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Philanthropy and inter generational wealth transfer
Philanthropy and inter generational wealth transfer
Philanthropy and inter generational wealth transfer
Philanthropy and inter generational wealth transfer
Philanthropy and inter generational wealth transfer
Philanthropy and inter generational wealth transfer
Philanthropy and inter generational wealth transfer
Philanthropy and inter generational wealth transfer
Philanthropy and inter generational wealth transfer
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Philanthropy and inter generational wealth transfer

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This research delves into the increasing engagement of high new worth individuals with philanthropy and the strategies they are adopting to better align their values, expertise and charitable …

This research delves into the increasing engagement of high new worth individuals with philanthropy and the strategies they are adopting to better align their values, expertise and charitable activities. This often involves active engagement with a philanthropic enterprise rather than simply writing a cheque. One example is venture philanthropy which involves using business techniques, to address social ills. The vehicles can be non-governmental organisations, more traditional business ventures or social enterprises.

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  • 1. Global Financial Institute Your entry to in-depth knowledge in finance www.DeAWM.com Philanthropy and inter-genera- tional wealth transfer Dr. Paul Kielstra Deutsche Asset & Wealth Management S4SPECIAL ISSUE
  • 2. Philanthropy and inter-generational wealth transfer2 Deutsche Asset & Wealth Management’s Global Financial Institute asked the Economist Intelli- gence Unit to produce a series of white papers, custom articles, and info-graphics focused spe- cifically on global capital market trends in 2030. While overall growth has resumed, and the value traded on capital markets is astoundingly large (the world’s financial stock grew to $212 trillion by the end of 2010, according to McKin- sey & Company) since the global financial crisis of 2008, the new growth has been driven mainly by expansion in developing economies, and by a $4.4 trillion increase in sovereign debt in 2010. The trends are clear: Emerging markets, particularly in Asia, are driving capital-raising; in many places debt markets are fragile due to the large component of government debt; and stock Global Financial Institute Introduction to “Global Capital Markets in 2030“ markets face weakening demand in many mature markets. In short, while the world’s stock of financial assets (e.g. stocks, bonds, currency and commodity futures) is growing, the pattern of that growth sug- gests that major shifts lie ahead in the shape of capi- tal markets. This series of studies by Global Financial Institute and the Economist Intelligence Unit aims to offer deep insights into the long term future of capital markets. It will employ both secondary and primary research, based on surveys and interviews with leading institutional investors, corporate executives, bankers, academics, regulators, and others who will influence the future of capital markets.
  • 3. Paper tigers: Chinese and Indian capital markets3 About the Economist Intelligence Unit The Economist Intelligence Unit (EIU) is the world’s leading resource for economic and busi- ness research, forecasting and analysis. It provides accurate and impartial intelligence for companies, government agencies, financial institutions and academic organisations around the globe, inspir- ing business leaders to act with confidence since 1946. EIU products include its flagship Country Reports service, providing political and economic analysis for 195 countries, and a portfolio of sub- scription-based data and forecasting services. The company also undertakes bespoke research and analysis projects on individual markets and busi- ness sectors. The EIU is headquartered in London, UK, with offices in more than 40 cities and a net- work of some 650 country experts and analysts worldwide. It operates independently as the busi- ness-to-business arm of The Economist Group, the leading source of analysis on international business and world affairs. This article was written by Dr. Paul Kielstra and edited by Brian Gardner. Dr. Paul Kielstra is a Contributing Editor at the Economist Intelligence Unit. He has written on a wide range of topics, from the implications of political violence for business, through the eco- nomic costs of diabetes. HIs work has included a variety of pieces covering the financial services industry including the changing role relationship between the risk and finance function in banks, preparing for the future bank customer, sanctions compliance in the financial services industry, and the future of insurance. A published historian, Dr. Kielstra has degrees in history from the Universi- ties of Toronto and Oxford, and a graduate diploma in Economics from the London School of Econom- ics. He has worked in business, academia, and the charitable sector. Brian Gardner is a Senior Editor with the EIU’s Thought Leadership Team. His work has covered a breadth of business strategy issues across indus- tries ranging from energy and information tech- nology to manufacturing and financial services. In this role, he provides analysis as well as editing, project management and the occasional speaking role. Prior work included leading