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.