Private banking: Smarter, faster ways of giving

“Thirty years ago it took us several weeks to learn about a famine in East Africa, but today a refugee child drowns and the whole world knows the same day,” says Silvia Bastante, head of philanthropy advisory at UBS. 

Thanks to information technology, we are now, whether we like it or not, aware of the seemingly never-ending challenges facing the human race. Over 10% of the world’s population lives in extreme poverty. One in nine people in the world are undernourished. One in 10 do not have access to clean water, and almost 2.5 billion people live without adequate sanitation. 

Meanwhile, by 2030 there will be 23.6 million new cases of cancer a year worldwide and the number of people with Alzheimer’s disease is expected to double to 65 million. It will also cost at least $44 trillion to move from fossil fuels to clean energy. 

The challenges can appear overwhelming. That governments cannot solve these problems alone is clear. And faith in government is also diminishing – for example, only 24% of wealthy individuals donated to a candidate in the 2016 US presidential election. Instead, people are opting to give charitable donations directly to non-profits, NGOs, individuals and groups. 

Yet, while generosity is increasing – an estimated $3.5 trillion has been made in charitable donations around the world since 2010 – there is also a growing awareness that progress has been limited. John Mathews, head of private wealth management and ultra-high net-worth at UBS Americas, says a survey conducted by the firm showed that 90% of the millionaires surveyed are serious about philanthropy but a staggering 80% say they do not believe their giving to be effective.

What is needed is a new type of philanthropy, one that is more efficient and has a greater impact. And it is emerging. We are witnessing the restructuring of foundations, an enthusiasm for impact investing and collaborative ventures with a greater focus on measuring outcomes. Diane Whitty, global head of the Philanthropy Centre at JPMorgan Private Bank, calls it the ‘second golden age of philanthropy’.

To some extent, the wealthy are being put in the spotlight, says one private banker: “There is a realization that this huge gap between the rich and the poor has got out of hand. It is just unacceptable to be vastly rich and not help in a very meaningful way.” 

Indeed wealth has been concentrated into a smaller number of hands in several of the largest countries in the world since 2009. There are 145,000 individuals with more than $30 million in assets worldwide, according to the most recent Capgemini Wealth Report. Of those, 1,810 are billionaires, with $6.5 trillion in combined assets. The “richest eight of them have the same amount of wealth as the bottom 50% of the global population,” announced Oxfam at the World Economic Forum in January. 

It seems that this wealth can be put to work far faster by philanthropists than by governments or charitable organizations. Whitty says that one of the biggest differences she is witnessing is that today’s philanthropists are “prepared to take risks with their fortunes in order to more quickly solve the world’s pressing problems”. 

In 2015, philanthropy consultant Bridgespan Group counted 58 philanthropic gifts of $25 million or more centred on solving a large-scale social problem, compared with just 19 made in 1999. And 68% of those surveyed in BNP Paribas Wealth Management’s 2016 philanthropy survey said the goal of their giving was to “eradicate the problem completely.” 

Bill and Melinda Gates are the role models. Their foundation committed a staggering $17.5 billion to vaccine alliance, GAVI, with the goal of immunizing 300 million children by 2020. 

This urgency to make an impact has put the traditional concept of a foundation under scrutiny. Whitty points out that one of the biggest changes she has seen is that instead of viewing their foundation as something that will fund a cause for a hundred years, ultra-high net-worth individuals are now determined they want to be spending down their foundation assets during their lifetimes – or certainly within three to five years after they die. 

Melanie Schnoll Begun, head of Morgan Stanley’s Wealth Management’s philanthropy management group, says her firm is helping clients consider if a perpetual structure makes sense. 

“Many of the smaller foundations in particular are setting shorter term limits and asking for greater rigour from family members to put the money to work now and to not waste money on issues that aren’t urgent. They know that there are so many problems the world faces, why wait?” she says. 

UBS’s Bastante says that while two-thirds of philanthropists the bank interacts with have a foundation, very few have a foundation endowed in perpetuity, and she expects that to fall further in popularity. Even the foundation itself is not seen as the must-have it once was. 

“Running a foundation can be very time-consuming in terms of appointing a board and secretariat and complying with the supervisory authority,” says Jean-Philippe Krafft, senior wealth planner in charge of philanthropy at Pictet Wealth Management. Some clients are instead opting to join the umbrella foundations that their banks offer.

Efficiency is now key, which means philanthropists are taking advantage of the data-age by looking to measure the impact of their giving. Maximilian Martin, global head of philanthropy at Lombard Odier, says the wealthy want to see a sustainable change. 

“If you look at the collective consciousness today, there is a sense that our old paradigm is hanging in the balance. Our forecasts and models are off, and we cannot predict what will happen even in elections. The world is in flux and people are asking what positive and game-changing roles capital markets and finance can play.” 

Indeed, Lombard Odier named its marketing campaign last year ‘Rethink everything’ as a nod to the global mood. 

