AUGUST 22, 2018

Episode 25 – Impactful Investing in Philanthropy

Jared Toren from Proper Wealth Management

On today’s episode, we welcome the CEO and Founder of Proper Wealth Management, a boutique wealth management and investment advisory firm dedicated to creating dynamic strategies designed to create bigger legacies and empower clients to donate to the charities and causes that matter to them. Jared is passionate about figuring what the right moves for each, unique client case, especially when it comes to impact investing. Between personal portfolios, estate planning, tax savings, and philanthropy, each different and unique conversation that Jared has with clients shapes his perspective on the overlap of profitable financial returns and social impact. Listen to this week’s podcast to learn about the effects of deploying capital in low-income communities, underdeveloped regions, investing in companies with a social impact model, or organizations with powerful missions.

Lisa Graham (00:00):
Hi, my name is Lisa Graham, and I’m happy to welcome you to another episode of Change The Rules. I have my co-host Dan Graham with me, and today we will be talking with Jared Toren, CEO and Founder of Proper Wealth Management, where he creates substantial impact on his client’s wealth, so that they can create bigger legacies and donate more to the charities and causes that they care about. Today, we’re going to be speaking with Jared about wealth management as an impact and legacy tool, as well as how nonprofits learn to approach wealthy individuals as part of their fundraising strategy. So thanks for joining us, Jared, we’re happy to have you here.
Jared Toren (00:30):
Absolutely. Thanks for having me.
New Speaker (00:31):
So can you start out with just, how did you get into wealth management and what do you enjoy about your work?
Jared Toren (00:36):
Yeah, absolutely. So I got into wealth management, not per-se by accident, but because of, I was looking for a change in careers. So started out of college was an analyst. I was a trader. I then moved into working with hedge funds and then this little thing called the financial crisis happened. And, you know, the relationship when you’re working with hedge funds and raising money versus actually advising clients, one-on-one, to determine really what’s right for them and the solutions. There really wasn’t a fit. So post financial crisis, I was looking for a new role and new opportunities. So I started to work at wealth management in Morgan Stanley in New York. And in doing that, I found how much I really liked the relationship that I had with the clients and being able to advise them. And from there, it just, it’s all been history that was, you know, eight, nine years ago.
Lisa Graham (01:29):
And how did you decide to start your own thing?
Jared Toren (01:32):
That was, I never enjoyed working for somebody else. I never liked the rules that a large firm had to have because they had to manage a very large population. I call them least common denominator rules. And so for me, advising founders and some of the topics that come up just dealing with their daily lives, it didn’t really fit in with the traditional big banking rules. So for me, leaving was an inevitability from day one.
Dan Graham (02:00):
Can you give an example of one of those least common denominator rules that you were frustrated having to follow?
Jared Toren (02:06):
Yeah, absolutely. So I could think of one at UBS. Working with founders, working with angel investors, and just having a relatively modest network here in Austin, there were times when I knew people that needed to raise capital. I knew people that are providers of that capital. But making the connections between them, even when they weren’t clients on both sides, was a problem that I got, you know, slapped on the hand for lack of a better term. And so, you know, being able to serve your clients to the best of their abilities, even your network, for me, required being unhinged from that traditional banking system.
Dan Graham (02:43):
Is that because there was sort of a bureaucratic process you would normally have to go through to like evaluate an investment opportunity that you would kind of struggle to have to go through every time you want it to advise a client in a particular course of action? Is that the sort of thing you mean?
Jared Toren (03:00):
I would say that, yes. Not always, but in this situation, yes. It’s called selling away and it’s a whole big process for how you get approved. And, when you’re really trying to be a fiduciary and you take that seriously, it’s hard when you’re limited in what you can actually provide in terms of service and advice.
Lisa Graham (03:22):
When most clients come to you, do they already have an idea of how they want to be philanthropic and if they don’t, how do you advise them on how to start that, or how to begin that journey?
