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:
- Transaction based, low cost providers that offer no advice to client/donors.
- Transaction based, premium priced providers that advise their client/donors on giving.
- 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.