In order to make sense of how philanthropy can be truly transformative, measurements of outcomes are required. That is not an easy task. Some 44% of the 300 members of UBS’s Global Philanthropists' Community consider that measuring the impact of their activities is the greatest challenge they face in their philanthropy. 

Russell Prior, head of philanthropy for the UK and CEEMEA at HSBC Private Bank, says while philanthropy is moving towards measuring impacts, its first step has been shifting to become outcome-driven: “The wealthy are sitting down and thinking about the outcomes they want to see and how best to get there, but genuine impact measurement is tough to do. Every programme is different, every person or cause it touches is different and every desire of a philanthropist is different. But still, it’s crucial that clients keep asking: ‘Is this having the level of success I want?’” 

This measure of success means charities, NGOs and programmes are now being called to better define and report on how money is being put to work. It is worth them doing so. As Prior points out, there are so many charitable organizations, the greater the focus on measurement, efficiency and success, the greater the likelihood of not only achieving a charity’s goals, but also attracting more financing. 

Steven Werlin works with Fonkoze in Haiti, a charity that seeks to help the poorest women in communities become self-sufficient. He says that the greater engagement of philanthropists is having a positive impact on his organization: “As donors look to become more involved and focus more on the results of their giving, they are holding us at NGOs and charities to higher account. Often aid workers are busy in the field and not always thinking about measuring the impact, or how impact can be improved, so that push by donors is actually very helpful.” 

One of the challenges his organization uncovered when it started to measure its success more fully, was that the micro-loans structure did not work for those in the most extreme poverty. 

“For the very poor, the pressure to simply survive means that loans understandably do not always get spent in line with what is agreed,” says Werlin. “Furthermore, we found that people were going to extremes to pay back loans. We tried smaller loans but it didn’t help the very poorest women, so it was clear we needed a different structure if we wanted to make a difference.”

Fonkoze now uses grant money to provide training and assets such as goats to individuals over a period of 18 months, and then helps them receive a community loan to continue their business alone. 

Lombard Odier’s Martin points out that the philanthropic community has to be careful not to get caught up in measurements at the expense of common sense: “There’s a measurement industry now emerging, but some issues just don’t lend themselves to impact measurements and would suffer if that was the sole focus.”

The work of Fonkoze is a case in point. In its mission, the organization found that some of its programmes failed due to poor health among borrowers. It now provides individuals in its graduation programme with a latrine, a water filter and roof repairs so that homes stay dry. 

“We also teach them basic health messages and partner with Partners in Health, which provides medical access over the course of the programme,” says Werlin. Greater health in the community is an indirect outcome that may be missed by donors if only job creation is measured. 

Bastante says that philanthropists are recognizing this: “It’s not just about the outcome, but taking into account the wider impact that giving has on the communities, societies and environment in the areas they operate.” 

As philanthropists battle with how to be more effective and embrace the need for flexibility, innovative structures are emerging on the financing side. Julia Balandina Jaquier is author of ‘Catalyzing wealth for change’ and founder of JBJ Consult, Impact Investment Solutions. She says that it is precisely because philanthropists are increasingly focused on driving sustainable or even systemic change, that they are viewing their foundations as innovation labs that can help develop scalable solutions. 

“They want to leverage their capital to mobilize further funding and that can be achieved in many ways – by sharing their knowledge and infrastructure with other families; by supporting a social business start-up early on, enabling it to prove their model and raise investment capital; or by absorbing a higher portion of risk in a transaction, attracting more commercial sources of capital, such as banks, to co-invest”. 

This notion of supporting social businesses has become popular among philanthropists. Lombard Odier’s Martin says this is particularly the case in emerging markets where, because of the sheer magnitude of issues that they face, market mechanisms and social enterprise are seen as providing sustainable solutions. Bastante points out a desire among self-made entrepreneurs and millionaires to support a person rather than a programme.

Schnoll Begun says that as part of this innovative look at philanthropy, clients are examining ways they can put their foundation’s money to work at all times. “Rather than just focusing on the 5% that must be given away each year, they are now looking at how the remaining 95% can be put to work in a way that also serves a purpose, through loans or investments.” This shift in mindset is further boosting the growth of socially responsible and impact investing. 

Another key change to philanthropy is the strong urge to collaborate. UBS launched its invitation-only Global Philanthropists Community two years ago so that it could create a space for ultra-high net-worth individuals to connect. 

“We realized that they wanted to network amongst their peers,” says Bastante, “wanted to learn from one another and, importantly, wanted to collaborate particularly on some more unique philanthropic ventures – topics that were more specific than the traditional general themes of health, education, women and children, such as autism, human trafficking, dementia, animal welfare and Alzheimer’s.”

According to BNP Paribas Wealth Management’s philanthropy survey, 54% of high net-worth individuals want to work with other philanthropic organizations and 53% want to work with individual philanthropists. There is a recognition that a greater impact can be achieved through collaboration. 

