Deutsche Asset & Wealth Management www.DeAWM.com S4 SPECIAL ISSUE Philanthropy and inter-generational wealth transfer Global Financial Institute Your entry to in-depth knowledge in finance Dr Paul Kielstra Philanthropy and inter-generational wealth transfer Global Financial Institute Introduction to “Global Capital Markets in 2030“ Deutsche Asset & Wealth Management’s Global markets face weakening demand in many mature Financial Institute asked the Economist Intelli- markets gence Unit to produce a series of white papers, custom articles, and info-graphics focused spe- In short, while the world’s stock of financial assets cifically on global capital market trends in 2030 (e.g stocks, bonds, currency and commodity futures) is growing, the pattern of that growth sugWhile overall growth has resumed, and the gests that major shifts lie ahead in the shape of capi- value traded on capital markets is astoundingly tal markets large (the world’s financial stock grew to $212 trillion by the end of 2010, according to McKin- This series of studies by Global Financial Institute sey & Company) since the global financial crisis and the Economist Intelligence Unit aims to offer of 2008, the new growth has been driven mainly deep insights into the long term future of capital by and markets It will employ both secondary and primary by a $4.4 trillion increase in sovereign debt in research, based on surveys and interviews with 2010 The trends are clear: Emerging markets, leading institutional investors, corporate executives, particularly in Asia, are driving capital-raising; in bankers, academics, regulators, and others who will many places debt markets are fragile due to the influence the future of capital markets expansion in developing economies, large component of government debt; and stock Paper tigers: Chinese and Indian capital markets Global Financial Institute Introduction to Global Financial Institute Global Financial Institute was launched in Novem- institutions are hundreds of years old, the per- ber 2011 It is a new-concept think tank that seeks fect place to go to for long-term insight into the to foster a unique category of thought leadership global economy Furthermore, in order to present for professional and individual investors by effec- a well-balanced perspective, the publications span tively and tastefully combining the perspectives of a wide variety of academic fields from macroeco- two worlds: the world of investing and the world nomics and finance to sociology Deutsche Asset of academia While primarily targeting an audi- & Wealth Management invites you to check the ence within the international fund investor com- Global munity, publications white papers, interviews, videos, podcasts, and are nonetheless highly relevant to anyone who is more from Deutsche Asset & Wealth Manage- interested long-term ment’s Co-Chief Investment Officer of Asset Man- views on the economic, political, financial, and agement Dr Asoka Wöhrmann, CIO Office Chief social issues facing the world To accomplish this Economist mission, Global in Financial Institute’s independent, Global Financial educated, Institute’s Financial Institute Johannes website Müller, and regularly for distinguished publications professors from institutions like the University of combine the views of Deutsche Asset & Wealth Cambridge, the University of California Berkeley, Management’s those the University of Zurich and many more, all made of leading academic institutions in Europe, the investment experts with relevant and reader-friendly for investment profes- United States, and Asia Many of these academic sionals like you About the Economist Intelligence Unit The the a variety of pieces covering the financial services world’s leading resource for economic and busi- Economist Intelligence industry including the changing role relationship ness research, forecasting and analysis It provides between the risk and finance function in banks, accurate and impartial intelligence for companies, preparing for the future bank customer, sanctions government agencies, Unit financial (EIU) is and compliance in the financial services industry, and academic organisations around the globe, inspir- institutions the future of insurance A published historian, Dr ing business leaders to act with confidence since Kielstra has degrees in history from the Universi- 1946 EIU products include its flagship Country ties of Toronto and Oxford, and a graduate diploma Reports service, providing political and economic in Economics from the London School of Econom- analysis for 195 countries, and a portfolio of sub- ics scription-based data and forecasting services The the charitable sector He has worked in business, academia, and company also undertakes bespoke research and analysis projects on individual markets and busi- Brian Gardner is a Senior Editor with the EIU’s ness sectors The EIU is headquartered in London, Thought Leadership Team His work has covered a UK, with offices in more than 40 cities and a net- breadth of business strategy issues across indus- work of some 650 country experts and analysts tries ranging from energy and information tech- worldwide It operates independently as the busi- nology to manufacturing and financial services In ness-to-business Group, this role, he provides analysis as well as editing, the leading source of analysis on international project management and the occasional speaking business and world affairs role Prior work included leading investigations arm of The Economist into energy systems, governance and regulatory This article was written by Dr Paul Kielstra and regimes Before that he consulted for the Commit- edited by Brian Gardner tee on Global Thought and the Joint US-China Collaboration on Clean Energy He holds a master’s Dr Paul Kielstra is a Contributing Editor at the degree from Columbia University in New York City Economist Intelligence Unit He has written on and a bachelor’s degree from American University a wide range of topics, from the implications of in Washington, DC He also contributes to The political violence for business, through the eco- Economist Group’s management thinking portal nomic costs of diabetes HIs work has included