Jared Toren (03:38):
I think clients, it’s different for everybody. You know, I work with a variety of people. And what I do find is everyone has different views on philanthropy. What they want to give. How they want to give it. So it really starts from having that detailed conversation at the get-go of every relationship and ongoing as well, but how do you view these? How do you view philanthropy? How do you want to make an impact? Do you want to do it today? Do you want to do it tomorrow? Also, which I find in a lot of the younger founders I work with, they want to build their wealth before they start donor advised funds or private foundations and things like that. So I do find it tends to be very, very different every single time you’re sitting down with somebody, which also makes it a lot of fun because it’s never the same thing.
Lisa Graham (04:24):
And so you mentioned a few of those questions that you would ask at the beginning. What does that initial sit down look like? Do they usually come to you and say, look, I want to do something like this? Or is it also a question that as a wealth manager, most wealth managers are going to ask their clients, hey, is this something that you want to do as part of your plan? And if so, then what are those questions that someone who’s going to go to a wealth manager, what do you need to start exploring within yourself to start making these decisions?
Jared Toren (04:50):
Yes. So at the beginning of the relationships, we’re always asking them, right? What charities and causes you care about? Are you currently set up for philanthropy? Do you have a process? Do you have an investment policy statement? Do you have a mission-driven, you know, charity and causes you care about? So it always is the conversation regarding that. And what was your follow-up question?
Lisa Graham (05:13):
What advice or what do people who are going to start investing and maybe are coming to you as a potential client? What do you advise them to start if they want to be philanthropic? What are some things that they need to start thinking about or planning for on their end, as they’re talking with you and working through how they’re investing their money?
Jared Toren (05:30):
So if someone has a real mission to be philanthropic, we’re usually going through the process of helping them get set up with a donor advised fund. And what that means is it’s a process that you can gift in, you know, a company, a liquid asset, and people do that right when they’re also about to sell their company, or post-sale they’re going to deposit a large amount of money that can develop, again, a mission-driven statement, and then allocate to charities on an ongoing basis. So it’s usually those conversations and giving them the options and saying, you know, you can set aside a percentage of income every single year to donate. You could set aside a percentage of your assets or growth and appreciation, or you can make a larger gift today, get the tax benefit today, and then create a policy for how you’re going to distribute those funds to various causes and charities that you care about.
Dan Graham (06:23):
So, can you just maybe describe that idea of, you get the tax benefit today, but you can give later? Like you mentioned earlier, that a lot of younger founders are interested in accumulating wealth and then giving it later. How does the donor advised fund help them accomplish that?
Jared Toren (06:38):
So, yeah, I’ll asterisk this with, I’m not a tax planner, so everybody needs to talk to their tax planners before they do anything. And with that being said, the way the donor advised funds that we work with, the way they work is you deposit a sum of money. You’re required to give a small percentage away each year to charity. And now through that process, we’re also, again, what charities and causes do you care about? Do you care about underprivileged children? Do you care about equality in the workforce? There’s thousands and thousands of options for how someone can then distribute that wealth? You know, for me, it’s just having that conversation alongside of, sometimes, the donor advised funds. That could be, you know, Austin Community Foundation, or even Schwab Charitable and figuring out what makes sense locally or on the national scale.
Lisa Graham (07:30):
Within Proper Wealth, how do you all view philanthropy as a company? Is this something that you all like to get involved with on a company-wide level? And if so, how do you all do that internally?
Dan Graham (07:41):
Be careful how you answer this. A lot of our listeners are non-profits and you may get table sponsorship requests.
Jared Toren (07:49):
Well, I get those and you know, that we’re usually at the same ones or some of the same charity events. So again, for me, I view it not as necessarily a corporate Proper Wealth Management, right? We’re a small boutique. I lead by example. So it’s, what do I care about? And so for me, what I care about is causes that usually impact underprivileged children. For example, Big Brothers & Big Sisters of Central Texas. I was on the board there for three years and I’ve also been on their Ice Ball planning gala committee for three years. I am on this year as well. Always a lot of fun.