investigations into energy systems, governance and regulatory regimes. Before that he consulted for the Commit- tee on Global Thought and the Joint US-China Col- laboration on Clean Energy. He holds a master’s degree from Columbia University in New York City and a bachelor’s degree from American University in Washington, DC. He also contributes to The Economist Group’s management thinking portal. Global Financial Institute Introduction to Global Financial Institute Global Financial Institute was launched in Novem- ber 2011. It is a new-concept think tank that seeks to foster a unique category of thought leadership for professional and individual investors by effec- tively and tastefully combining the perspectives of two worlds: the world of investing and the world of academia. While primarily targeting an audi- ence within the international fund investor com- munity, Global Financial Institute’s publications are nonetheless highly relevant to anyone who is interested in independent, educated, long-term views on the economic, political, financial, and social issues facing the world. To accomplish this mission, Global Financial Institute’s publications combine the views of Deutsche Asset & Wealth Management’s investment experts with those of leading academic institutions in Europe, the United States, and Asia. Many of these academic institutions are hundreds of years old, the per- fect place to go to for long-term insight into the global economy. Furthermore, in order to present a well-balanced perspective, the publications span a wide variety of academic fields from macroeco- nomics and finance to sociology. Deutsche Asset & Wealth Management invites you to check the Global Financial Institute website regularly for white papers, interviews, videos, podcasts, and more from Deutsche Asset & Wealth Manage- ment’s Co-Chief Investment Officer of Asset Man- agement Dr. Asoka Wöhrmann, CIO Office Chief Economist Johannes Müller, and distinguished professors from institutions like the University of Cambridge, the University of California Berkeley, the University of Zurich and many more, all made relevant and reader-friendly for investment profes- sionals like you.
  • 4. 4 A growing interest in giving Capital is ultimately only a tool rather than an end in itself and nothing quite focuses the mind on this limitation quite like mortality. For those of high net worth, the problem of not being able to take it with you has, if anything, grown more acute in recent years, even with amid the economic downturn. According to Cap Gemini’s World Wealth Report the global number of millionaires has risen from 7.2m holding US$26.7trn in investable wealth in 2002 to 12m with US$46.2trn in 2012. Much of this wealth will eventually be transferred to later generations of the same family. In recent years, however, notes Kelin Gersick—a US-based consultant and expert on cross-generational change in family firms, as well as in family philanthropy—increasingly the focus of discussions by the families of wealthy entrepreneurs has shifted from the creation and preservation of wealth to its appropriate and meaningful use. This “brings philanthropy more into the centre of the conversation”about wealth management and its transfer, Mr Gersick says. The billions of dollars that Bill Gates and Warren Buffett have given through the for- mer’s foundation are the most prominent and largest high- profile donations. They are not unique, however, or even isolated exceptions. Li Ka shing, a Hong Kong property tycoon, and India’s Azim Premji have both also given away billions, while a recent global survey of high-net-worth individuals found that 17% of those with over US$20m in investment assets had their own charitable foundations.1 Such activity is not, in itself, new. Some well-endowed insti- tutions that were created in this way, such as the Rocke- feller Foundation in the US and the Rowntree Trusts in Brit- ain, have existed for over a century. However, there are also indications that there is a growing level of philanthropy among the wealthy. One is an apparent increase in the establishment of family foundations—a common vehicle for high-net-worth families to channel their giving. In 2000 the Foundation Centre, an American organisation that studies philanthropy, found 24,434 grant-making foun- dations “with measurable donor or donor-family involve- ment” in the US. By 2010 the number had risen to 38,671, representing an increase of 58%. A 2009 study of family foundations in several European countries, meanwhile, found signs of a growing number of such organisations in the UK and Italy.2 Entrepreneur-established foundations have even begun to appear in Asia’s emerging markets.3 Such indications of growth are consistent with the impres- sions of those in the field. Mr Gersick notes that over the past two decades the role of philanthropy in the planning of transgenerational wealth transfer “has seemed to be increasing”. Moreover, despite inevitable cultural varia- tions, he believes that the idea that “the mark of a family of quality includes the issue of effective, well-managed philanthropy is becoming a global cultural phenomenon.” Theresa Lloyd, a British philanthropy consultant and co- author of Richer Lives: Why rich people give, also says that family philanthropy is “undoubtedly more prominent and the number of people setting up foundations as a perma- nent and strategic commitment to family philanthropy has been increasing.” Philanthropy as a tool in inter-generational wealth transfer The drivers of philanthropy by wealthy individuals are complex and vary widely by culture: personal experi- ence with an area of need or religion tend to be a leading motivators in the Middle East, while a desire to give back Philanthropy and inter-generational wealth transfer A Global Financial Institute research paper written by the Economist Intelligence Unit June 2014 Philanthropy and inter-generational wealth transfer Global Financial Institute 1 BNP Paribas Individual Philanthropy Index: Measuring Commitment in Europe, Asia, Middle East. BNP Paribas, May 2013. 