Finding a way to make charity pay

Over the past few years, private banks in Europe have significantly strengthened their philanthropy offering, viewed as part of the holistic service they aspire to offer to clients, as well as a compelling differentiating factor.

At the same time, dramatic growth and concentration of wealth over the past decades, combined with changes in attitudes and global demographics – leading to a huge amount of assets being passed onto the next generation over the next 10 to 15 years – are driving the wealthy to start or increase their giving.

 “While a couple of decades back the bulk of philanthropy was done as an end of life estate planning process, now people want to be heavily involved during their lives,” says Russell Prior, head of philanthropy EMEA at HSBC Private Bank.

This is also because the majority of wealth is self-made. “When you inherit money, you want to pass it on to your children and grandchildren,” notes François Debiesse, senior adviser at BNP Paribas Wealth Management. “But when you have built your wealth through your profession, you adopt a much more entrepreneurial approach.” The donation is more and more perceived as an ‘investment’, of which donors want to be able to measure the social impact.

With that comes the need for independent advice and detailed reporting on the effectiveness of giving.

“Private bankers have a very important role to play in helping wealth holders achieve their philanthropic goals,” states Melissa Berman, president and CEO, Rockefeller Philanthropy Advisors. “They are trusted, they understand not only the financial situation but often the family’s core values and aspirations.”

Many private banks started offering philanthropy services to clients as an extension of the philanthropy activity carried by the bank’s founders. Lombard Odier took this strategic decision four years ago by hiring Karin Jestin, consultant for the bank’s own foundation, to head the philanthropy services for the bank’s clients.

 “It is important to understand the client’s ‘theory of change’, which is how they believe they are going to make a difference on a specific issue,” says Ms Jestin, now heading a team of four. This means helping them to choose and understand the issue they want to address, select projects and measure their impact.

In addition to bespoke advice, private banks often give clients access to their umbrella foundations, which generally partner with a selected number of non profit organisations. This service is particularly appealing to donors that have no need to create their own structures, trusts or foundations, to pursue their philanthropy activities, as the level of their donations is not that high.

Lombard Odier offers bespoke services, regardless of whether clients donate through the bank’s umbrella foundation, or their own foundation, claims Ms Jestin.

At BNP Paribas, clients need to donate at least Ä1m to benefit from the bank’s tailor-made philanthropy solutions, and €10,000 to access the turnkey solutions of its Fondation de L’Orangerie. The philanthropy projects available through the foundation, not more than 10 at any one time, are selected via a five-step due diligence process and last for three to five years, says Nathalie Sauvanet, head of individual philanthropy at the French private bank since 2008. Asset thresholds were also introduced to be able to cope with increased client demand.

In order to be successful, banks have to raise private bankers’ levels of comfort for initiating a conversation on philanthropy with clients, and to then be able to refer them to the dedicated team. “A big part of my job is training relationship managers. Whenever the philanthropy initiative fails at a private bank is because it has not been explained well to them,” says Ms Sauvanet, who relies on a team of three and on some support from a dozen people within the bank.

The number of relationship managers at the French bank able to acknowledge clients’ need in this space has increased by a third in the past year. But as the philanthropy team can serve up to 80 clients per year, those who can benefit from bespoke services are selected more carefully today than in the past, she explains.

Private banks find there is often pent up demand in philanthropy. Once the service is available and relationship managers are trained,  inquiries come forward naturally. This was the experience at JP Morgan Private Bank, which set up a dedicated team in Emea five years ago. Until then, the bank’s philanthropy advisers in the US, with a 50 year track-record, had to some extent catered to the needs of European donors too.

HSBC Private Bank experienced a positive growth trend, when it entered this space in Emea a couple of years ago, having advised on philanthropy for five decades in Asia.

Financial targets

Private bankers claim they have no financial targets associated with providing philanthropy services, both in terms of the number of clients to serve or assets under management to bring in. But understanding clients’ vision for their giving generally involves talking to them about their values and passions, which enables them to build a strong, multi-generational relationships over the long term. This may eventually lead to increase their share of wallet.

 “The primary driver for us is building relationships, but in my experience, offering a philanthropy service does help concentrate clients’ share of wallet, and we do win new clients based on this,” says HSBC’s Mr Prior.

Improving clients’ share of wallet is how private banks rationalise delivering these services within what is fundamentally a poor profit entity, says Cath Tillotson, partner at Scorpio Partnership. While it is “perfectly legitimate” for private banks to charge for the more technical advice and administration of structures, such as trusts and foundations, it is more difficult to ask clients a fee for strategic advice on philanthropy, she explains

In Europe, in particular, HNW individuals are reluctant to pay for advice on how they give their money away, which also explains the very limited number of pure philanthropy advisers. The result is that most private banks delivering that strategic advice are unable to charge for it.

But philanthropy services must be part of private banks’ holistic approach, as giving back is a significant part of wealthy people’s lives, believes Ms Tillotson.