Philanthropy and inter-generational wealth transfer Global Financial Institute Philanthropy and inter-generational wealth transfer Written by A Global Financial Institute research paper written by the Economist Intelligence Unit June 2014 A growing interest in giving indications that there is a growing level of philanthropy Capital is ultimately only a tool rather than an end in itself among the wealthy One is an apparent increase in the and nothing quite focuses the mind on this limitation quite establishment of family foundations—a common vehicle like mortality For those of high net worth, the problem of for high-net-worth families to channel their giving In 2000 not being able to take it with you has, if anything, grown the Foundation Centre, an American organisation that more acute in recent years, even with amid the economic studies philanthropy, found 24,434 grant-making foun- downturn According to Cap Gemini’s World Wealth Report dations “with measurable donor or donor-family involve- the global number of millionaires has risen from 7.2m ment” in the US By 2010 the number had risen to 38,671, holding US$26.7trn in investable wealth in 2002 to 12m representing an increase of 58% A 2009 study of family with US$46.2trn in 2012 foundations in several European countries, meanwhile, found signs of a growing number of such organisations in Much of this wealth will eventually be transferred to later the UK and Italy.2 Entrepreneur-established foundations generations of the same family In recent years, however, have even begun to appear in Asia’s emerging markets.3 notes Kelin Gersick—a US-based consultant and expert on cross-generational change in family firms, as well as in Such indications of growth are consistent with the impres- family philanthropy—increasingly the focus of discussions sions of those in the field Mr Gersick notes that over the by the families of wealthy entrepreneurs has shifted from past two decades the role of philanthropy in the planning the creation and preservation of wealth to its appropriate of transgenerational wealth transfer “has seemed to be and meaningful use This “brings philanthropy more into increasing” Moreover, despite inevitable cultural varia- the centre of the conversation” about wealth management tions, he believes that the idea that “the mark of a family and its transfer, Mr Gersick says The billions of dollars that of quality includes the issue of effective, well-managed Bill Gates and Warren Buffett have given through the for- philanthropy is becoming a global cultural phenomenon.” mer’s foundation are the most prominent and largest high- Theresa Lloyd, a British philanthropy consultant and co- profile donations They are not unique, however, or even author of Richer Lives: Why rich people give, also says that isolated exceptions Li Ka shing, a Hong Kong property family philanthropy is “undoubtedly more prominent and tycoon, and India’s Azim Premji have both also given away the number of people setting up foundations as a perma- billions, while a recent global survey of high-net-worth nent and strategic commitment to family philanthropy has individuals found that 17% of those with over US$20m in been increasing.” investment assets had their own charitable foundations.1 Philanthropy as a tool in inter-generational wealth transfer Such activity is not, in itself, new Some well-endowed insti- The drivers of philanthropy by wealthy individuals are tutions that were created in this way, such as the Rocke- complex and vary widely by culture: personal experi- feller Foundation in the US and the Rowntree Trusts in Brit- ence with an area of need or religion tend to be a leading ain, have existed for over a century However, there are also motivators in the Middle East, while a desire to give back BNP Paribas Individual Philanthropy Index: Measuring Commitment in Europe, Asia, Middle East BNP Paribas, May 2013 Pharoah, C (2009) Family Foundation Philanthropy 2009: UK, Germany, Italy, US London: Alliance Publishing Trust 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 Philanthropy and inter-generational wealth transfer Global Financial Institute and general feelings of altruism are the main factors in Asia and Once they are wrestling with such questions, parents in high- Europe respectively.4 Linking all of these motivations is the idea net-worth families, according to Ms Lloyd, will “see the creation that rich donors are genuinely seeking to help their wider societ- of a foundation as not just something good for their own giving ies, rather than looking for secondary benefits such as reduced but as a solution” for other issues In particular, involving younger taxes Mr Gersick notes, “most families that have philanthropy as relatives in the running of family foundations, or in philanthropy part of their family system want to be responsible to their com- more generally, can help to address a range of inter-related family munities They see it as one mark of an honourable lifestyle.” For issues that frequently revolve around preparing children for the some, wealth creation and giving back are inextricably inter- substantial challenges of maintaining inherited wealth The think- twined Grant Gordon is a philanthropist and a member of the ing behind such use of philanthropy by families, says Ms Lloyd, fifth generation to work in the family business, William Grant & is “almost a paradox If you give some away, your family is more Sons, a Scottish distiller He explains that the company’s success likely to hold onto the rest through more generations.” In other has taught his family the importance of the local community in words, the money being given to good causes can at the same which it operates and has instilled a sense of responsibility for it time provide an opportunity for lessons in entrepreneurship, per- One form this awareness takes is a desire to support the areas in sonal and civic responsibility as well as wealth management which it operates, and to create more opportunities for people there to thrive One of the most common family purposes for structured philanthropy is, notes Mr Gordon, “to instil in the next generation the Within this context of a genuine desire to