Betterment RIAs, retail clients gain charitable giving option – Financial Planning

Betterment, the largest independent robo, is rolling out a charitable donations feature that can help clients — especially high-net-worth individuals — cut down on their taxes owed to Uncle Sam.

Clients can donate appreciated shares to charities directly on the Betterment platform through its new Charitable Giving feature. In addition to getting a tax deduction, they can also skirt capital gains levies.

“This has long been a practice of smart investors,” says Alex Benke, vice president of advice and investing at Betterment. “Clients can pass the taxes on to charities, and since they are non-tax-paying entities, those taxes get avoided altogether.”

Most HNW philanthropists said they gave their largest donations as unrestricted gifts.

Clients decide the donation amount and Betterment funds it with the most appreciated shares in the portfolio. “There’s no secret sauce,” Benke says. “Our algorithm does all the heavy lifting and finds the most tax embedded shares.”

For example, a New York resident earning $500,000 a year will be taxed at 39.6% federal rate, 6.85% in state taxes and 23.8% in capital gains taxes. If that client donated $10,000 in assets, they would get a $4,600 tax deduction and save $920 in capital gains taxes, the firm calculated.

The option will also be available to advisors using the Betterment for Advisors platform by the end of November.

Betterment has sought to improve services, particularly its RIA platform. In addition to the new charity donations feature, the firm added more staff dedicated to working with RIAs and has developed a lead generation pipeline for the dozen firms in the new Betterment Advisor Network.

Since its launch in 2014, the advisor platform has undergone a rebranding and an expansion of portfolio options. The company is now adding more platform features and is giving more account control to users.

There are charitable giving strategies offered by online and traditional wealth management already. Personal Capital includes charitable planning as an option for its clients, for instance, while Fidelity offers donor advised funds.

Charities like such arrangements, Benke says, particularly appreciated share donations. That’s because more of the donation gets transferred to the organization, instead of burning some of it away with credit card processing fees, or other intermediaries, Benke says.

“They’ve never had a brokerage account that is easy to manage and charges no fees,” Benke says.

John Folsom, president of Wounded Warriors Family Support, said in a statement that having 100% of donor contributions go directly to the charity means more families get the help they need.

At launch, Betterment is working with 10 charities, including UNICEF, World Wildlife Fund and Wounded Warrior.

Back-office red tape is also cleaned up with Betterment’s new feature, says Benke. Typically, charities have to look up the highest and lowest value of the shares on the day they were donated and then take the average to report their tax receipts properly to the IRS, he says.

“The IRS rules are a bit annoying,” Benke says. “It’s a big pain for them.” That information is already provided through the Betterment platform.

Potential security breaches are also lessened by going direct to charities without using third-party firms, Betterment says. “Security might not be a core competency of a charity like it is for financial institutions,” Benke says.

Since the donation is carried out completely within the Betterment account, clients won’t have to give out personal information.

“You’re not expanding the surface area of your personal information,” he says.

The effort ties into recent efforts by robo advice platforms to appeal to younger investors by introducing impact investing options.

Betterment has developed an socially responsible investing portfolio that clients can select. Wealthfront said it would give its clients the choice of removing any security that doesn’t align with their values from its direct indexing platform.

“There is a sensitivity among the young to be supporting causes, so I do think there is an opportunity to offer an easy way to do that,” Alois Pirker, director of wealth management research at Aite Group, told Bloomberg News. “It’s all about differentiating and where can you go next to have something unique.”

Additional reporting from Bloomberg News

Sean Allocca

Sean Allocca is the associate editor of Financial Planning, On Wall Street and Bank Investment Consultant.

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