the region for most of the 20th century. However, this situation changed during the last decade, with philanthropy emerging as one of the fastest-growing sectors among Asian HNWIs. However, a study by the National University of Singapore found that HNWIs are reluctant to publicly discuss contributions.
Driven by a desire to give back to society, Asian HNWIs are increasingly participating in philanthropic activities through monetary donations. The region has been home to some of the most innovative philanthropic ideas of recent times, and HNWIs in the region often market their companies through philanthropic activity.
Philanthropic contributions from Australian HNWIs are lower than their counterparts in developed economies. While the wealth of HNWIs in the region grown steadily, philanthropic contributions have not matched this growth. Irrespective of the government’s series of tax incentives and structures, philanthropic contributions among Australians have remained comparatively weak. The trend is culturally motivated; historically, the government has been at the forefront of the nation’s socio-economic development. Philanthropy among HNWIs in Australia is expected to grow slowly over the forecast period.
Poor healthcare structure resulting in an increase in HNWI funding
When deciding upon a cause to support, Asian HNWIs vary according to the socio-economic conditions of their countries’ people. However, healthcare is among the main causes driving the region’s HNWIs towards philanthropy. In China, the influence of Buddhism has made contributions towards healthcare significant.
Religion driving HNWI philanthropy in the Asia-Pacific region
Islam is the primary religion of Pakistan, Bangladesh and Indonesia. In these countries, a significant proportion of HNWIs contribute a considerable proportion of their annual wealth to charity due to religious beliefs. Environmental, cultural, humanitarian and educational causes also act as important focus areas. In rural areas of China, India, Bangladesh and Sri Lanka, access to healthcare and education is limited, and a cause for concern among some HNWIs.
Growing impact of family foundation bodes well for philanthropy in Asia-Pacific
Growth in China and India’s economies transformed the economic landscape of the Asia-Pacific. During the review period, the region recorded the rise of several smaller but growth-oriented economies such as South Korea, Taiwan, Indonesia and Singapore.
Irrespective of the spending capability of the population and the influence of Western culture, most Asian economies place high importance on their families. HNWIs in the region also follow similar cultural practices when contributing to society. As a consequence, a surge in family philanthropy is being recorded.
The majority of the region’s HNWIs believe that philanthropy can help them achieve multi-generational cohesion between family members, both in life and in business. Most philanthropic families are focused on only a single cause, which makes the members work together towards a single goal. Additionally, many HNWIs in the region feel that philanthropy would also help them in passing on their values to the younger generation.
However, intrinsic challenges exist in this format of philanthropy. In contrast to Western family foundations, family philanthropy in the Asia-Pacific region remains largely unprofessional. Accordingly, there is a need for training institutions, scalable and effective implementation partners, and government policies that support the donors. The professionalization of philanthropy in the region will enable these families to pool more resources for their causes. With large-scale challenges dominating the region and governments being unable to address all the issues, opportunities are abundant for philanthropy.
Asia-Pacific offers large-scale opportunities for philanthropy
Despite the rapid growth of the Asian economy, there is a gap in the region’s demographics. The lag in the socio-economic status of a significant proportion of the population in the region is a cause for concern for many governments. The World Bank states that more than 66% of the South Asian population lives on US$2 per day, while in the East Asian region, around 30% of the population lives on US$2 per day. This disparity of wealth between the rich and the poor is among the region’s main challenges. The region also suffers from a deep rural and urban divide. While development in urban centers has been rapid, the same cannot be said for rural areas, which also suffer from acute issues related to healthcare and education.
The region offers opportunities for philanthropic funding, which has resulted in gradual regulatory changes. Favorable legal and policy frameworks regarding philanthropy have been made, leading to the development of philanthropy in the region.
Impact-driven philanthropy to grow in the Asia-Pacific region
Due to the region’s rapid economic growth, a marked difference has emerged in the approaches of the older and younger generations. Elderly HNWI philanthropists are more influenced by tradition and culture, and feel more responsible for the local community, while younger HNWIs are more concerned about national and international causes.
However, younger HNWIs in the region are more focused on the impact of their giving- a trend increasingly followed by older HNWIs. This has led to a decline in spontaneous giving.
Innovation the key ingredient for channeling funds to the masses
Philanthropy in Western economies generally revolves around donations of time and money towards charity. These two factors also play an important role in the Asian philanthropic sector. However, innovation also plays a significant role. HNWI philanthropists in India have been forerunners in the world of micro-financing for healthcare benefits. Narayana Hrudayalaya, a leading hospital for cardiologic disorders, has developed a micro-financing scheme. The HNWI owner of the group, Devi Shetty, is among the leading cardiologists in the region. Through the scheme, large campuses with more than 5,000 beds were built for people suffering from heart disorders. Working on such a large scale offers economies of scale for the foundation. The scheme has been highly successful, and various hospitals are replicating the model. Currently, the hospital is responsible for the most number of open heart surgeries in the world. Around 35 Open-Heart surgeries are performed in the hospital on a daily basis.
Similarly, Biocon India, a leading biopharmaceuticals enterprise in the region, develops high-quality generic drugs at affordable rates. The HNWI owner of the hospital, Kiran Majumdar-Shaw, has also established low-cost cancer treatment hospitals based on the micro-financing model.
Europe
The state of the economy and HNWIs
The persistent effect of the financial and eurozone crises severely stalled Europe’s economic progress. Several countries such as Greece, Spain and Ukraine have been adversely affected while others such as the UK, Germany and Switzerland are driving the EU towards a gradual recovery. Comparatively high wages and a strong labor forces in these economies are resulting in a strengthening of consumer confidence and spending.
Despite the economic turbulence, a significant increase in the region’s HNWI population was recorded in 2013. Germany, the UK and Switzerland have the highest numbers of HNWIs in the region.
In terms of wealth, the region’s HNWI population demonstrated consistent growth in their assets and net worth. The combined wealth of the region’s HNWI population is estimated to grow from 6,950 billion in 2012 to 7,600 billion in 2013.
Europe demonstrating rising net worth of female HNWIs
In contrast to other developed regions, the proportion of female HNWIs in Europe is growing at a rapid pace. Their average net worth of is also rising. Consequently, females represent a growth opportunity for wealth managers.
European philanthropic sector: a varied landscape
Europe’s HNWI population comprises individuals that differ in terms of language, culture and race. Due to the region’s generally cross-cultural society, philanthropic activity in the region is extremely varied. Additionally, the rising influence of HNWI contributions has resulted in a reduction of grants made by public institutions, instigating a further sense of philanthropic responsibility among HNWIs. As this relationship pans out, the burden of social development is expected to tilt towards private funding.
HNWIs in the UK focus more on international issues
HNWIs in the UK are considered to have more international concerns in terms of philanthropic decisions. Issues such as climate