2 Pharoah, C. (2009). Family Foundation Philanthropy 2009: UK, Germany, Italy, US. London: Alliance Publishing Trust. 3 UBS-INSEAD Study on Family Philanthropy in Asia. UBS-INSEAD, 2011,“Rich more willing to set up family foundations,”People’s Daily Online, May 16th 2011. Written by
  • 5. 5 Philanthropy and inter-generational wealth transfer and general feelings of altruism are the main factors in Asia and Europe respectively.4 Linking all of these motivations is the idea that rich donors are genuinely seeking to help their wider societ- ies, rather than looking for secondary benefits such as reduced taxes. Mr Gersick notes, “most families that have philanthropy as part of their family system want to be responsible to their com- munities. They see it as one mark of an honourable lifestyle.” For some, wealth creation and giving back are inextricably inter- twined. Grant Gordon is a philanthropist and a member of the fifth generation to work in the family business, William Grant & Sons, a Scottish distiller. He explains that the company’s success has taught his family the importance of the local community in which it operates and has instilled a sense of responsibility for it. One form this awareness takes is a desire to support the areas in which it operates, and to create more opportunities for people there to thrive. Within this context of a genuine desire to do good, the way that philanthropy is structured by high-net-worth families plays a vari- ety of strategic roles in inter-generational wealth transfer. This, as much as the tax advantages found in many jurisdictions, explains the increasing use of family foundations. Mr Gersick states that, especially after the first generation produces substantial wealth, often through an operating company, a family office or holding company frequently emerges as the centre of family activity. “Then philanthropy becomes one of the structural components of the family enterprise system”, with a philanthropic foundation often one of several significant entities. This shift has had an important psychological impact for both current business decisions and planning for the future. Lord Rumi Verjee is a successful British entrepreneur who established the Rumi Foundation in 2006, which is chaired by his nephew, Jay Verjee, a Canadian businessman. The foundation’s work, says Lord Verjee, has integrated with family business activities and succession-planning in several ways.” It gives a rigour in thinking about wealth-transfer issues, looking at questions like, ‘When is enough, enough?’ and ‘How much do you give?’ It really drives you to question those sorts of issues.” He adds that, more gener- ally, “setting up a foundation has helped a lot to bring discipline into entrepreneurial and business activities,” as philanthropic activity encourages a long-term vision. Once they are wrestling with such questions, parents in high- net-worth families, according to Ms Lloyd, will “see the creation of a foundation as not just something good for their own giving but as a solution”for other issues. In particular, involving younger relatives in the running of family foundations, or in philanthropy more generally, can help to address a range of inter-related family issues that frequently revolve around preparing children for the substantial challenges of maintaining inherited wealth.The think- ing behind such use of philanthropy by families, says Ms Lloyd, is “almost a paradox. If you give some away, your family is more likely to hold onto the rest through more generations.” In other words, the money being given to good causes can at the same time provide an opportunity for lessons in entrepreneurship, per- sonal and civic responsibility as well as wealth management. One of the most common family purposes for structured philan- thropy is, notes Mr Gordon, “to instil in the next generation the family values—around the importance of community and the responsibilities of beneficiaries [of wealth]—that you may have received and which you have tried to build on and maintain.”The Rumi Foundation is a case in point. Rumi Verjee made his own wealth after his family’s forced exit from Idi Amin-ruled Uganda. Before the dictator confiscated most of its assets, however, sev- eral generations in Africa and in the family’s native home of India had been very well-off and, consistent with their Ismaili Muslim beliefs, engaged in substantial community-support and reli- gious giving. As Rumi puts it, “history, culture within the family, past philanthropy, and religion—that is what drives older family members to make sure values do transfer down to other genera- tions. Involving members of the next generation and giving them responsibility helps to inculcate those values.” Jay Verjee agrees. He sees his appointment as part of an effort to instil “a culture of giving back and thinking of others, which is something the older generation is trying to make sure the younger one understands and prioritises. [In this way, the founda- tion acts] as a place to put cultural values in. I love that my cousins are interested in getting involved and, from the age of 16, think- ing about projects.” In addition to educating members of younger generations on desired moral values, foundations and other forms of 4 2014 BNP Paribas Individual Philanthropy Index: Philanthropic Journeys :The Importance of Timing. BNP Paribas, February 2014. For a more nuanced examination of giving by high-net-worth individuals in one country see Breeze, B. and Lloyd, T. (2013) Richer Livers: Why rich people give. London: Directory of Social Change. Global Financial Institute
