A New Model for Community Foundations

A lot of people won’t like this post. That’s OK, life would be pretty boring if we all agreed all the time.

Yesterday in response to my post about how banks could start launching no minimum donor advised funds, Ruth Lando of the Community Foundation of Sarasota wrote:

Why couldn’t this be done through the more than 700 community foundations nationwide? We already know how to do donor advised funds having done them most of forever…and we have a track record with Merrill Lynch for their clients through their Community Charitable Fund…

I think this would be a huge mistake for community foundations. In the future I expect the competition between the commercial donor advised funds (Fidelity, Schwab, etc) and community foundations to subside. This will only happen once the community foundation/donor advised fund business model is segmented into three areas:

  1. Transaction based, low cost providers that offer no advice to client/donors.
  2. Transaction based, premium priced providers that advise their client/donors on giving.
  3. Discretionary grant managers who are paid for their expertise in high impact grant making.

Model #1 is currently characterized by Schwab and Fidelity. Realize that Charles Schwab & Co made their name by being a “Transaction based, low cost provider that offerrf no advice to clients” in the late 70’s while all other stock brokers were pursuing model #2. For people who don’t want advice on where to give and simply want a financial account to hold their philanthropic assets, model #1 is a great choice.

Model #2 is currently being pursued by community foundations that offer donors advised funds. However, I would argue that community foundations should more clearly differentiate themselves from commercial donor advised funds by increasing what they charge, implement a relatively high minimum account size and then offer a premium advice service to help their clients decide how and where to give. This model is similar to a full service stockbroker where you pay more to place stock trades but receive advice on which stocks to buy.

Model #3 would be similar to the model being pursued by community foundations with their endowments as well as some public foundations like Ploughshares Fund. In this model, the entity is given full discretion to make grants using a methodology that is made clear to donors. Ploughshares Fund for instance is interested in building peace, security and a nuclear weapon-free world. They attract donors who have a shared philanthropic mission and recognize that Ploughshares is better positioned then they are to identify high impact grant opportunities.

If I’m right about this, it would be crazy for commuity foundations to partner with a bank to offer the no minimum donor advised fund. The bank model is a low margin, low cost, transaction based service. Community foundations have a massive competitive advantage in that they understand their local community’s philanthropic needs better than anyone. This is also a highly protected advantage that is difficult to duplicate by compeitors due to 1) the concentrated local knowledge base, 2) the fact that understanding the local situation is at least partially dependent on having a history in the community.

By raising minimums and increasing fees while at the same time focusing as much energy as possible on providing great advice to client/donors (I’m thinking every client/donor gets assigned a community foundation rep who calls them at least once a quarter to talk about their giving and understands the client/donor’s goals and objectives deeply), community foundations can differentiate themselves from the commercial donor advised funds and be recognized for their store of institutional knowledge about their local communities.

At the highest end (model #3), I think donors can be convinced to give a portion of their giving budget to expert organizations to handle on their behalf. While the first two models are reminisent of separate account management in the wealth management business, this third model employees the hedge fund or mutual fund as an anology. If you visit Ploughshares’ website you see that they’ve done an excellent job of creating a compelling case that they can do a better job than individual donors of making grants that seek to support peace and security.

The only way this last model works is if the fund provides outstanding donor communication that demonstrates the impact of their gift. A hedge fund or mutual fund can just report investment returns. But since a philanthropic fund cannot present statistical proof of their effectiveness, they must qualitatively explain to donors the impact that they are having. They must also view donors to the fund not as simply having made a one time transaction, but instead as long-term “stakeholders” whose gifts are responsible for the long-term success of the fund.

As it stands now, I see most community foundations making the classic mistake of being “caught in the middle”. They are trying to be both low costs providers that compete head to head with the commercial donor advised funds as well as making the argument that they offer more and better advice than Schwab and Fidelity.

This is a receipe for extinction.

Community foundations are a wonderful asset for communities across the country. It would be devastating to see their business model fail. For them to succeed in the Next Great Wave of Philanthropy, they must recognize that their competitive advantage is in their philanthropic expertise and not in transcation processing.

Remember, this story has played out before. Low cost, transaction based services are best handled by large organizations that can create economies of scale. High touch, personalized advice based services are best handled my small to mid-size providers who identify and seek out a niche client base.

If my models are correct, I don’t see why most community foundations won’t just outsource the administration of their donor advised funds to Schwab and Fidelity and focus their resources on hiring the most outstanding donor/client advisors and philanthropic research analysts that they can find.

I know that donors do not like to pay for giving advice. But if community foundations are going to survive, they will need to change that mindset with donors. I wrote just recently about how valuable grantmaking expertise is. I think that donors can be convinced.


  1. Nick Scheibel says:

    I agree with a lot of your ideas, but I think you underestimate the value of affiliation with a community foundation regardless of the expectation of grantmaking advice.