good, the way that family values—around the importance of community and the philanthropy is structured by high-net-worth families plays a vari- responsibilities of beneficiaries [of wealth]—that you may have ety of strategic roles in inter-generational wealth transfer This, as received and which you have tried to build on and maintain.” The much as the tax advantages found in many jurisdictions, explains Rumi Foundation is a case in point Rumi Verjee made his own the increasing use of family foundations Mr Gersick states that, wealth after his family’s forced exit from Idi Amin-ruled Uganda especially after the first generation produces substantial wealth, Before the dictator confiscated most of its assets, however, sev- often through an operating company, a family office or holding eral generations in Africa and in the family’s native home of India company frequently emerges as the centre of family activity had been very well-off and, consistent with their Ismaili Muslim “Then philanthropy becomes one of the structural components beliefs, engaged in substantial community-support and reli- of the family enterprise system”, with a philanthropic foundation gious giving As Rumi puts it, “history, culture within the family, often one of several significant entities past philanthropy, and religion—that is what drives older family members to make sure values transfer down to other genera- This shift has had an important psychological impact for both tions Involving members of the next generation and giving them current business decisions and planning for the future Lord Rumi responsibility helps to inculcate those values.” Verjee is a successful British entrepreneur who established the Rumi Foundation in 2006, which is chaired by his nephew, Jay Jay Verjee agrees He sees his appointment as part of an effort Verjee, a Canadian businessman The foundation’s work, says to instil “a culture of giving back and thinking of others, which Lord Verjee, has integrated with family business activities and is something the older generation is trying to make sure the succession-planning in several ways.” It gives a rigour in thinking younger one understands and prioritises [In this way, the founda- about wealth-transfer issues, looking at questions like, ‘When is tion acts] as a place to put cultural values in I love that my cousins enough, enough?’ and ‘How much you give?’ It really drives are interested in getting involved and, from the age of 16, think- you to question those sorts of issues.” He adds that, more gener- ing about projects.” ally, “setting up a foundation has helped a lot to bring discipline into entrepreneurial and business activities,” as philanthropic In addition to educating members of younger generations activity encourages a long-term vision on desired moral values, foundations and other forms of 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 Philanthropy and inter-generational wealth transfer Global Financial Institute high-net-worth family philanthropy are sometimes expected to Of his own generation, he notes a number of cousins “from quite serve as a financial, leadership and collaboration training ground different walks of life and not working in family business for Ms Lloyd explains that “running a family foundation requires dif- whom giving is the one part of the family enterprise that they ficult decisions” and some families feel that such involvement will care most deeply about.” The younger generation of some 30 mean that younger relatives are less likely to waste other parts cousins, meanwhile, get together once a year to decide what to of the family fortune Mr Gersick adds that, given how rarely with a defined pot of charitable money “as a team exercise” younger family members receive training in governance issues, He notes that these philanthropic activities, as well as the distinct “for the members of all generations in an extended family to ones in which his nuclear family engages, have made his own have the opportunity to work together, make decisions, manage children—who are not interested in a career in the business— money, and argue over policies, [the experience] has value.” More- ”more engaged in the broader family enterprise” Philanthropy over, he says, this work can reveal hidden human capital among can even have a strong impact across several generations Jay family members, which can then be applied elsewhere Verjee recalls the effect that seeing a mosque in Mombasa which his great-grandfather had paid to erect in 1850 had on him “The Mr Gersick warns, however, that foundations are not panaceas culture of giving is what makes me most proud to be part of our Senior generations of high-net-worth families often see founda- family,” he says tions, or involvement in charitable work more generally, as ways to give moral and management lessons “To a point they can fulfil This does not mean that families necessarily have to agree on those functions,” he believes, “but not as much as seniors believe.” a specific cause to support Rather, the process of philanthropy With regard to ethical values, he notes that when the establish- itself has an impact Ms Lloyd recalls one family she worked with: ment of a foundation is an isolated activity, inconsistent with the parents said that during the adolescence of their four chil- other family behaviour, “the kids don’t believe [the supposed dren, the only time everyone seemed willing to talk together was moral lesson] anyway Creating a foundation by itself does not about their philanthropy, despite the fact that they supported create—or repair—a family culture.” very different causes But formal philanthropic structures can also help The Rumi Foundation, for example, does so by providing a Similarly, he adds, family foundations and companies are not focus for family action Both Verjees note, for example, that dis- identical, and so running the former does not in itself create the persal across geographies and even cultures—a common issue capacity to run the latter well Mr Gordon agrees Although he for high-net-worth families—can impede a group’s focus on giv- believes that involvement in a family’s charitable activities pro- ing As Jay Verjee puts it, “The