A new generation of philanthropists is beginning to emerge in the UK, according to a report in the UK’s Sunday Times this month. “They are m...

A new generation of philanthropists is beginning to emerge in the UK, according to a report in the UK’s Sunday Times this month. “They are more demanding than their predecessors. They want to see returns on their ‘investment’ and bring the discipline of business to their giving.” By way of example, Sir Tom Hunter, the Scottish entrepreneur, has donated a total of £100 million ($178 million) to his Hunter Foundation, up to five per cent of which is set aside to assess the impact of individual projects in which it ‘invests.’ “We want to see a return,” said Hunter. “We want to see that our money has made a difference
We don’t just put the money in and hope.”

Leaving a lasting legacy has long been an important objective for individuals who have amassed large fortunes. In the US, large-scale philanthropy goes back uninterrupted to the nineteenth century with Andrew Carnegie and other industrial barons such as Henry Clay Frick and George Peabody.

In Europe, by contrast, the strong tradition of philanthropy faltered in the post-war period as governments assumed a burgeoning role in the universal provision of education, health, pensions and the arts. To pay for all this, taxes were raised to a point where relatively few fortunes were being created and where individuals could take comfort in the knowledge that the state would provide. The role of the private sector in welfare provision had become marginalised.

The extent to which the UK economy was reformed in the 1980s by Margaret Thatcher was reflected in a new age of philanthropy. But there remains still plenty of leeway for the UK to catch up on the US. The percentage of individual charitable giving in the US, at 1.75 per cent of GDP, is more than double the level in the UK at 0.76 per cent of GDP.

An argument advanced in the US for charitable giving is that inherited wealth serves as a drag on the economy. The offspring of ultra high net worth individuals who might otherwise play a dynamic role in wealth creation are encouraged, instead, to live off the fortunes created by their parents.

Curiously, this point of view is probably held more strongly by the right than the liberal left and it finds expression in calls for various forms of inheritance taxation. It provides a strong intellectual underpinning for charitable giving and it explains why Bill Gates has donated more than $25 billion to the Bill & Melissa Gates Foundation while making relatively modest provision for his children.

What are the implications of all this for the wealth management community? First, in developing a holistic view of their clients’ wealth and wealth aspirations, they need to take full account of the powerful psychological need to leave a lasting legacy through charitable giving, alongside meeting other normal investment objectives.

Second, philanthropy is a growing asset class - Americans donate $200 billion a year; the Brits over £7 billion a year with over 20 individuals having donated more than £1 million in 2004 (for 17 of whom this represented more than 1.5 per cent of their stock of wealth). This money is increasingly being “invested” by benefactors who are more demanding than their predecessors in looking for a lot more than a nice warm glow from their giving. They want to make a difference in their local communities and in the world beyond; just as they have made a difference in their business careers.

Historically, wealth managers have assisted their clients by helping set up and run charitable trusts through their trust administration and asset management arms. Some private banks, such as Coutts, run educational programmes for aspiring benefactors. It would seem a logical extension to develop specialist units, which can engage more proactively with their clients in creating and executing effective philanthropic strategies. A glance at the websites of some of the leading global private banks suggests that the wealth management industry has some way to go in catering effectively for this growing asset class.

Wealth managers also need to reach out more to charitable organisations. In the US, where planned giving amounts to over 60 per cent of philanthropic donations compared with less than 25 per cent in the UK, there is a much closer alignment between not-for-profit organisations on the one hand and benefactors and their wealth management advisors on the other.

One result is that US not-for-profits have been able to build up huge endowments - compare Harvard’s $25.9 billion with Cambridge’s £3.1 billion - rather than living from year to year on whatever the latest fundraising drive can bring. Far sighted wealth managers should be able to benefit from this transfer of wealth if the US experience is anything to go by. There, asset managers compete fiercely to look after the massive endowments of the larger not-for-profits.