  • 6. 6 Philanthropy and inter-generational wealth transfer high-net-worth family philanthropy are sometimes expected to serve as a financial, leadership and collaboration training ground. Ms Lloyd explains that “running a family foundation requires dif- ficult decisions”and some families feel that such involvement will mean that younger relatives are less likely to waste other parts of the family fortune. Mr Gersick adds that, given how rarely younger family members receive training in governance issues, “for the members of all generations in an extended family to have the opportunity to work together, make decisions, manage money, and argue over policies, [the experience] has value.”More- over, he says, this work can reveal hidden human capital among family members, which can then be applied elsewhere. Mr Gersick warns, however, that foundations are not panaceas. Senior generations of high-net-worth families often see founda- tions, or involvement in charitable work more generally, as ways to give moral and management lessons.“To a point they can fulfil those functions,”he believes,“but not as much as seniors believe.” With regard to ethical values, he notes that when the establish- ment of a foundation is an isolated activity, inconsistent with other family behaviour, “the kids don’t believe [the supposed moral lesson] anyway. Creating a foundation by itself does not create—or repair—a family culture.” Similarly, he adds, family foundations and companies are not identical, and so running the former does not in itself create the capacity to run the latter well. Mr Gordon agrees. Although he believes that involvement in a family’s charitable activities pro- vides good experience and “a solid training ground for gover- nance,” he notes that “it is not a career development move”. Both for its own intrinsic value and the lessons it can teach, the more experience family members have of well-run, thoughtful philan- thropy the better. Doing so does not, however, create the condi- tions for effective inter-generational wealth transfer in isolation. Nevertheless, if done well, many families also find that philan- thropy can provide a shared activity around which generations can coalesce—an important good in itself and an aid in build- ing relationships that ease the broader process of wealth transfer. Although “it doesn’t work every time,” Mr Gordon calls philan- thropy a“potentially powerful way of engaging family members”. Of his own generation, he notes a number of cousins“from quite different walks of life and not working in family business for whom giving is the one part of the family enterprise that they care most deeply about.” The younger generation of some 30 cousins, meanwhile, get together once a year to decide what to do with a defined pot of charitable money “as a team exercise”. He notes that these philanthropic activities, as well as the distinct ones in which his nuclear family engages, have made his own children—who are not interested in a career in the business— ”more engaged in the broader family enterprise”. Philanthropy can even have a strong impact across several generations. Jay Verjee recalls the effect that seeing a mosque in Mombasa which his great-grandfather had paid to erect in 1850 had on him. “The culture of giving is what makes me most proud to be part of our family,”he says. This does not mean that families necessarily have to agree on a specific cause to support. Rather, the process of philanthropy itself has an impact. Ms Lloyd recalls one family she worked with: the parents said that during the adolescence of their four chil- dren, the only time everyone seemed willing to talk together was about their philanthropy, despite the fact that they supported very different causes. But formal philanthropic structures can also help. The Rumi Foundation, for example, does so by providing a focus for family action. Both Verjees note, for example, that dis- persal across geographies and even cultures—a common issue for high-net-worth families—can impede a group’s focus on giv- ing. As Jay Verjee puts it, “The most difficult thing for my genera- tion is that we are all over the place. Philanthropy is easier when you are all together.” Finally, especially for those of very high net worth looking to secure the welfare of future generations, giving money away can, in some cases, be a means of protecting heirs from the hazards inherent in wealth transfer. From Andrew Carnegie to Mr Gates, a number of very successful entrepreneurs have turned to phi- lanthropy after setting aside what they consider to be sufficient resources for the next generation. For them, the legacy is the example, not simply the income. Mr Buffett, for example, has even found an interesting way to square the circle of philanthropy and heirs by funding charitable foundations run by his three children Global Financial Institute
