How to retain HNW clients with donor-advised funds: A financial advisor’s guide

In the professional services industry, the key to success is simple and clear: Know what your ideal clients want and help them get it. As a financial advisor, this typically means understanding what high-net-worth (HNW) clients value and connecting them to it.

As straightforward as that sounds, studies suggest that a lot of advisors fail to deliver in one particular area, strategic charitable giving, which happens to be something that HNW investors value highly. As a result, they’re missing out on donor-advised funds (DAFs), an increasingly popular charitable giving tool that not only can help clients achieve their charitable ambitions but also address other wealth-planning goals.

Give them what they want

In America, we have come to expect HNW individuals to engage in philanthropy. Still, we might not realize just how many wealthy people give to nonprofits. According to a recent Bank of America study, nine out of 10 affluent Americans donated to charity in 2020.

While that’s an enlightening stat, another data point is even more eye-opening for financial advisors. According to that same Bank of America study, nine out of 10 HNW individuals believe charitable giving is so integral to their financial lives that it should be a part of their very first conversations with a financial advisor.

And that’s where there’s a disconnect. According to a recent Edward Jones survey, most financial advisors fail to talk about charitable giving with their clients. In fact, only 23% of survey respondents said their financial advisors ever discuss charitable giving with them, and half of the Bank of America survey participants said that, when the conversation does come up, the client is the one who brings it up.

That explains why less than half of HNW clients are satisfied with the philanthropic discussions they have with their financial advisors, according to the Bank of America survey.

Smart financial advisors will see this as an opportunity to stand out and strengthen client relationships by helping clients achieve both their philanthropic and holistic financial objectives.

How to make giving a part of the equation

In a relationship built on wealth accumulation and preservation, it might seem odd to talk about giving money away, but HNW individuals clearly want this to be a part of the conversation. It’s your job, as their advisor, to know how to approach the topic and what solutions to offer so they can reach their financial goals while supporting causes that are important to them.

One thing to keep in mind is how not to start the conversation. While charitable giving is most often discussed as a tax-avoidance strategy, studies show that HNW clients see it differently. In fact, in an AssetMark study, they ranked tax planning eighth among the reasons for giving, well behind reasons like personal satisfaction, a thirst to make a difference, and the desire to establish a family legacy.

Nonetheless, a 2015 U.S. Trust Study of High Net Worth Philanthropy revealed that 71% of advisors take a technical approach to discussions of philanthropy, focusing on taxes and wealth structuring. As a result, it seems that an advisor who talks first about what motivates a client to give and then about the tax benefits of giving is likely to be seen as more valuable.  

With that in mind, here are four steps you can take to meet your clients’ charitable giving expectations:

Discuss charitable giving early to strengthen the relationship 

A conversation about charitable giving not only will help you create a more holistic financial plan for your client, but it also will help you build a stronger relationship with the client. So make your first conversation about more than money. Make it about values, personal priorities, and overall goals and objectives. Here are some questions you can ask to get the process started:

  • Are there particular causes or charities that are important to you? Why?
  • Do you have specific philanthropic goals and aspirations? A way you want to change the world?
  • What is your history of charitable giving? What organizations have you donated to? Why?
  • What financial resources do you have available for charitable giving? 
  • What is your family’s involvement in philanthropy?
  • Do you have tax objectives related to charitable giving? 
  • Do you have any preferred methods of giving?
  • Do you know about the opportunities presented by donating non-cash assets? 

Remember to approach these questions with sensitivity. Active listening and open-ended questions can help you gather valuable insights into your HNW clients’ philanthropic vision and capabilities. This will help you develop tailored strategies that align with a client’s financial goals, values, and aspirations while also taking advantage of technical opportunities and tax benefits. (For more, on this point, see No. 2 below.)

The result will be a clear demonstration that you have both the ability to grasp the client’s vision and the expertise to provide smart strategies. Here’s what you need to know as you approach this conversation with clients.

Review creative tax strategies to demonstrate a technical awareness.

While tax strategies might not be HNW clients’ top reason for charitable giving, that doesn’t mean they don’t value the tax benefits. Let them know that you’re aware of the opportunities provided by their giving by explaining some basic options, including:

  • Tax-loss harvesting. Help your client see that selling a poorly performing security at a loss can help to offset capital gains earned by other investments.
  • Qualified charitable distributions. An option for clients age 70½ or older is a qualified charitable distribution (QCD) which allows for funds to be pulled from an IRA for charitable contributions.
  • Roth conversions. In the right scenario, converting a traditional IRA into a Roth IRA can reduce taxes paid in retirement.   
  • Portfolio reallocation. When the time comes for portfolio rebalancing, investors often can reduce their tax liability by using the reallocation as an opportunity to donate to charity from appreciated assets.
  • Complex assets. The vast majority of Americans’ wealth is held in non-cash assets, and yet most people think first of cash when donating to charity. Donating appreciated complex assets such as company stock, real estate, and collectibles can provide a considerable tax break.

Here are five more smart tax strategies to use with DAFs.  

Stay up to date with tax laws and regulations.

As a financial advisor, it’s important to stay up to date with the latest tax laws and regulations, especially as they pertain to charitable tax strategies. Showing your HNW clients that you know about recent tax changes, informing them about developments that could affect them, and providing updated guidance will build trust. (For more information about current tax laws and regulations, click here.)

By the same token, don’t be afraid to bring expertise to the table when necessary. Work closely with legal and tax professionals to ensure that recommended charitable tax strategies comply with current law and regulations. Being a connector and resource for comprehensive and personalized advice on charitable tax strategies will make you valuable to HNW clients and, again, show that you have their best interests in mind. 

Introduce donor-advised funds

DAFs help HNW clients meet many of their charitable and value-based objectives at the same time. Learn more below.

The DAF advantage – for you and your client

The fastest-growing charitable vehicle in the world, DAFs allow HNW individuals to create charitable funds, make tax-deductible contributions to them, and recommend grants to qualified charitable organizations. They let donors set aside money for charitable giving before they decide exactly how they would like to distribute it, which means they have greater flexibility and opportunities to give where they feel the impact will be greatest. They allow families to plan and execute giving together and allow for the establishment of long-term legacies. And they do all of this with immediate and long-term tax benefits.

In other words, they align with the giving priorities mentioned by affluent Americans in the AssetMark study.

But DAFs also have benefits for financial advisors. Most important, perhaps, funds donated to a DAF can remain under your firm’s management, and you can continue to work with your client to direct how funds are invested.

Ren provides tools and expertise take the burden of DAF administration off of you and your firm, and for advisors in need of a sponsoring charity, we smooth the process by providing access to a sponsoring charity that can set up your client’s DAF.

In other words, you don’t need to be a DAF expert; you simply need to make the connection. And then reap the rewards of giving your HNW clients what they want.

If you’re interested in more information about how DAFs can help your clients achieve their philanthropic ambitions and objectives, talk to our experts at Ren.

Is a donor-advised fund the right choice for your client?​

Get the answers to the most frequently asked questions about donor-advised funds in our free eBook — 12 Questions to Ask Before Setting Up a Donor-Advised Fund.