The Promises of DAFs in Hong Kong

Donor-advised funds (DAFs) are prevalent in the US, and increasing in the UK, and Singapore. However, apart from UBS with its Optimus Foundation, and Give2Asia with its Hong Kong DAF primarily to facilitate cross-border giving into Asia, DAFs are almost non-existent in Hong Kong. The jurisdiction has low income tax rates and no inheritance tax. There are limited tax incentives for charitable giving, and giving vehicles that primarily offer tax efficiency have little appeal in Hong Kong.

A number of us in Hong Kong — philanthropy advisors, lawyers, philanthropists and nonprofit professionals — gathered in June to discuss the challenges and promises of DAFs for the city.

Charitable trusts as the predominant vehicle

The most common giving vehicle is the charitable trust, set up by wealthy families and individuals. Private banks like HSBC, UBS, and JP Morgan provide philanthropy advice and support to their trust and wealth management clients. But the lack of alternative giving vehicles means that, apart from the very wealthy, there is little support for those with fewer resources, or those looking to explore philanthropy by starting small.

There also isn’t a platform for stakeholders to come together to learn, plan, and collaborate. Charitable trusts are typically discreet. Nonprofits often have no way of connecting with potential donors. Philanthropists themselves, unless they are already knowledgeable and proactive, often find it challenging to reach out to nonprofits to learn about them and the causes they support. It is also difficult for independent lawyers and philanthropy advisors to be part of the solution, as private banks — the main providers of charitable trust services — often have their own in-house and preferred advisors.

DAFs — four areas to tackle

Encouraged by the progress in setting up and promoting DAFs globally, the June roundtable explored whether DAFs can play a role in benefiting Hong Kong society, philanthropists, and the city’s philanthropic ecosystem. For DAFs to work well in Hong Kong, we recognised four major areas to tackle.

1. Structure

Asian high-net-worth individuals are often very structure-conscious. They want to ensure that structures are compliant, efficient, and value for money. In addition to being effective in philanthropic terms, DAFs also have to make sense for wealth planning.

It is also important for DAFs to be structured in a way that preserves flexibility. Clients should be able to add money once they have a donation in mind (the so-called ‘flow-through’ arrangement). The architecture should be open enough to allow independent legal and philanthropy advisors to participate. Structuring is the first and foremost question in many of our DAF conversations.

2. Professional advisors

DAFs should not just be a conduit for philanthropic money. They should also be a platform for philanthropists to learn and be supported. The lack of independent philanthropy advisors in the city is one major gap to fill if DAFs are to be effective.

Like many other places, philanthropy in Hong Kong was traditionally instinctive and relationship-based. Donors typically rely on themselves rather than professionals for analysis and decisions around donations. Globally, organisations like Daylight in the US, and WMI in Singapore are working to train professionals in related fields (such as wealth and trust advisors) and build communities of philanthropy advisors to fill the gap. These are resources and models that Hong Kong should tap into.

3. Stakeholders

Nonprofits, professional fundraisers, investment advisors, private banks, and other related-fields are all essential in creating a vibrant philanthropy ecosystem. A comprehensive narrative does not yet exist for how they can contribute and benefit professionally. It takes time to establish a common language and a pool of cross-industry experts who can bridge the concepts of social impact, investment return, family legacy, and compliance. DAF platforms can be the catalyst that makes this happen.

4. Deal flow

One problem identified at the roundtable is the lack of attractive deal flow, which could undermine the appeal of DAFs. If what’s available on the market is mostly traditional projects looking for charitable donations, DAFs would lose some of their edge as facilitators and clearing houses of more unique, impactful projects.

This is not at all a criticism of providers of charitable projects, but a reflection of the current funding environment. Philanthropists often lack the outlet to learn about and explore more progressive funding models such as impact investing. DAFs can ideally be such a forum. They can also facilitate discussions between philanthropists and service providers, as a way to encourage a greater variety of deals.

These are all big topics. Participants at the roundtable felt that DAFs are promising as a tool to promote the wellbeing of the city, the growth of philanthropists, and the contribution of stakeholders.

The discussion continues, and the passion and experience of the philanthropy and DAF communities internationally are giving us reason to be optimistic.

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