Jared Toren (08:28):
Besides Big Brothers & Big Sisters, I’ve been involved with a relatively newer charity called Carrying Hope and they provide something called Hope Packs to children and the foster parents that the kids that are entering the foster care system receive that day. And they usually are pulled out of their house in the middle of the night. They have nothing. And so this provides them at least some comfort. It’s usually something that they keep with for, you know, their journey through the foster care system. And again, big need there. And then, Austin Sunshine Camps through YMBL. But again, everything that I’m doing right now is focused on underprivileged children and helping them out.
Lisa Graham (09:14):
Would you have any advice to non-profits who are wanting to approach some of these high wealth individuals who maybe have an established foundation or newly established donor advised funds? What’s some advice that you would have for approaching these individuals if they wanted to write a grant or asked for them to be on their board? Like, what are some tips that you would have?
Jared Toren (09:42):
It’s a good question. I think it’s really hard to answer because philanthropy is such a personal thing. You know, I think the best way to do that is almost the best way that actually I get new clients, which is usually referrals and introductions, right? So you have somebody that’s already involved in the charity or in the non-profit. And they’re making those introductions to those other folks that they want to get in front of them, other family foundations and things like that. It has to align with their mission though. And also in order to do that, what I found, some of the organizations that I work with and have been involved with are very good at data. And also showing, especially in this new age of data, showing this is the impact we’re able to have, and whether it’s Big Brothers & Big Sisters saying, you know, we have a much higher rate of the children staying in school, and moving onto college, and becoming productive, and breaking the cycle that usually those children are unfortunately in.
Jared Toren (10:39):
So I think being able to show that data and the impact, or also then creating carveouts. So if someone really cares about the mission, being able to show them that their particular dollars are going to go towards this one thing, and this is the impact. Whether it’s, again, not to preach Big Brothers & Big Sisters, but I’m going to sponsor a fall carnival, and we’re going to do that. And we’re going to get to see that impact firsthand and watch all these kids have a ton of fun. So I think it’s, again, aligning with that particular wealthy family or family foundation with what really pulls on their, not just their heart-strings, but really the mission that they want to be involved with.
Lisa Graham (11:18):
So many conversations I’ve been having are centered around this idea of data. And it’s interesting to hear more and more. I think it’s always been a part of the conversation, but more and more investors or donors are really interested in that piece. And I think what’s great about it is it also holds nonprofits to a higher standard of having returns as well.
Jared Toren (11:39):
Oh, absolutely. And, you know, like impact investing, or investing with companies that they also may be for profit, but have a social good component. Like, I think the most obvious one to me at least is Tom’s Shoes where you give them money and they give a pair of shoes. Or you buy sunglasses, they give sunglasses. You buy their coffee, they’re donating water. I think that’s also just really important to consumers nowadays as well.
Lisa Graham (12:03):
Yeah. And so how do you think about balancing investments with these impact businesses or impact investments? Is that something that you look at with your portfolio? And how do you find some of these investments?
Jared Toren (12:19):
I think that there’s potentially like two questions there. I don’t view philanthropy as part of like portfolio management, right? I think it’s philanthropy in the traditional sense of, I want to give money to a cause I care about. It’s part of planning, but not necessarily the portfolio management aspect. So it’s really related to how much can I give if I’m generating cash flow from investments or how much can I carve out of a portfolio and donate in lump sums either to, like, donor advised funds or private family foundations. When you’re looking at actual investments and investing into companies, that usually falls under the umbrella for me of like socially responsible investing, which is the component of environmental, social, and corporate governments and things like that. And then that tends to be, not necessarily a black hole, but there are so many investment opportunities right now within the public and private markets in stocks, bonds, private equity, opportunity zones, and real estate.
Jared Toren (13:23):
So it tends to kind of come back into this one-on-one conversation and really what’s the right fit for the person. Because with all the families that I work with, I haven’t have the same conversation regarding investment portfolios, planning, philanthropy. It’s always a new conversation, which is, again, also why it’s fun.