Whitty shares an example of a collaboration that arose from JPMorgan’s philanthropic forum with clients in Rome last summer: “It became clear that the refugee crisis was on the minds of those gathered; several came together to form a working group at that event to explore what could be done beyond the help of governments and aid-workers to create an environment where refugees would be seen as valuable to, and therefore better welcomed by, host countries.” 

After the forum, a group of clients went to Greece to explore first-hand the challenges for refugees; now some 40 philanthropists are working together on a plan of action. “There is a powerful force in connecting high-level clients together and it is a valuable proposition that private banks can offer,” says Whitty. 

Where does this leave the banks? If the ultra-wealthy are taking their philanthropy into their own hands, folding long-term foundations or looking to make direct partnerships, is the role of the private bank or philanthropy adviser diminished? It is an interesting question, given philanthropy is often viewed as an ancillary service for banks, not one that produces direct revenues. 

Balandina Jaquier says that new philanthropy is a big opportunity for service providers, chiefly as it requires more guidance and support than the traditional forms of giving. 

“In addition to networking and introductions, banks can help educate clients about venture philanthropy and impact investing, provide strategic advice and offer products that reflect their values,” she points out. 

And Pictet’s Krafft says that the sheer complexity of philanthropy almost demands the use of intermediaries: “It’s not just about the legal advice or tax structuring. Those who want to give want to do so mindfully, and that often requires a lot of thoughtful advice.” 

He points to a discussion he had with an eye surgeon who worked for an NGO in Nepal: “For all the good intentions in setting up a free eye hospital, he pointed out that there could be a negative knock-on effect on local surgeries, and the desperately needed surgeons in the local communities may be forced to look for work abroad instead. There is a very real responsibility that comes with donating that calls for good and experienced guidance.” 

Younger generations in particular are in need of a helping hand. One banker says that some are simply terrified of the responsibility that comes with such vast sums and the need to manage them. Younger generations also tend to regard philanthropy not as separate to their wealth, but at the heart of all they do. 

“Millennials, in particular, regard their family businesses, their career and their wealth as the opportunity to put their values into action and make a real difference,” says Balandina Jaquier. “For them it’s not just how to do good with the created wealth, but how to create wealth doing good too.” 

Everyone in the wealth industry is having to raise their game, says Schnoll Begun. “Attorneys who used to only have to consider structures or accountants that looked solely at reporting, I now hear talking about sustainability of investments and measurements of impact.” 

She points out that some of the most popular courses at universities deal with social entrepreneurship, not-for-profit management and philanthropic advisory. 

New players are emerging such as philanthropic consultants, impact measurement companies and money managers specifically focused on impact investing. These new entrants could emerge as a threat to private bankers. A survey from Foundation Source last year suggests advisers are not seen as active in philanthropy lower down the wealth spectrum. Less than 12% of the 1,200 clients surveyed said they were likely to speak to their advisers about giving, yet 60% of respondents said it was important or very important that their adviser was knowledgeable about charitable giving. 

The large private banks are taking notice. JPMorgan for example is creating a digital platform to make philanthropic advisory more accessible to more clients. It will include videos and access to research, “whether they’re new to philanthropy or cheque-book philanthropists moving to being more mindful, or are more sophisticated philanthropists,” says Whitty. UBS has launched a similar offering and has forged a path into impact investing, offering co-investments through its Optimus Foundation. 

Credit Suisse has created a joint venture with UOB to source and manage impact investments, in addition to launching several innovative note structures for clients in conservation and education. Lombard Odier offers an impact investing fund and funds of microfinance funds. In addition to services, products and events, banks are hiring from non-profits and corporate CSR divisions. 

Bill Woodson, head of North America Family Office Group, Citi Private Bank, says as philanthropy increasingly becomes part of every conversation with private clients, the firms that can direct them to the right resources and help them tap into their passions are going to differentiate themselves. 

“There’s never been a numerical value on philanthropy, but in my experience it is often one of the most important things a bank offers for its client,” he says. “It touches on purpose, quality of life, family engagement and wealth transfer. Those things while immeasurable, are at the core of their choice of bank.” 

He adds that the relationship also becomes a virtuous circle whereby, through advising a client on their philanthropy, the adviser obtains a better understanding of how to manage the wealth more holistically for the client. 

Martin at Lombard Odier says private banks are a logical partner in this new era of philanthropy: “Often for philanthropists looking to explore something close to their heart, they want to do so in a discreet way. They want someone who can stay with them during that gestation period and help them with due diligence. Private banks lend themselves perfectly to that, particularly if the private bank is engaged in philanthropy so there is a shared understanding.”

Bastante says supportive leadership is going to be the cornerstone of any private bank that hopes to be part of the changes taking place in philanthropy: “You cannot treat philanthropy exclusively like a business – it goes against its very spirit. But I can tell you for sure it adds value and will increasingly do so as millennial-controlled wealth grows, because they feel even more strongly than the current generation that they must direct their capital towards solving global issues. And they will be looking for partners who can help them.”