Next generation reshapes world of philanthropy

Philanthropic activity is fast becoming a crucial component of wealth transfer plans. Offering customised solutions in this space enables private banks to win new business and deepen relationships with existing clients.

“For a private bank, taking care of money means also making sure wealth is going to be used properly in future generations, and philanthropy today is a very major part of long-term wealth planning,” says Vicky Wong, head of Key Client Solutions at LGT Bank in Hong Kong.

Donating assets to a good cause can bring family members together, but can also tear them apart, if the process is not well thought through, and differences between generations are not acknowledged. 

While patriarchs have generally favoured gifts and monetary contributions to implement charitable goals, younger generations, particularly today’s entrepreneurs, have a completely different mindset. 

Millennial entrepreneurs take an active and strategic approach not only to their businesses but also to philanthropic endeavours, and are prepared to take risk with social investment. 

“Their ambitions are bigger, they can dream and solve problems. They also have better information and a lot better understanding of good practice,” says Cynthia D’Anjou Brown, head of Philanthropy Advisory and Family Governance Advisor at HSBC Private Bank. Unlike their grandparents, especially in Asia, who would often leave families in the dark with regards to their giving activities, many younger people like to network, believe in crowdfunding and sharing information, wanting to co-invest for greater social impact.

According to new research from HSBC Private Bank, most successful millennial entrepreneurs are distinguished by a desire to positively affect their community and economy. Positive economic impact is a factor in the decision to go into business for 70 per cent of millennial entrepreneurs, with 59 per cent wanting to have a positive impact in their community. Around 80 per cent of millennial entrepreneurs surveyed globally are actively involved in philanthropic activities.

“In the same way millennial entrepreneurs take a very hands-on approach to business, this is also reflected in their wealth management and philanthropy,” says Nick Levitt, head of the Global Solutions Group at HSBC Private Bank. “They are as motivated to create an impact on the world as they are to make money, and they are having a positive impact on their communities.”

This different approach means the first generation may face significant challenges when incorporating philanthropy in their wealth transfer plans and private banks can really fill the gap in this respect, by acting as a  trusted adviser.

“Philanthropy is a great training ground for family members, especially the younger ones, to learn about business and family governance. It is a very good mirror for other parts of the family enterprise,” says Ms Brown. The essence of good family governance is collective decision making, communication and stewardship of resources. These are also key factors to make philanthropic investments work.

Increasingly, children as young as 10 to 12 are invited to sit on the board of a family charity. While obviously not having any voting power, they learn how to make group decisions, how to read a balance sheet and how to run a board meeting. They have savings plans, and their parents match dollars the children wish to donate.

Philanthropy is an expression of values and can act as a glue for family members. “Philanthropy allows the family to look outward and talking about issues in the community really does have a very good impact on family members. It is a powerful way to unite a family,” states Ms Brown.

To implement charitable goals, sophisticated clients combine traditional structures such as trusts or private foundations with family constitutions or charters. Within an overarching family governance system, these instruments document and implement their business succession plans as well as their giving objectives. 

“The overall architecture serves as a road map to guide and foster cohesiveness amongst future generations in respect of the family’s giving programme,” says Henny Liow, chief trust officer at DBS Private Bank. The Singapore-based bank enables its clients to gain access to DBS Foundation’s community of more than 200 social enterprises across Asia, particularly catering to the preference of younger givers.

However, allowing for some flexibility is a key factor in wealth and philanthropy planning.

“One of the hardest things, not just from a philanthropic standpoint but for financial planning overall, is that the first generation needs to let go a little bit and trust that the next generation is still going to do the right thing,” says LGT’s Ms Wong.

It is essential to define guiding principles and values, and a private bank can assist families to do this, by making sure they take into account  that values and objectives can evolve over time. Constitutions are not legally binding as trusts or foundations, but these structures also need to allow for some flexibility as the world evolves. For instance, diseases which a trust was set up to fight may eventually be cured.  

Ensuring financial support is also important. “Families and investment advisers really have to look at what kind of funding they need. For example, if a charity is set up to grant scholarships every year, they have to make sure their investments will generate adequate income for that purpose,” says Ms Wong. 

Availability of financial assets or income can determine what kind of philanthropic causes one may want to address, but sometimes the reverse is true. For example building a school requires a large amount of money, but over the long term money is needed to maintain the building, hire teachers or buy books. 

“It’s always important for a family to do a reality check when doing generational planning. It needs to budget its resources, not just in terms of money but also in time and energy,” she says. “For families who don’t have the stomach or the desire to take on a long term commitment, that’s where making a one-time gift or aiming for shorter term charitable goals may be more appropriate.” 

A new growing phenomenon is what Marguerite Griffin, director of Philanthropic Advisory Services at US bank Northern Trust , calls “bottom up philanthropy”.

