Betterment plans to digitize yet another value proposition of traditional advisers, this time setting its robo-sights on charitable giving.
A new feature from the digital adviser, aptly named Betterment Charitable Giving, lets investors donate directly from their accounts to charities on the Betterment platform. After a user decides how much to give, Betterment funds the donation with the most appreciated shares from their portfolio, allowing clients to get the tax deduction and avoid capital gains taxes.
The shares are transferred to a Betterment account owned by the charity. Betterment handles selling the shares and sending the charity cash to avoid credit card processing and brokerage, ensuring the charity receives the full donation.
The company says it's a safe, convenient and more efficient way to give, and brings the tax advantages of donating appreciated shares down-market to Betterment's mass affluent customers.
"Investors have done this for a long time, but typically on the high-net-worth end of the spectrum," Alex Benke, Betterment's vice president of advice and investing, told
InvestmentNews. "For people who haven't been investing for decades, we're enabling something, and making it super easy, to help people get an edge in their finances."
"This has long been a practice of smart investors, and we've made it both simple and free," Benke said in a press release.
GIVING TUESDAY
The feature will be available on Nov. 28 – coinciding with "Giving Tuesday" – to all Betterment users with a taxable account.
It will be up to investors to itemize deductions and ensure they receive tax benefits, but Mr. Benke said the company plans to educate users on it.
Zach Conway, an associate at Conway Wealth Group at Summit Financial Resources, said he likes the idea a digital adviser introducing investors to tax-efficient charitable giving, especially in conjunction with other features like tax-loss harvesting, but believes there needs to be a human component to hold investors accountable.
"It's not like these platforms are betting that you understand the nuances of tax deduction. They let you sign up and start firing away," Mr. Conway said. An adviser can also make charitable giving a part of the client's financial plan and encourage them to give regularly instead of during times of crisis. Mr. Conway said this is especially important for millennial investors influenced by social media.
(More: Giving to charity, the millennial way.)
"If they're not budgeting, at the end of the year they may be having cash flow problems and can't continue to donate," Mr. Conway said. "I think the hybrid model is a better solution."
HUMAN HELP
Mr. Benke said users paying for Betterment Premium,
the company's hybrid robo-adviser, will get help from a human adviser on when and how much they should give. The service will also be available on Betterment for Advisors, the company's white-label version of the product.
At launch, the charities available on the platform are UNICEF, World Wildlife Fund, Feeding America, Big Brothers Big Sisters of NYC, Save the Children, Wounded Warrior Family Support, Hour Children, Against Malaria, DonorsChoose, GiveWell, and LCBC Church. By having the non-profits create accounts on Betterment to receive donations, Mr. Benke says Betterment Charitable Giving cuts out middle men like donor-advised funds and the management fees they charge.
Betterment Charitable Giving won't charge charities with less than $1 million on the platform. Mr. Benke expects the charities to withdraw funds before it reaches that amount, but said some have expressed interest in using Betterment to manage their portfolios.
Ken Nopar, a senior philanthropic adviser of the American Endowment Foundation (AEF), said donor-advised funds justify their fees by providing an outlet for investors to make regular contributions and realize tax benefits over their entire lifetime, not just on a per-year basis. Mr. Nopar added that the funds allow investors to give more complex assets, and allow for more choice on where the donations go.
"People and companies that give have their own idea of where they want to give," Mr. Nopar said. "Even within various causes, there may be hundreds of eligible charities for where they can give their money. To boil it down to a limited choice, it may not be too appealing for some."
ONLINE TREND
Mr. Nopar does see an advantage to moving the charitable giving process online. He said 90% of grant recommendations are made online, up from two-thirds just a few years ago.
"It's a lot easier than writing a bunch of checks," Mr. Nopar said. If a robo-adviser wants to help increase the amount given to charities, Mr. Nopar said he would applaud them for doing it.
For Betterment, adding charitable giving is a chance to both enhance relationships with current clients and attract more high-net-worth clients. Mr. Benke also hopes the feature will encourage more advisers to consider Betterment for Advisors as an option to manage client assets.
TAX REFORM
It's an interesting time for Betterment to introduce tax-efficient charitable giving. "Giving Tuesday" notwithstanding, changes to charitable deductions have been floated as an idea for tax reform. A bill
introduced by the Senate plans to keep current deduction rules as they are, while the
House of Representatives' bill proposes changing adjustments to gross income limits for cash contributions.
(More: Tax reform threatens a powerful client relationship tool.)
Mr. Benke doesn't think it would make much political sense to remove itemized tax deductions for charitable giving, and says doing so would remove the incentive for people to donate. But even if the tax benefit is reduced, he still sees Betterment's charitable giving as a way for clients to avoid capital gains taxes.