Dan Graham (13:44):
You mentioned opportunity zones. I’ve been hearing a lot of buzz in Austin and within the community of what is an opportunity fund? What is an opportunity zone? Where are they? What is the benefit? How do I take advantage of it? Can you describe that a little bit? It’s new as of the new tax code rewrite, I think.
Jared Toren (14:05):
It’s very new. And there were opportunities zones in the past. This is a new part of the code though, which is a little different than what they were doing in the past, which is usually around like devastated areas due to natural disasters like Katrina and things like that.
Jared Toren (14:22):
Again, little asterisk, anything related to taxes, talk to a CPA about. So, opportunity funds, I think also get confused with opportunity zones. So, out of this recent tax bill, every governor in every state had the opportunity to designate 25% of their lower income tracks as opportunity zones. And what that means is there’s a benefit for tax deferral of a large capital gain. So, if you have a large capital gain, you could defer it by investing into these underprivileged areas, which are mapped out. If you Google opportunity zones maps, you’ll be able to find where they are in Austin. They’re far East, Northwest, things like that.
Dan Graham (15:11):
Is Cedar park an opportunity zone? Is that what you’re saying?
Jared Toren (15:13):
Pflugerville is. A lot of Pflugerville and a lot of the cities like Elgin and a few others. I haven’t looked in the map recently for those areas. I’m more focused on Austin, in East Austin and Northeast. But you’re able to defer taxes, capital gains, if you hold it for certain periods of time and even get a reduction. So the government in some way is giving you an interest free loan on your capital gains. And then after another period of time, 10 years or so, you can hold the real estate. And if you were selling it, you wouldn’t have capital gains on the real estate gain. But that’s, you know, it’s very, very complicated. The rules aren’t even written yet. They’re coming out in the next 30 days or so to specific guidelines since there are some inklings that you can actually move businesses into these zones and be qualified as within the opportunity zone. An opportunity fund is really just an IRS paper that you self-certify that what you’re doing qualifies. So I think that the terms tend to get confused. Most people think it’s something you can invest into a fund. I haven’t seen any offerings yet though. But it is possible that someone may take advantage of it.
Dan Graham (16:22):
The potential tax savings from investing in these zones are enough that a lot of people are kind of taking the risks in advance of any concrete rules coming out, I’m sure. As they’re having exits this year or trying to amend their returns from last year and those kinds of things, so it should be pretty interesting.
Jared Toren (16:44):
It’s going to be very interesting. You’ve been hearing about it. I’ve been hearing about it. And so I know that there’s a lot of eyes on this. The difficulty becomes in the deployment. How do you deploy capital in an efficient way into these segments? Because like they are lower income and from the maps that I’ve seen, like, there’s a lot of residential areas, so you’d be door to door knocking or like doing it on a house by house basis. And you’d be renovating them mostly because you need to have substantial renovations as part of it, which is, until we get the guidance on it, is a very subjective thing.
Lisa Graham (17:22):
And so is the idea to begin to update these areas, or is it to bring in new business to these areas? If it’s residential, is it updating a neighborhood? What is that?
Jared Toren (17:40):
The whole purpose of this is to bring money into lower income areas. So this was a topic that was put through by Sean Parker’s organization. And it was a way to say there’s a tremendous amount of capital gains or investments that people have. These very large capital gains. And we want to create an incentive for them to invest in these lower income areas. So the whole purpose of this is to revitalize communities. And yes, you can do that through residential and buying a house, renovating it, and releasing it to the old owner or new owners in that area. Or buying businesses or buying commercial real estate in that area, and also bringing your business even into the building. And by doing so you’re going to take these areas and they’ll naturally get revitalized over time.
Dan Graham (18:29):
So, in addition, to more dollars as investments flowing into existing project potential areas, businesses themselves might move into these areas in order to give their potential investors tax savings. And so you have not just money flowing in, but actual businesses flowing in to these areas as well I think is part of the idea also.