While parents or grandparents who have built or acquired wealth may have some ideas about charitable giving, it is increasingly the younger generations who are informing their families about needs in society. 

Being exposed to different cultures, generally tech-savvy and frequent users of social media, they are able  to provide new, different insights into how families can address a particular issue. While parents may want to give assets to homeless shelters, their children may want to try and eradicate the problem, for instance.

“It’s the future wealth holders that are really setting the stage for a discussion around wealth transfer planning and how they want to participate in that,” notes Ms Griffin.

The success of family philanthropy revolves around communication about money, values, and it is about control, love and legacy, according to Northern Trust. 

In families where money was always outside the reach of younger family members, or  was used as a way of controlling them and their activities, issues certainly arise when the wealth holders eventually announce they want to give their assets to charity. It is much easier in families where parents share their values  with their children at an early stage and lead by example.  

The older generation must also acknowledge their children’s approach to this topic may be different but is equally valid. 

Parents may be interested in arts and culture, while the younger cohorts may want to focus on environmental issues. “You will get participation if there is a sense of collective vision, but also a sense of autonomy that family members are not going to be judged, if they don’t want to support the opera or the symphony,” says Ms Griffin.

What tears families and their philanthropy apart is not having different views about which organisation to support, but failure to deal with governance or decision making, she says.

 “We encourage families to be transparent about their goals, their values and what their expectations are of family members.” 

It is also important they understand whether their charitable legacy is something they want to pass to the next generation or whether there is room for their children to make their own decisions.

In the Middle East a notable trend is increasingly for younger family members to take ownership of socially responsible investments and the family’s philanthropic activities, observes Faranak Foroughi, founder and CEO, Tharwa Management Consultancy, a Dubai-based wealth advisory business working with family offices and private banks.

In the region, philanthropy is mainly driven by religious reasons. Charity or Zakat is one of Islam’s five pillars and believers every year at Ramadan give 10 per cent of their annual earnings to charity through their religious chiefs. 

People do not like to show off or brag about it, like sometimes in Europe or the US because, according to religious values, money should be given away discreetly. 

Zakat is not even considered philanthropy, but everyday activity.

However, in the past 10 months, there has been a clear trend for wealthy families to address specific causes such as supporting women, that are not covered by Zakat, explains Nathalie Sauvanet, global head of Individual Philanthropy at BNP Paribas Wealth Management. Increasingly the wealthy have set up foundations or trusts, also abroad, where they have their business interests, or have contributed to such vehicles linked to royal families to address particular causes. 

While the US leads in terms of current and projected giving, the Middle East has made the sharpest increase last year, according to the recent BNP Paribas/Forbes Insight study.

Succession planning is “absolutely massive”, explains the Middle East  head of global family offices at a large, global bank. While in the past wealth owners would have completely run out of energy before they ever considered appointing a successor, today they empower the next generation much earlier, as a result of education and lessons learned from the Western world.

However, there is “no traction” nor “strong evidence” of families incorporating philanthropy in wealth planning, he says.   

Giving money away because of religious principles may be considered an ethical obligation, says the private bank’s senior executive, but should be seen very differently from the genuine desire of giving back to the community.  

Pooling and sharing

Private banks can play a key role in planning philanthropy activities across generations. Their services range from assisting wealthy families to identify their goals and develop a mission statement, to helping set up a suitable structure. Defining future decision makers is a key factor, while training family members and sourcing charitable organisations are also important. 

Private banks can arrange charity site visits, monitor the progress of philanthropic activity and evaluate its impact. They can do everything in-house or outsource part of the work to external consultants.

Banks such as Northern Trust conduct fee-based consulting workshops, often lasting several months, which include facilitating discussions across generations and streamlining families’ administrative internal processes. Engaging with younger members to make sure their views are taken into account can also prove useful.  

Private banks can also encourage partnerships, bringing families or foundations with the same goals into contact. This is a growing trend, with donors often seeking to pool resources. 

Warren Buffett’s decision to contribute to the Bill and Melinda Gates foundation, instead of starting his own, marked the beginning of a different way of thinking for wealthy people, explains Northern Trust’s Ms Griffin. In many cases, it is more efficient working with an existing infrastructure, with proven expertise and administrator functions, rather than building a new structure.

Sharing best practices is important, agrees Ms Wong at LGT. The bank’s owners, the princely family of Liechtenstein, are particularly focused on helping clients explore venture philanthropy, and Prince Max regularly hold talks with clients to share best practices adopted by LGT Venture Philanthropy, she explains.

But pooling money to address a common cause may prove difficult especially for larger clients.

“People might not have exactly the same wishes and desires, especially when putting millions of dollars into charities. These charities they set up are often quite personal, and aim to solve issues they have a personal connection to.”

Pinpointing opportunities can be the hardest task, she believes. “The energy and effort required to find opportunities is much more labour intensive than people think.”