This is confirmed by recent research, conducted by Scorpio on 250 millionaires. Asked what areas of their life are more important when it comes to their responsibility, family comes first, followed closely by civic duty to obey laws and regulations. But, on an almost equal footing is the desire to engage in activities that give something back to society, through environmental responsibility, ethical investment, engagement in civil society and charity.

Wealth advisers, on the other hand, over-estimate the importance of securing the family’s financial future and significantly underestimate the urge of wealth creators toward wider altruism, according to the report.

“The wealth industry is often oriented towards wealth preservation. Wealth management firms offering philanthropy services are now trying to balance and talk to clients about their values and what is important to them as a member of society, and not just as a father or mother,” says Ms Tillotson.

Private banks are adopting a variety of pricing models depending on the type of philanthropy advice offered.

Unlike BNP Paribas or JP Morgan, which offer their bespoke advice for free, Lombard Odier charges clients on a time basis for its bespoke consultancy services, which are all provided in-house. JP Morgan, however, works on an ‘informal basis’ with individual consultants, who do charge clients for carrying out due diligence on charities and helping them put together a portfolio of grants.

Private banks tend to informally introduce their clients to other philanthropists or organisations, but they are not taking responsibilities for making judgements on non-profits, says Ms Tillotson. “It would be the wealth manager’s fiduciary duty to do due diligence on those charities before they recommend them, and they just don’t have the bandwidth to do that, especially if it’s a service that people are not prepared to pay for.”

This is the philosophy followed at Deutsche Bank, which helps clients set up structures such as trusts, but does not offer proprietary advice on which charity they should support, although it can point clients on “a sort of hands off basis”, explains Mark Smallwood, head of wealth management solutions APAC. The philanthropy services some banks offer are merely “marketing tools”, he believes.

“The real challenge for private banks is that philanthropy is not their core expertise and it is often difficult for them to charge enough for philanthropic services to cover the cost of offering them,” says Rockefeller’s Ms Berman. “Clients seem to expect this is part of the service they pay for with their asset management fee, so for many banks it can become a cost centre. Whereas if it is an external provider – an attorney, art or philanthropic adviser – it is clear they need to pay separately.”

Also, for banks it is hard to build an internal team having expertise across a broad range of issue areas, and not very cost effective, argues Ms Berman. 

Visibility and globalisation

The visibility to philanthropy activity given by Bill and Melinda Gates through their Gates Foundation and philanthropists such as Warren Buffet has contributed to change the perspective on strategic giving.

The Giving Pledge – the philanthropic effort initiated three years ago by Warren Buffett and the Gateses to encourage the richest individuals to promise to devote at least 50 per cent of their wealth to philanthropy – has been signed by more than 110 people worldwide today.

But talking loudly about making a pledge is not attractive at all for many.

Depending on the culture or region, there is still much guilt associated with philanthropy, explains Mr Debiesse at BNP Paribas, and many philanthropists prefer to carry out their activity anonymously. “I personally believe it is important to give more and more visibility to philanthropy, as it is a real potential for resources worldwide,” he says.

Private banks spend a great deal of resources to organise events to promote philanthropy, ranging from training courses, peer to peer events and even prizes, such as the BNP Paribas philanthropy awards.

“We make introductions to experienced donors, and clients value that very highly,” says Rebecca Eastmond, head of philanthropic services at JP Morgan Private Bank. Talking to a philanthropist who has been in a specific field for two or three decades can help another client avoid mistakes, she says.

As a consequence of growing networking, as well as technology, people are becoming more globalised and willing to give beyond their local community.

But many clients often have no plans for the long-term sustainability of their programme or no exit plan. It is important to talk to donors about a “critical path” says David Hayward Evans, head of philanthropy and values-based investing APAC at UBS Wealth Management. “Clients should have their own theory of change, which fully describes the problem they wish to address. From this, they can develop a strategy with quantifiable interim outputs towards their defined goal. This way, philanthropy becomes a journey of learning as well as doing,” he says.

The bank’s clients can donate through the UBS Optimus Foundation, established in 1999 in Zurich, which just recently opened a regional office in Hong Kong. The Foundation partners with selected charities supporting children, on which the bank undertakes due diligence, monitoring and oversight.

Philanthropy can also represent the initial seed of capital for social enterprises, similar to venture capital, investing in early-stage social innovation. “It’s very hard for governments to be able to support all new ideas in the social sectors, so that is a great role for private philanthropy to take,” says Mr Evans.

Private banks such as Lombard Odier and JP Morgan have started offering social impact investments. But this is still a nascent field and lack of track record or scale makes it very difficult for institutions to recommend these products to clients, according to Scorpio.

Other challenges refer to lack of data on the number and profile of donors, on which kind of charities they are giving to and how they are selecting them, which makes it difficult to offer the right products and services in this space.

It is hard to know which non government organisations are working on specific issues, so everyone goes through the same process of identifying the right partners and doing due diligence, says Lombard Odier’s Ms Jestin.

Individual philanthropists or foundation trustees work in their own silo, notes JP Morgan’s Ms Eastmond, and often research carried out by exceptional grant-making foundations in Europe is not published. “In philanthropy, there is no proprietary interest that should make you keep your research internal,” she adds.