Outside-IN

Tax reform threatens a powerful client relationship tool

Charitable deductions are an incentive to giving and a way for advisers to show their humanity

Oct 13, 2017 @ 8:49 am

By Andrew Hibel

This won't be your father's tax reform process – and it may not be the one your business needs either. That's because it might take away investment advisers' number one secret weapon for building strong relationships with their clients – the charitable deduction.

The path to tax code simplicity will not be a simple one. Last time out, President Ronald Reagan's Tax Reform Act of 1986 reduced 14 income brackets to a mere three – a process that, with bipartisan support, went relatively smoothly. In contrast, the Aug. 30 debut of President Donald J. Trump's tax proposal only spurred the posturing that followed: House Republicans floated their blueprint for tax reform; Senate Democrats volleyed back with a letter that lists their non-negotiables for the process.

Speaker Paul Ryan's blueprint called for a doubling of the standard deduction. This proposal would simplify life for many of the nation's tax filers – the 33% of taxpayers who currently rise to the challenge of itemizing all those messy deductions – according to a study by the Charitable Giving Coalition. Yet reduced itemization would come with serious collateral damage for philanthropy, as without itemization there would be no tax advantage to charitable giving.

(More: Trump reconsiders plan to eliminate deduction for state, local taxes.)

The link is clear to Rahul Agrawal, chief investment officer at Advisor Partners: "Charitable giving achieves two important objectives. It provides needed funding to causes that are important to people and improves the social well-being of our community while at the same time allowing the donor to reduce his/her personal tax liability.

"Removing the charitable giving deduction will impact the amount of funds charitable groups receive since people will be disincentivized to donate their wealth. In other words, removing this deduction will adversely impact this country on multiple fronts."

CLOSE TO HOME

More than 98 percent of high-net-worth households donate to charity, and three-quarters volunteer, according to a 2014 U.S. Trust study. A 2016 study found that 74% of voters would rather give $1,000 to charities than to the federal government, and 88% of them believe it should be easier to deduct charitable gifts from their taxes.

Most financial advisers acknowledge that theirs is a relationship business. Trust, familiarity and philosophical alignment cement client relationships as surely as financial returns do. Yet despite the fact that philanthropy is their clients' passion, surveys have shown that most investment advisers continue to discuss charity mostly from a technical perspective.

In an era when robo-investor services are rapidly stealing market share from financial advisers, one would think those advisers would make the most of their distinguishing advantage: their humanity.

ENLIGHTENED PERSPECTIVE

Some advisers do see and act on this big picture. According to Michael E. Pharr, partner at Summit Financial Wealth Advisors, "It's critical for any financial professional working with affluent investors to understand the importance of charitable deductions and the role they play in a client's overall financial plan."

He urges advisers to work closely with the estate and tax professionals of affluent clients, ensuring that any charitable giving is done in a way that not only coincides with clients' overall wealth goals but, more importantly, "gives clients a sense of fulfillment that their hard work and sacrifice will make a difference towards a cause that they believe in."

Because of the conversations it can start, the deduction is a valuable tool for learning your client's heart and mind – and it's a tool your client clearly wants you to use. But many financial advisers continue to miss the boat. What will they do if that ship sails into the tax reform sunset?

Simplifying the tax code is a great idea; dumbing it down is not. The line is a fine one. But gutting the power of the charitable deduction – and suffering the unintended consequences such a move would cause among nonprofit organizations, philanthropically minded investors, and our own businesses – may define that line very clearly.

Andrew Hibel is the founder of The Advise Us Fund, a donor-focused donor-advised fund.

0
Comments

What do you think?

View comments

Upcoming event

Sep 10

Conference

Denver Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

INTV

Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

Latest news & opinion

Wall Street lashes out at Sanders' plan to pay off student debt with a securities trading tax

Financial pros argue that a transaction levy will hurt mom-and-pop investors along with investment houses.

GPB paid B-Ds and reps steep commissions to sell troubled private placements

GPB paid commissions of 9.3%, or $167 million altogether, on the firm's private placements.

Give us a break, active managers say

Seven portfolio managers share their outlooks for the rest of the year, generally agreeing that it's been hard for active managers to stand out.

GPB Capital reports decline in value of two biggest funds

One has dropped by 25.4% and the other by 39%, according to the company.

6 ways Social Security will change in 2020

As the enormous baby boomer generation continues to march toward retirement, they are straining the resources of Social Security. Here are six ways that the nation’s primary retirement income program will change in 2020.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print