Jared Toren (18:52):
Yes, I know someone in particular who has two companies and that’s what they’re looking to do is move over to east side of Austin, put their companies in the building. They know their cash flow really well. So they’re renting right there. They’re the businesses that are going to be the landlords. He personally would be the owner. From an investment perspective, it’s incredibly wise and I think very lucrative to do those maneuvers.
Dan Graham (19:18):
Yeah. And I assume that that kind of migration oof potentially fast-growing businesses into those low-income areas is exactly what the government wanted to see happen.
Jared Toren (19:28):
Yes, I agree.
Lisa Graham (19:29):
And how new is this? You said just, I mean, just in the next 30 days, they’re writing what the regulations will be.
Jared Toren (19:37):
It’s very new. I talked to a lot of people involved in real estate that aren’t even aware of it like brokers or people that own businesses that are commercial operators. Like it’s so new and so few people understand it. And so, yeah, as soon as the regulations are written, and as soon as more people are talking about it, the more it’s going to get very crowded. I think the time to act, as Dan was saying is, I think you have 90 days to 120 days to make some really good moves before everyone else knows about it.
Lisa Graham (20:13):
Got it. And the returns on a lot of this stuff will be probably in the next five years or faster than that?
Dan Graham (20:21):
I think there are different stages of tax benefit, depending on how long you hold your investment.
Lisa Graham (20:24):
Oh yeah, you said 10 years?
Jared Toren (20:26):
10 years gives you the most beneficial treatment, but then there’s, again, there’s these step downs and phase outs of your capital gains tax from whatever you were trying to defer in the first place.
Dan Graham (20:39):
So I think the governor just proposed the Texas zones a couple of months ago, so it’s pretty new.
Jared Toren (20:45):
It’s brand new. I spoke to a group of like 12 CEOs and none of them had ever heard of it before.
Lisa Graham (20:52):
Are they excited?
Jared Toren (20:55):
I think everyone is excited. Although, everyone is still very confused about what are the actual rules? What do we need to follow? Because it definitely has the potential to cause audit problems if you don’t do things correctly. So I think if you’re going to do this, you really want to follow the rules and make sure you’re doing everything, because the penalties of the deferral will wipe out any potential gains if you’re not doing it above-board.
Lisa Graham (21:23):
Yeah. I think it’d be interesting too, to learn about who’s at the table for a lot of those regulations. Just so you know, in terms of the protection of the community that’s already there, and what does that look like for changes that are going to be taking place.
Dan Graham (21:36):
The reason that we’re really excited about it at Notley is because the potential tax savings going back to investors, that when we go look to raise money for real estate projects in East Austin that have community benefit, a lot of the challenges with those kinds of projects is affordability. And if you can provide similar market returns to investors, and use the savings to free up subsidization dollars for the tenants or the people that we’re trying to serve. So it just creates a lot more opportunity for affordable housing or even just commercial rent for non-profit organizations or social ventures.
Jared Toren (22:15):
Yes. I think one of the things that, you said it, but the returns, like all of this sounds like really good on paper, but at the end of the day, if the returns don’t make sense to investors, like everyone wants to have like a social good. And if I can have a market return, or return on a project that doesn’t have a social impact, but I can invest in one that does, and get all these benefits along with it, then it becomes a real win-win. It’s when those things aren’t aligned that these projects aren’t going to work. If they don’t produce a positive investor return with that benefit. And I haven’t seen any yet, because it’s still so new. So again, that’s what I’m excited to, hopefully, find some attractive opportunities for folks that I work with in those opportunities zones, whether it’s here in Texas or out of state.
Lisa Graham (23:04):
Do you find that when looking at investments in for-profit companies, more traditional for-profit companies versus impact for-profit companies, do you have clients who are willing to take less of a return with an impact company? Or do they tend to pass on opportunities like that when the return is not as on par with a more traditional for-profit company?