    Some donor advisors definitely see the value in a community foundation’s expertise, and utilize those services to facilitate their grantmaking. But I think an even larger percentage of donors use their funds just like a Schwab or Fidelity account, but still like the idea of being a part of a community foundation. They feel like the fees they pay are being used to benefit the community, and they enjoy the feeling of membership in a group of philanthropists striving towards a common goal — even if their grantmaking may not directly align with the unrestricted giving of the foundation.

    I agree that it is foolhardy for a community foundation to try and be all things to all donors, but I do feel that by applying a progressive fee structure, reducing overhead through online interaction, and offering a menu of services to a range of potential clients, the community foundation can still provide added value to even the smallest funds.

  2. I agree that some donors (or even many?) would rather see their fees go to a community foundation even though they totally self direct their account. But I’m arguing that community foundations should not want those donors. I don’t think those donors are “profitable” for the community foundation. In addition, by serving a smaller, more select set of donors (those that want their advice), community foundations will enhance their value proposition and attract more of the types of donors who will really value their expertise.

  3. Bradley Logan says:


    It seems we already have the offerings you discuss, just not packaged the way your are advocating. We have low cost administration (Schwab, Fidelity, and communities foundations). We are experiencing the burgeoning of advisory services in the two flavors you suggest (ad hoc fee for service via philanthropy advisors and via “fund” mode like Ploughshares).

    Wouldn’t it be prudent for communities foundations to offer distinct services in each category? If they outsource the administration, then how are they different than the advisory services that already exist?

  4. Community foundations should have the “advisory service” field dominated. I think they have so much more credibility than some of the one or two person “philanthropy consultants”.

    Plus I’m not advocating an “ad hoc” fee for service, but rather an ongoing advisory role, not a project based role. Most donors have multiple interests and so they can be best served by an organization with the depth to advise them across issue areas.

    I agree that Schwab and Fidelity are dominating low cost admin. But I disagree that the other two fields have much competition. Yes there are independent consultants and a handful of firms like Arabella Advisors, but the playing field is still wide open. And while there are groups like Ploughshares, the market for this type of service is still highly immature.

  5. Nick Scheibel says:

    It is almost certainly true across the community foundation world that small donor advised funds lose money. It is even likely that for many of these foundations, the “break even” point for a donor advised fund — based on traditional pricing models — is well into 6 figures.

    I think the challenge to community foundations is two-fold: 1) we must lower overhead costs by reducing costs for small funds 2) we must identify a pricing model that includes fee-for-service offerings and an overall fee structure that is progressive for the largest funds.

  6. If we assume that DAFs less than $100,000 are not “profitable”, why don’t you advocate for community foundations to just institute a $100,000 minimum? I know this is a hard process (you’ll lose revenue and anger some people), but every business analyst would say that you need to focus on the people you serve best. If there were no alternatives for your small donors, I could see the argument that you have a mission driven obligation to support the smaller accounts. But with the commercial funds as a good alternative for small donors who are using their DAFs in a self directed way, why not just let them go there and focus on the people you can really deliver value to?

  7. ruth lando says:

    Very, very interesting and thought provoking stuff, Sean.

    There is a definite movement afoot to be more “impactful,” strategic and proactive in grantmaking, but we (community foundations) all struggle with the difficulty of raising purely discretionary or unrestricted money from living donors…because it flies in the face of the growing Boomer “hands-on, I want to be in on the decision making” mentality AND because we can’t be perceived of as competing with the very nonprofits we serve with their annual and capital campaigns. I think that’s one major reason why donor advised funds are growing apace.

  8. Great points Ruth (and thanks for kick starting a great conversation).

    Boomers do want to be “hands on” and involved in their giving. But I believe that their reasoning is that they want to be more impactful and involved with their giving. I think raising money for your endowment is much more of a “model #3” activity, while premium service DAFs are the classic “Model #2”. So while figuring out how to work with the hands on attitude of the Boomers is key, the Model #2 concept I outlined lets donors be involved and also recognizes that even the most hands on donor can see that paying for expert assistance can be money well spent.

  9. Roxie Jerde says:

    At the heart of a community foundation’s value is being local experts on community priorities and the nonprofits charged with making our communities stronger. How does a donor know what their philanthropic investments will achieve when they invest in a nonprofit?? At the Greater Kansas City Community Foundation, we created DonorEdge to do just that…give donors an edge in making effective charitable investments. By working with our communities’ nonprofits, our staff of Donor Education Specialists assist nonprofits in creating and updating an objective, verified profile. It details how the mission is accomplished through programs and if the nonprofit has the organizational capacity in its governance, financials, management and infrastrucure.

    DonorEdge’s value is in quality and current information which the Community Foundation designates by the “Check Mark-Review” brand to quickly let a donor know this is an accountable and transparent nonprofit. As we work with donors on achieving their philanthropic dreams, we start with educating them on a nonprofit’s program success that aligns with their community goals.

    We are very enthused to be working with GuideStar as our technology partner for DonorEdge, being used for donor education work by the Greater Kansas City Community Foundation, the Community Foundation of Middle Tennessee (GivingMatters), the Columbus Foundation (Power Philanthropy), the Greater Houston Community Foundation (DonorHouston) and the Community Foundation of Central Florida.