During the angry passionate debate set off by my Financial Times column on the risks and opportunities facing community foundations, a discussion broke out around whether donors are willing to pay for advice on where to give. I made the point in a comment that donors already pay for this advice, since many community foundations charge a fee that exceeds the fee charged by purely administrative donor advised funds such as the offerings from Schwab & Fidelity.
In the December issue of Alliance magazine is an article titled, “Will They Pay?” by Laura Starita of Philanthropy Action. (Tactical Philanthropy readers have exclusive, free access to the Alliance website through the end of December as outline in the last item of this post). Laura does a wonderful job of exploring the increasing growth of donor advisory services and the difficulty these firms are having creating a sustainable business model. What I find rather amazing is that the article does not even mention community foundations. However, I don’t imagine this is an oversight by the author. I think, as I put forth in my Financial Times column, the public simply does not perceive community foundations to be “trusted donor advisors” in the way that the organizations profiled in Laura’s article are striving to become.
Yet, community foundations do have a business model that has worked for some time. So why then are the new firms trying to create a new business model? I would suggest that one reason might be that these firms are coming of age in a time when low cost administration has already become a commodity. They have the luxury of starting from scratch rather than taking on the difficult task of reworking their business models as I suggested community foundations do.
However, I haven’t yet answered the question posed by “Will They Pay?” Simple economic theory says that people will pay for things that they find valuable and which they cannot get for free. The “bespoke” advice in particular profiled in the article is something that donors certainly cannot get for free. Why then do donors say they want this kind of advice but resist paying for it? I believe it comes down to the difficulty of proving impact. A wealth manager who can statistically show that they can make money for their clients have an easy time charging for their service. But a donor advisor who can’t show that donations made with their advice have more impact than donations made without their advice will have a hard time charging for their service. Donors might like the idea of advice, but if they don’t know that the advice is improving the outcome, they will view of cost of the advice as “taking away” from the amount they give rather than “increasing” the amount of their impact.
My guess is that the firms that figure out how to demonstrate increased impact will be the ones that win. Demonstrating impact does not have to mean showing donors a bunch of statistics. In fact, it will far more likely be shown through a seamless story telling mechanism that uses statistics as the underlying theme of the story, but which use a narrative to relate it. Why has Kiva.org managed to mainstream microfinance? It is not because they’ve proven to their users that microfinance has statistically valid impact, it is because they’ve figured out how to use digital storytelling to get users to “understand” that they are making a difference.
I don’t see any reason that community foundations can’t take the necessary steps to transform themselves so that they prove that donors will pay for advice. If they make the shift quickly and correctly, they might even drive out the emerging competitors profiled in Laura’s article.
Side note: The response to my column about community foundations has be universally negative from people who work at community foundations and universally positive from people who don’t work at community foundations (I’ve spoken to a LOT of people about it separately from the comments on the post). This sets up the interesting question of whether community foundation employees are blind to the effect of the changes going on around them or whether outside observers simply don’t understand community foundations very well. One or the other conclusion must be correct. It certainly may be the case that I am incorrect. I’ve been wrong before and I’ll be wrong again. But I can’t get away from the fact that when Schwab made low cost “administration” available to wealth advisors, they forced a fundamental reworking of the investment advice business model and the change included a totally different approach to charging clients. It is hard for me to imagine that a similar shift isn’t going to occur in the donor advice business. The good news is that Schwab’s offering created a whole new business model that was fantastically better for the wealth advisors. At least for those who understood the shift and tried to jump ahead of the curve rather than fighting the tide of change.
As a community foundation employee who is also a fan of your blog, I have to chime in. I think you may find that many of those in the community foundation world who were so upset with your comments are those in charge of promoting their CF to the outside world and you hit a nerve. Our CF and I believe most others have been trying to market themselves as a one-stop philanthropy shop. We make giving easy, bring us your complicated gifts, your long term plans, your questions about how to do it – and we’ll make it all easy. Your blog has just proved what we all knew in the back of our minds – we aren’t successfully getting the word out. We aren’t marketing ourselves as well as we could be. Because of limited staff resources, our CF focuses on peer referrals, referrals from lawyers, accountants and wealth managers and one-on-one interactions. While this is currently the best use of our resources in our particular market, it does nothing to inform the greater public of what we can do or work to change the mindset of paying for charity advice. Our internal dialogue has started to change and we have big dreams of inspiring our community to greater and more effective philanthropy. Will we put our dreams into action before the rest of the wealth managers beat us to it? I hope so.
Thank you for stirring the pot and holding up a mirror. Facing reality can only make us stronger.
The Alliance article mentions two areas where community foundations already surpass what any administrative service could provide for donors. First, the advice is personal but neutral, based on what the community foundation knows about the community’s most pressing issues (defined usually by independent data as well as the experience of community leaders on the community foundation’s board). Second, community foundations can easily supply on-going in-depth research about high-quality, effective nonprofits, because community foundations are evaluating the nonprofit community all the time in order to make the most impact with their own grantmaking from endowment.
When grant specialists are making site visits to evaluate new grant requests made to the community foundation’s own endowment and receiving reports from previous grantees, it is a small step to provide current, detailed advice to a donor about a specific area of interest or a specific organization.
Partnerships with donors at the Community Foundation of Greater Birmingham develop from relationships, which is a third issue that the Alliance article does not really address. Financial advisors are not always “right” (if by that you mean achieving continually positive results for investors), but if the relationship is solid, the client and advisor will work through the tough times together. Likewise, assessing impact from donor dollars can be challenging, but if donor and community foundation staff have the same goal — creating the most value from limited philanthropic dollars — the relationship continues to grow and deepen, maybe even leading to a bequest in which the donor trusts the community foundation to continue support for the things that person or family cared about during life.