  • 7. 7 Philanthropy and inter-generational wealth transfer through gifts worth well over US$1bn to each. The changing face of philanthropy Even as one of the secondary goals of high-net-worth family phi- lanthropy is to have a positive impact on younger family mem- bers, the newer generation is having its own impact on how phi- lanthropy is practised. In recent years several new philanthropic strategies have grown in popularity among those with the resources to pursue them. These typically involve active engagement with the charitable enterprise rather than simply writing a cheque. The most well known—philanthrocapitalism, also known as venture philan- thropy—involves using business techniques, as well as investing time and energy, in order to bring to scale solutions to problems which are best dealt with through charities rather than busi- nesses. Further blurring the lines between business and philan- thropy has been the growth of social or impact investment, which typically involves putting money into an organisation with a view to a social return as well as an economic one. The vehicle in this case can be a non-governmental organisation, a traditional com- pany or a social enterprise—organisations using market-based techniques that generate profits in pursuit of a specific social goal. These developments are coming into family philanthropy largely through younger individuals. According to Ms Lloyd, “[there is] no question that there are generational differences. The older generation tended to be more traditional grant-makers. Emerg- ing donors are more interested in social and impact investing, in spending more time, setting up their own operational organisa- tions, rolling up their sleeves.” The difference, however, is one of exposure to new ideas rather than a fixed strategic vision. Mr Ger- sick notes that, in his experience, the idea of venture philanthropy tends to be raised first by a younger family member. Neverthe- less, especially where an entrepreneurial founder of a foundation is still alive, such strategies quickly resonate with the “return on investment” orientation that the senior leader used to build the enterprise. “I wouldn’t say there is a lot of resistance [from older individuals],”he adds,“it is more the idea [that] this business pro- cess to philanthropy tends to enter discussion from the younger generations.” Rather than a one-way transfer of knowledge, joint philanthropy efforts can create an exchange between family members. This is consistent with the experience of the Verjees. Jay Verjee says that he and Lord Verjee rarely disagree on particular causes, but differ only in keeping up with philanthropic trends. “I try to look at impact investment and social entrepreneurship. Rumi has a more traditional view,” which has shaped the foundation’s approach to date. His uncle is not even sure that this is such a dif- ference. He believes that “philanthropy is changing dramatically and the world is changing.” He sees a broader shift of attitude in which older individuals share. Like the younger generation, “I now think more about the social impact of a lot of what I do”than he did in his own youth, he says. In the coming years, an increasing number of high-net-worth individuals will be considering the ultimate destinations of a growing amount of capital. Part of this money will go to philan- thropy. Although the main driver will be a charitable impulse, it will make sense to donate these funds in a way that helps to incul- cate important values and skills in the family’s younger genera- tion. If done well, this will not only help the latter to manage their entire inheritance better in future, but it can also widen perspec- tives on giving in the present—a greatly enhanced legacy from one generation to another. Global Financial Institute
  • 8. Disclaimer Deutsche Asset & Wealth Management represents the asset management and wealth management activities conducted by Deutsche Bank AG or any of its subsidiaries. Clients will be provided Deutsche Asset & Wealth Management products or services by one or more legal entities that will be identified to clients pursuant to the contracts, agreements, offering materials or other documentation relevant to such products or services. This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or for Deutsche Bank AG and its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither Deutsche Bank AG nor any of its affiliates, gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the Deutsche Bank Group, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The opinions and views presented in this document are solely the views of the author and may differ from those of Deutsche Asset & Wealth Management and the other business units of Deutsche Bank. The views expressed in this docu- ment constitute the author’s judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. Any forecasts provided herein are based upon the author’s opinion of the market at this date and are subject to change, dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. Investments are subject to risks, including possible loss of principal amount invested. Publication and distribution of this document may be subject to restrictions in certain jurisdictions. © Deutsche Bank · June 2014 8 R-34278-1 (3/14) Global Financial Institute
  • 9. Your input is important to us. For enquiries and feedback, please contact: Dr. Henning Stein Head of Global Financial Institute henning.stein@db.com

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