James Wilcox, managing partner at Floreat Group, the independent investment firm based in London, writes here about what family offices and HNW individuals should consider when creating a charitable endowment. This is an important area when philanthropy is so front of mind amidst the global pandemic. 

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Charitable endowments have long been used by family offices and high net worth individuals as a vehicle for creating a lasting, positive legacy, providing a means of supporting disadvantaged members of society and committing the donors’ money to generating a worthwhile and continual impact. 

Now more than ever, family offices or individuals may be planning to set up their own charitable foundations. In the wake of COVID-19, the UK government has set aside millions to support small and medium-sized charities, and the importance of the NHS and the support of its staff has never been more visible.

The rise in environmental, social and governance-based investment has also driven demand for philanthropy, with increased awareness of the impact that one’s fiscal decisions can create. Giving has changed, and so have people’s ideas on how they want to give.

In the UK, it has become increasingly more complicated to create, register and run a charity. Regulation has been steadily increasing since the Charities Act of 2006, which gave birth to the Charity Commission – a regulator with 350 staff and a range of powers. Throughout the year, they investigate around 150 charities in relation to their activities. 

It is therefore vital to ensure that you have the correct framework in place to support clients through the complexities of the process of setting up a charitable foundation, and that everyone involved has an understanding of the weight of the process itself. 

Firstly, you must understand your client’s aims as a philanthropist: what causes are they passionate about? Do they have a global or local mindset? Take the time to understand the person sitting in front of you and to determine their core mission. Giving can manifest in many ways, so it is imperative that you identify the cause and a plan of action that is the best fit. 

I see a wealth manager’s role as one of joining up the dots, and collaboration is at the heart of this. What an adviser brings to the table is not just donations, but an overall network, which could play a pivotal role when embarking on a philanthropical venture. We are more than just our separate parts when we collaborate with one another. 
 

Once you have decided upon your aims, the next step is ensuring that you have the legal and contractual framework in place to support your work. Create a business plan, set up a board of trustees and follow all prescribed guidelines. For example, when applying for a grant you must meticulously carry out all financial due diligence; this is something that needs to be managed daily. We would recommend working closely with a law firm when establishing charitable foundations to help navigate the contractual complexities and to maintain client protection. 

Reputation protection is an important part of the process, as donating money to a group of people is like any investment. One must confirm that the charity’s values align with those of the donor, and that there are clear processes in place to guarantee that the money is used as intended.  Despite well-meaning intentions, a lack of thoroughness can be extremely damaging to a client’s name, should the Charity Commission start an investigation. Therefore, you should establish donor clauses to protect clients from the potential misuse of public and private funds, enabling them to legally withdraw donations if there is any misconduct. 

Donor involvement is therefore another key element of this framework. At Floreat, we encourage donors to be as involved as possible, and to understand every stage of the process, from grant applications to donor agreements. We run courses to train them to be trustees and treat them like a board of directors. This hands-on approach is not only more rewarding for the donors themselves, but also increases clarity throughout the process for all parties involved.

Finally, it is crucial that you are creating sustainable impacts. Long-term thinking is at the heart of this and I have found that a minimum of three years of donation time is recommended to enact true, lasting change. Accordingly, some of our foundations prefer three-year donation agreements, which allow the donor and charity to build a relationship and ensures that every project we embark upon has positive and long-lasting impacts. 

Setting up a charitable endowment or foundation is a truly rewarding experience, but one that must not be taken lightly. Preparation and planning are key, and having the correct contractual framework in place can protect you from the pitfalls of this highly regulated space.