most difficult thing for my genera- vides good experience and “a solid training ground for gover- tion is that we are all over the place Philanthropy is easier when nance,” he notes that “it is not a career development move” Both you are all together.” for its own intrinsic value and the lessons it can teach, the more experience family members have of well-run, thoughtful philan- Finally, especially for those of very high net worth looking to thropy the better Doing so does not, however, create the condi- secure the welfare of future generations, giving money away can, tions for effective inter-generational wealth transfer in isolation in some cases, be a means of protecting heirs from the hazards inherent in wealth transfer From Andrew Carnegie to Mr Gates, Nevertheless, if done well, many families also find that philan- a number of very successful entrepreneurs have turned to phi- thropy can provide a shared activity around which generations lanthropy after setting aside what they consider to be sufficient can coalesce—an important good in itself and an aid in build- resources for the next generation For them, the legacy is the ing relationships that ease the broader process of wealth transfer example, not simply the income Mr Buffett, for example, has even Although “it doesn’t work every time,” Mr Gordon calls philan- found an interesting way to square the circle of philanthropy and thropy a “potentially powerful way of engaging family members” heirs by funding charitable foundations run by his three children Philanthropy and inter-generational wealth transfer through gifts worth well over US$1bn to each Global Financial Institute tends to be raised first by a younger family member Nevertheless, especially where an entrepreneurial founder of a foundation The changing face of philanthropy is still alive, such strategies quickly resonate with the “return on Even as one of the secondary goals of high-net-worth family phi- investment” orientation that the senior leader used to build the lanthropy is to have a positive impact on younger family mem- enterprise “I wouldn’t say there is a lot of resistance [from older bers, the newer generation is having its own impact on how phi- individuals],” he adds, “it is more the idea [that] this business pro- lanthropy is practised cess to philanthropy tends to enter discussion from the younger generations.” Rather than a one-way transfer of knowledge, joint In recent years several new philanthropic strategies have grown philanthropy efforts can create an exchange between family in popularity among those with the resources to pursue them members These typically involve active engagement with the charitable enterprise rather than simply writing a cheque The most well This is consistent with the experience of the Verjees Jay Verjee known—philanthrocapitalism, also known as venture philan- says that he and Lord Verjee rarely disagree on particular causes, thropy—involves using business techniques, as well as investing but differ only in keeping up with philanthropic trends “I try to time and energy, in order to bring to scale solutions to problems look at impact investment and social entrepreneurship Rumi which are best dealt with through charities rather than busi- has a more traditional view,” which has shaped the foundation’s nesses Further blurring the lines between business and philan- approach to date His uncle is not even sure that this is such a dif- thropy has been the growth of social or impact investment, which ference He believes that “philanthropy is changing dramatically typically involves putting money into an organisation with a view and the world is changing.” He sees a broader shift of attitude to a social return as well as an economic one The vehicle in this in which older individuals share Like the younger generation, “I case can be a non-governmental organisation, a traditional com- now think more about the social impact of a lot of what I do” than pany or a social enterprise—organisations using market-based he did in his own youth, he says techniques that generate profits in pursuit of a specific social goal In the coming years, an increasing number of high-net-worth individuals will be considering the ultimate destinations of a These developments are coming into family philanthropy largely growing amount of capital Part of this money will go to philan- through younger individuals According to Ms Lloyd, “[there is] thropy Although the main driver will be a charitable impulse, it no question that there are generational differences The older will make sense to donate these funds in a way that helps to incul- generation tended to be more traditional grant-makers Emerg- cate important values and skills in the family’s younger genera- ing donors are more interested in social and impact investing, in tion If done well, this will not only help the latter to manage their spending more time, setting up their own operational organisa- entire inheritance better in future, but it can also widen perspec- tions, rolling up their sleeves.” The difference, however, is one of tives on giving in the present—a greatly enhanced legacy from exposure to new ideas rather than a fixed strategic vision Mr Ger- one generation to another sick notes that, in his experience, the idea of venture philanthropy Disclaimer Global Financial Institute 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 document 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 R-34278-1 (3/14) Your input is important to us For enquiries and feedback, please contact: Dr Henning Stein Head of Global Financial Institute henning.stein@db.com ... of diabetes HIs work has included Philanthropy and inter- generational wealth transfer Global Financial Institute Philanthropy and inter- generational wealth transfer Written by A Global Financial...2 Philanthropy and inter- generational wealth transfer Global Financial Institute Introduction to “Global Capital Markets in 2030“ Deutsche Asset & Wealth Management’s Global... of wealthy entrepreneurs has shifted from past two decades the role of philanthropy in the planning the creation and preservation of wealth to its appropriate of transgenerational wealth transfer