Investment Advisors Should All be Methodists!
But on the face of it, the goal of giving away money and assets is completely at odds with the business goal of all good investment advisors, which is to increase their Assets under Management. (AUM). Managed assets are the life blood of investment advisory businesses. And as with all businesses, you either grow or die; there is no such thing as healthy stasis.
So the idea of encouraging your clients to do more giving sounds a lot like asking your business to cut off a limb. At a minimum, it’s completely counter intuitive to the essential ambition of growing one’s business. The good news is that the apparent conflict is completely incorrect.
“Make all you can, save all you can, give all you can.”
John Wesley, Founder of Methodism
For sophisticated advisors managing assets for Christian clients, there are charitable giving techniques which align with your clients’ values and also help create or maintain manageable assets. This is the first in a series of articles, video presentations, and webinars in which we will describe such techniques. The goal of these presentations is to help you grow your business as you help our donors, who we call Givers, achieve their charitable goals.
As an important aside, I’ve been in the investment management business for more than 25 years. When I first started and barely knew the difference between a stock and a bond, it took me several years to bring $25 million into the “value” shop where I was working. Years later, in a much shorter time, I grew my three-employee consulting firm to a little over $500 million in supervised assets. I like the business and appreciate the service advisors provide their clients.
Aligning Techniques to Goals
For a great many of our Givers, supporting ministries is an extremely important part of their lives. But it’s rarely their whole life or their only goal. Some have families to whom they want to give or leave assets. Others have businesses they enjoy and wish to maintain. Almost all have multi-dimensional lives in which their charitable giving is merely one part. And almost all have a continuing need for income from business, salary, or investment assets. Investment advisors are uniquely positioned to help their clients, our Givers, achieve their heart-felt desire to “give more” while still meeting their other obligations.
To do that, some giving techniques are more helpful than others. Examples include:
- Using charitable gifts to increase portfolio tax efficiency
- Liberating frozen assets such as low basis stock or real estate
- Gifting assets to future generations while also increasing charitable giving
- Using businesses to fund ministries
- Capturing capital gains from asset sales for giving and investment purposes
Some of these techniques, such as almost any gift of an on-going business interest, are extremely complex and only suitable for clients with the financial and emotional wherewithal to handle such complexity. But others, such as improving the tax efficiency of an investment portfolio, are incredibly simple. As another aside, (and a shameless plug for our services!) we are always willing to help advisors analyze potentially complex gifts. But let’s start with simplicity.
Tax Efficient Portfolios: A Simple Win-Win
For the sake of this example, let’s assume that your client regularly gives cash to ministries. And let’s also assume that the amounts are modest relative to the size of their investment portfolio. Consider the advantages of helping your client donate shares of appreciated publicly traded stock instead of cash.
The basic tax rule is that donors receive a charitable tax deduction for the full fair market value of shares held for more than one year. The deduction is usable against 30% of the donor’s adjusted gross income and any excess can be carried over and deducted for the next five years. Most importantly, there is no tax on the embedded capital gains. Since the tax-exempt charity sells the shares, the capital gains are never taxed.
Now wed giving in this manner to regularly selling losing positions to harvest tax losses and you have a very tax-efficient investment portfolio. Unless outside pressures interfere (such as an unplanned need for cash), your client regularly realizes tax losses but rarely recognizes capital gains. The after-tax performance of the portfolio improves.
In addition, if your client uses a Giving Fund at the National Christian Foundation (another shameless plug!), you can simply transfer the gifted shares to our account at your firm. We have such trading accounts with every firm on the street. We’ll then sell those shares and move the cash into your client’s Giving Fund. If that Giving Fund is $300,000 or more, at your client’s request we can also hire you and your firm to manage the fund.
By legally avoiding the capital gains on appreciated stock, your client can either give at a lower total cost, or give more for the same, net after tax cost. When you facilitate that ongoing benefit, you tie your work directly to your client’s charitable dreams and goals. And, as noted above, you also improve the after-tax performance of your client’s portfolio.
In all of this, it’s important to remember that the best techniques are merely tools and are only valuable when the tool addresses the client’s needs. But even the discussion of possible actions is often a relationship benefit, as your client knows you care about the same things and are working to help them achieve all of their goals. Watch for our next article on liberating frozen assets.
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