A New Role for Community Foundations

By Sean Stannard-Stockton
November 25, 2008 | Original FT.com Link

Community foundations in the US are at risk of becoming irrelevant unless they can transform into trusted donor advisers.

Since the founding of The Cleveland Foundation in 1914, community foundations have raised charitable funds from a community and distributed the money back to that area’s non-profit organisations. But a new role is emerging. In the near future, community foundations could supplant large private foundations as philanthropy’s leading voices and, in the process, change how individuals engage in philanthropy.

One of the core services of community foundations is offering donor-advised funds. These accounts allow donors to give money to the community foundation, but retain the right to advise which non-profits receive it.

Fidelity Investments launched the first low-cost, commercial donor-advised fund in 1991, and since then community foundations have not been competitive in the donor-advised fund marketplace. Today, commercial donor-advised funds hold the top three spots on the list of biggest donor-advised funds. But rather than competing, community foundations should see this low-cost administration as enabling a golden age for community philanthropy.

When Charles Schwab launched discount stock brokerage services in 1975, most stockbrokers saw it as a threat. Instead, while the role of full-service stockbroker has largely disappeared, a new industry of fee-based investment advisers has emerged, mostly created by former stockbrokers. These advisers outsource money management administration to low-cost providers such as Schwab and Fidelity, but command hefty fees for advising clients.

While the transition will be difficult, community foundations now have an opportunity to quit the business of offering donor-advised fund administration. These foundations should entirely outsource the administration of donor-advised funds and instead build world-class donor-advising services.

While many community foundations will argue that they already offer this service, the truth is few donors view community foundations as the “smartest people in the room” or “masters of the universe”, the way that investors view the best investment advisers.

In an online world where donors can find discreet information about non-profits, the “masters of the philanthropic universe” will be those people whom philanthropy adviser Lowell Weiss calls “synthesising generalists”. Mr Weiss has been a speechwriter for former president Bill Clinton, a grant-maker and advocacy specialist at the Bill & Melinda Gates Foundation, and right-hand man of super philanthropist Mario Marino.

In July, Mr Weiss launched Cascade Philanthropy Advisors. His concept of the “synthesising generalist” captures the idea that most good philanthropy draws on a range of knowledge. Community foundations, with their historical focus on a total community, not individual issues, are well positioned to help donors make the best possible philanthropic investments.

The donor-advising business is booming. New entrants such as The Hopewell Group and Cascade Philanthropy Advisors have joined established groups, including Arabella Philanthropic Investment Advisors and The Philanthropic Initiative.

It is hard work to end homelessness, save the environment or heal traumatised children. It should not be assumed that just because a non-profit sets out to tackle an issue it will have any success. But the best non-profits are making a difference and a tough analysis of the field by expert advisers would channel more resources to these top performers.

Community foundations should not simply be aggregators of philanthropic dollars, but instead become high-impact, philanthropic investment advisers.

In their groundbreaking report in 2005, On the Brink of New Promise: The Future of US Community Foundations, authors Lucy Bernholz, Katherine Fulton and Gabriel Kasper wrote: “Community foundations will face a far greater challenge than they have in the past to define and act on their distinctive value to their communities.”

Community foundations can make this change. They can emerge as the leaders of philanthropy in the 21st century. Donors deserve skilled advisers to whom they can turn for advice on how best to support the causes about which they care.

The writer is a principal and director of tactical philanthropy at Ensemble Capital Management and author of the blog TacticalPhilanthropy.com.