Rather than debating about who should take care of administrative details, manage investments or help donors fulfill their charitable goals most effectively, I wish we could talk constructively about how to raise awareness of the depth and breadth of knowledge offered by community foundations. Community foundations can be key partners in so many ways with people who want to be tactical about their philanthropy (to use the term headlining this blog) as well as financial advisors who want to serve their clients effectively.
Sean: i believe you’re confusing anger with passion and disagreement with denial. and we’re back to marketing and p.r.: raising awareness, telling stories. ah, to have the luxury of large communications budgets.
as to measuring impact: how does one assess the results of an individual’s grant of $50,000 to an agency that’s dealing with teenagers in prison? Or, for that matter, a foundation’s grant of $100,000 to combat global warming. I’ve seen the “metrics” of those who claim to be able to do this–i find the same proxy measures most foundations have used for years, just repackaged. We can do it in the aggregate, over time, for it to be meaningful.
Sean, I think Maureen’s comment (“we aren’t successfully getting the word out”) sums it very well and might be more of the indication of why Laura didn’t include community foundations in her article. I think a second angle, which is not fully discussed in the article, is whether or not these high-wealth donors are exclusively interested in providing support locally or whether their interests extend beyond their geographic catchment. I suspect it’s a mix (giving to the local organization providing food resources and also giving to organizations that build schools in Kenya), which is why community foundation may be in a natural disadvantage.
My two cents…
Thanks for all your comments. I’m traveling today and can’t respond to each of you, but I will next week.
Ani, note that I changed the post to say it set off a “passionate” debate. Point well taken.
Sean, per your questions, some observations from my previous 12+ years of work in community foundations:
* Too many of the 700+ CFs are too small to have the staff necessary to provide solid advice to donors, so there’s plenty of room in the market for others to do it
* Those that do have the advisory staff don’t often have the skills and systems in place to deliver high-quality information in ways that donors can use. Continued underinvestment in quality also leaves room for competition.
* Those that do have the skills and systems may not always deliver unbiased information, and may not be evaluating nonprofits with the same criteria or priorities as each donor. Even CFs with great advisory services aren’t always seen as neutral by donors and advisors because of the CF’s own initiatives or grant priorities. And some staff are arrogant enough to think they “know better” than donors or advisors.
* The average CF measures itself based on its asset size or grant totals, not on the net better impact of its donors or even the typical metrics of a professional services firm.
* The CF business model of fees on funds managed isn’t always holding up to support core operations let alone investing in high-quality advisory services.
There’s a lot of room for creative partnerships between wealth advisors and community foundations to provide great advice to donors. Hopefully your blog and work will spur this!
Emily, thanks for your comments. I know that the old debate pitting Fidelity against CFs sets the tone that administration only services like Fidelity are somehow a direct competitor to CFs. So I want to reiterate that I do not think in the least that admin only services are a competing product to CFs unless the CF is charging for “full service” but only delivering administration.
I can’t say I agree with you that the important thing is for everyone to just get the word out about CFs. While there are many great individuals at CFs, I think it would be incorrect to believe that CFs are a vibrant, robust donor advising service in this country. But I think they can be (please don’t take my swipe at the field as an attack on any individual. I just wrote about how poorly wealth managers serve philanthropists even though I myself am a wealth manager).
Thanks for adding your voice. I agree with your statements, but I want to make one small point. You say that many CFs are too small. Let me lay out a hypothetical example of how partnering with a Fidelity or Schwab could allow for more successful small CFs.
Today, many wealth managers of only 3-5 people manage as much as $200-$500 million in assets for clients. This can be done because the entire back office functionality are outsourced to Schwab or Fidelity and the advisors concern themselves only with managing clients and selecting investments.
It seems to me that someone with deep experience in a community and/or in institutional philanthropy could set up a donor advising business whereby a donor named them as an authorized advisor on a Fidelity of Schwab donor advised fund (much like an investor names a wealth manager as the advisor on an investment account). The problem with this of course is that as of right now, neither Schwab nor Fidelity allow grantmaking advisors to charge fees to a donor advised funds. They do however allow investment advisors to charge fees to individual DAFs. But this is a policy issue not a legal issue. Like any grantmaking organization, Schwab or Fidelity have the legal ability to pay grantmaking advisors for their advice.
I’m not saying that all CFs should be set up this way. But it is a very functional possibility that would make it easy for experienced grantmakers to set up shop as pseudo-CFs and advise donors.
I just wish the folks writing about advice for donors would get the word, so that consulting a local community foundation would be one of the options mentioned. And I think we agree that not every community foundation is equal in what it offers, and likewise with financial firms.
To that point, Tony Macklin’s comment left out any mention of national standards for community foundations, adopted by the field as a whole and now certifying hundreds of individual community foundations for compliance with the highest values and ethical standards, no matter the size of the CF. CF of Greater Birmingham has been ranked within the top 100 for all those numerical valuations (for whatever that’s worth) over the last 10 years, but it was still important for us to dot all i’s and cross all t’s to comply with national standards and be certain that we represent the best of what should be common to ALL community foundations.
Sean – agreed on the outsourcing issue. CFs, like many nonprofits, are behind the curve on outsourcing and strategic partnerships. Would be fantastic to see the arrangement you described with a Schwab or other firm.
Two downsides of a CF or nonprofit solely partnering with national provider though is potentially losing relationships with local financial institutions and managers (where they still exist) or opportunities to invest in local community economic development efforts through program-related investments. But those likely could be overcome.
Emily – I do know the national standards, and I think they’re a good start in creating better quality. But in my experience they don’t go deep enough to ensure the best quality and range of philanthropic advisory services. American College’s CAP program adds to the mix as does the pilot TPI is doing to “certify” some CF staff in family philanthropy programming and advising. What else have you seen?