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06/07/2011

Philanthropy and private banking: a common destiny to imagine

«Distribute your money is as difficult as earning it»
Bill Gates at the inauguration of his foundation "Bill and Melinda Gates"

The world of private banking wakes up to the financial crisis with a huge challenge: to gain back the trust of its clients. At the same time, global inequality and the needs of the poorest in our societies have never been as visible and tangible as during the last two years. Both post-crisis observations, seemingly unrelated, carry within the seeds of the major challenges the private banking world will have to cope with during the next decade: the development and structuring of philanthropic services.

Why is philanthropy more relevant today than it was yesterday? How does philanthropy relate to private banks? How does it come that these two sectors now have mutual stakes in common?

Philanthropy covers the entire process of donations of money, information, goods, services or (political) influence, coming from the private sector (companies or individuals), for the welfare of mankind and the community in general.

When reading the business press, philanthropy has never been standing so much in the spotlight as since the crisis. The first reason finds its roots in the increasing appetite of the public and private sector of funding publically related interests. For over ten years, various European countries have realized they could no longer afford alone to fund national and international needs within social and cultural areas, due to the magnitude of their deficits. Therefore, these countries have developed fiscally attractive mechanisms to stimulate individuals and companies to engage in philanthropy by financing areas that serve the general interest.

The second reason for this growing interest in philanthropy is due to the change in donor behavior, notably firms and individuals. For donors of older generations, donating was good in itself, while for the new ones, the gift must be effective. The typical modern philanthropist has made its fortune quickly, has an entrepreneurial mindset, will restore a part of what he has gained to the society and will invest in projects that he supports. The most famous archetype is Bill Gates, who created the foundation "Bill and Melinda Gates" just before his fortieth birthday and whose endowment is now standing at over 35 billion dollars. Today there is a strong demand coming from the wealthiest individuals to invest in philanthropy, both in Anglo-Saxon (which is an old trend) as in European countries (more a recent tendency).

The growing needs of the poor on national and global level, on the outskirts of globalization, also explains the renewed media attention for philanthropy.

Philanthropy is a sector whose financing needs are in the lift and in which many actors are willing to commit themselves, wealthy individuals as firms. The challenge in this sector lies basically in its ability to structure itself in order to find the equilibrium where supply (philanthropists willing to donate) can meet demand (aid to finance the public interest).

This need for structure has been highlighted by a study of Scorpio Partnership in 2007, showing that 90% of European philanthropists expressed the need to receive assistance on their philanthropic investments. More specifically, they are looking for sound advice enabling them to make appropriate choices. In addition, the study also reveals that most of these philanthropists are willing to pay for obtaining this advice.

Private banks, due to their knowledge in financial products and by the way they affect the public, possess the inherent capability to participate in the growth of philanthropy by offering:

• Products that encourage "Socially Responsible Investing" (SRI)
• Investments in philanthropic projects or charitable funds
• Advice to clients that wish to establish a foundation

What are the main reasons for private banks to engage in this sector which is in the middle of restructuring?

Philanthropy touches the core of believes that are deeply cherished by individuals. It allows starting a personal dialogue on emotional as well as on financial dimension. This dialogue can contribute to the establishment of a long-term client relationship based on trust, where the client is not simply seen as a portfolio of assets and where the banker possesses a broader vision than only selling products with high margins. This will enable banks to enlarge and deepen their knowledge base of customers and to secure loyalty by offering a long-term engagement in sustainable products.

Another working area where private banks have to dig in consists of developing an extended donor network. Philanthropists, especially beginners, express the need to meet other people in this domain to gain advice and share their experiences. From a bank's perspective, linking philanthropic clients represents an opportunity to enlarge its network of prospects. In France, BNP Paribas Wealth Management has understood the importance of this stake and created in May 2008 the circle of philanthropists following on the first edition of the "BNP Paribas Prize of Philanthropy".

From a client's perspective, a private bank that takes into account and supports a client's philanthropic investments opens a unique window of opportunities to also manage the client's assets, both financial as philanthropic. Several studies have identified the main reasons why wealthy people contact their private banks to invest in philanthropic subjects:

1) Tax benefits
2) To shed light on the different philanthropic organizations
3) The urge to measure and monitor effectively their donations

Structuring a philanthropic offer to optimize a client's fiscal position and to guide him to the legal mazes makes thus all sense.

Today, private banks are gaining momentum in the subject of philanthropy, clearly sensing the potential of loyalty and competitive differentiation behind it. But they will only be able to reap the benefits of it from the moment they are deemed competent by their clients. This involves on the one hand private training, putting a human client approach in front of the financial aspect, and on the other hand the reorganization of philanthropic products and services, taking into account all of a donation's fiscal, legal and emotional aspects.

 

Sia Partners

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