Jared Toren (23:28):
I would say for the most part, they would rather earn the better return and donate the excess. So the folks that I work with that have looked at, like specifically, if you’re talking about private companies, the opportunity has to be just as great to them. Because they want to, they still want to produce a positive impact, right? Then they can go ahead and now they have a bigger nest egg and they’re donating more money. So the folks I work with tend to be, and myself as well, IRR focused. But if there is an opportunity that produces a similar IRR or very close and has a very positive social good impact to it, or component to it, then yes, that will weigh the scale. But if you’re talking about substantial differences in returns, then the folks I work with would rather take something that has a higher outcome potential, high return potential, and just donate as it becomes successful. You’re talking about private companies, the risk is that when you invest in the private company, the risk is always it’s not going to work. So if it’s not going to work, and that’s my methodology and mindset going into it, then I need to get the highest potential outcome. And again, assuming things do go well, then they’re able to put that money to work back in the causes and charities they care about.
Lisa Graham (24:48):
Yeah, I think that’s one of those interesting things to think about when you’re looking at a deck for a for-profit company, it’s like, well, how do I look at an impact company? It’s like, well, you should look at it sometimes as if it’s a regular company if you’re looking for the same IRR because it’s the same thing, it just happens to have this extra thing on it. I was just curious in what you see, because I think there are some people out there who are willing like, hey, I’ll take a lower return if it’s impact. But if you’re not looking at it in the same realm as maybe the non-profit world where you get zero return on your financial investment. So I think that was kind of interesting to hear, because I think that’s probably a pretty common view when people are looking at their investments.
Dan Graham (25:34):
Yeah. I think investors, you know, typically, are looking at it exactly the way you described. The place where we’ve seen more movement is when they’re comparing kind of an impact investment to their philanthropic portfolio, where they’re donating lots of money and getting, as Lisa said, you know, negative 100% return every time. And you give them something that has the opportunity for a 2% or 4% return, or what’s called a PRI (program-related investment), then suddenly it looks interesting compared to what otherwise would just be a straight up donation. But even in that case, they’re not looking at it in comparison to an angel investment set of options where they’re going to be hopefully getting on average 20 or 30% IRR.
Jared Toren (26:22):
I also think the benefit of what you’re talking about and getting an investment in those types of companies is, yes, when you donate money to charity, it’s gone. It’s a hundred percent. And you know they’re going to use it for whatever their mission is. But for you to be able to also invest in a company that can produce a positive impact on your investment dollars, but where they don’t need to necessarily keep raising money from the public, right? If you could find an organization that has a social good, but sells a product, and that product then funds their philanthropic needs. So they only need to raise, I mean, they may need to raise a few rounds, but the benefit and the output and the impact that you’re able to achieve by taking in those dollars is so much more significant than if you’re constantly having to raise through a gala and, you know, and so on and so forth and constantly go back to your donors for more money.
Jared Toren (27:18):
So I think there’s a lot of power in finding companies that you can donate money to. They’re going to be able to self-sustain. And through that $1 that you give them or per dollar, it’s going to have a 20 times multiple potentially, or a thousand times multiple over time with who they’re going to be able to serve. Yeah.
Dan Graham (27:34):
Yeah, and we talk about it all the time on here, but non-profits are starting to trend that way as well and looking for earned revenue models. Granted, Big Brothers & Big Sisters calls it looking for the “magic cookie” from the Girls Scouts. How do you kind of tap into something like that that doesn’t require you to go back and really continue to push on the same donors every single year? Which causes fatigue and it’s just a hamster wheel of activity on the development side.
Jared Toren (28:04):
Oh, absolutely. And I saw it from being a board member as well. Yeah, donor fatigue is a real thing.
Lisa Graham (28:12):
Jared, thank you so much for joining us today and providing your expertise on all the things finance and investment and personal wealth management. We’ve really enjoyed learning a lot of stuff from you today. And to learn more about Proper Wealth Management, you can go to www.properguidance.com. The Change The Rules podcast is sponsored by Chez Boom Audio. Chez Boom Audio is the leading audio post-production company for TV, film, advertising, audio books, and podcasts in Austin, Texas. And we’re so honored to work in their studio with the wonderful Shayna Brown. You can find her studio at https://chezboomaudio.com/.