Category Archives: Philanthropic Capital Markets

Nonprofit Transparency

October 31, 2008 – 10:25 am

Let me make something clear. I am not advocating for the cause that FORGE is working on nor am I explicitly advocating for FORGE as an organization (or even Kjerstin as an individual). I am advocating for the cause of nonprofit transparency.

Why is transparency so important? Transparency builds trust and trust is the fundamental underpinning of markets and in fact most human endeavors. If I don’t trust you, interactions between us breaks down. Trust does not come from believing that someone is a great person, it comes from believing that what you observe is in fact a good description of reality. Transparency is a way to build trust. As a wealth advisor, I always make clear to my prospective clients how I am compensated and how various outcomes will benefit me (or not). This transparency allows prospective clients to trust my future statements because 1) they understand where I’m coming from and 2) I’ve just demonstrated that I will willingly point out ways in which I might be biased. Without trust, no client would ever hire me.

Public for-profit companies wrestle with this issue as well and sometimes make the right decisions and sometimes do not. When a for-profit investor is evaluating an investment idea, they diligently attempt to learn as much as possible about the company. However, at some point they must make a leap of faith and make the investment knowing that they do not have 100% of the facts (since, frankly, no one ever knows everything). This leap is made much more easily when the company in question goes to great length to transparently present their situation. When a company presents everything and does not appear to be “marketing” themselves, an investor can feel more confident that there is not knowable, relevant information of which they are unaware.

One of the functions of public stock exchanges is to create a standardized system of transparency. Not only can investor view the terms of historical transactions in the companies being traded, but the exchanges require a minimum level of transparency. Public companies must release quarterly and annual reports mandated by the SEC as well as release certain types of information within certain time frames.

I believe that if nonprofits can embrace transparency that they will build trust and more capital will flow to good. This is the promise of the social capital markets.

I’m off to meet with Kjerstin at FORGE. I think her experiment in radical transparency deserves all of our support.

By Sean Stannard-Stockton | Also posted in Philanthropy, Transparency | Comments (1)

Philanthropic IPOs

October 23, 2008 – 9:50 am

From the Ottawa Citizen (hat tip to Ani Hurwitz):

Non-profit ‘IPO’ invests in future of girls

The TSX may be flagging, but a Toronto-based non-profit foundation is betting that the IPO it offered yesterday at the exchange is the way to raise $1 million to fund programs for girls by the end of the year.

The IPO — as in “Immediate Public Opportunity” — of the Girls’ Growth Fund is a fundraiser by the Canadian Women’s Foundation.

Shares in the fund are $100 each. Donors get a share certificate and a prospectus. The funds will be used to support programs that develop self-esteem, leadership and critical thinking skills for girls between the ages of nine and 13 over the next three years.

While there is no monetary return, the IPO is one of a new breed of fundraisers billed as an investment that builds “social equity.”

…The non-profit IPO concept has been used before in charitable circles in the United States — last month, George Overholser of Nonprofit Finance Fund told The Economist that about $200 million U.S. in “philanthropic equity” has been raised in recent years.

…As the idea developed, the Girls’ Growth Fund had its eye on Mr. [Warren] Buffett’s philanthropist sister, Doris Buffett, said Ms. Babcock. It was a coup that Ms. Buffett agreed to become one of seven “angel investors” who bought $10,000 in shares in advance of the IPO.

BMO Financial Group chief economist Sherry Cooper was also an angel investor. Another 100 high-profile individuals purchased at last one share before the IPO, including writers Margaret Atwood and Gloria Steinem, former diplomat Stephen Lewis, actress Jane Fonda and Indigo Books founder Heather Reisman.

…The non-profit IPO is a bit of a gimmick. But it is one that plays into a growing mindset among donors, who see their contributions as more of an investment than a gift.

This is a pretty fascinating article. The author (knowingly it seems) blends together the “marketing gimmick” of the IPO concept with the new accounting methodology being put forth by George Overholser when he refers to “philanthropic equity”.

Part of me reads about the “IPO certificate” and the “prospectus” and is annoyed that what appears to be a typical fundraising effort is being dressed up as a new sort of “investment”. On the other hand I see the excitement the offer generates and the well known donors and it validates my belief that people want to give in a financially sophisticated way, but don’t know how.

What do you think? Is the Nonprofit IPO concept dillutive to real efforts at building philanthropic equity or is it a positive sign of donor demand?

By Sean Stannard-Stockton | Also posted in Fundraising, Philanthropy | Comments (10)

SoCap2008 Video

October 23, 2008 – 8:29 am

The good people at FORA.tv were at SoCap and filmed a number of sessions. This is the video of the session I moderated on New Wealth Management. The audio is fine on the video, but the mics only fed to the camera, so the large, packed room had trouble hearing us at first. That’s why you’ll notice we decide to stand up to present. For some reason the video starts at minute or so into the presentation. You can scroll back to the beginning once it starts with the controls at the bottom of the video widget.





The session after mine was about Mission Related Investing. I thought the session was excellent and it was interesting to hear from the KL Felicitas foundation (a leader in MRI) talk about their experience. KL Felicitas is a relatively small foundation so they have a different sort of story to tell than the multi-billion dollar foundations who are starting to get into MRI. Click here to view the video.

You can find a listing of all SoCap08 videos, including the keynote address by Matthew Bishop (who coined the word Philanthrocapitalism) by clicking here.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Effective Giving, Impact Measurement, Mission Related Investing, New Philanthropy, Philanthropy, video | Comments (0)

SoCap 2008: Securitizing Philanthropy

October 15, 2008 – 10:12 am

There is an irony in the fact that so much of the conversation at the SoCap conference is about moving philanthropy towards a financial markets approach that seems to be in the process of breaking down in the for-profit financial markets. However, we should not confuse financial innovation with excessive risk taking.

I just read the great book When Markets Collide. Published this year, the book comments on events that were occurring in the financial market as recently as the spring of this year. Author Mohamed El-Erian is the former head of  the Harvard endowment and current co-CEO of PIMCO, one of the largest investment managment companies in the world (he also spent 15 years at the International Monetary Fund). In the book, El-Erian says that when asked what career he would suggest a young women go into he replies “structured finance” without hesitation. His point is that while we are in a cyclical move away from structured finance due to excessive risk taking, the stuctured finance movement will continue to dominate financial markets over the long term.

All of this brings me to a great session I attended yesterday in which my friend George Overholser of NFF Capital Partners described how grantmakers can injected capital into a nonprofit debt financing deal to make it more attractive to for-profit lenders. The idea is that if a profit seeking lender will only lend to a nonprofit at a 10% interest rate, they may be willing to lend at a lower rate if a philanthropist puts up capital that will act as a “first loss” cushion. Let’s say that for example the loan is for $5 million. The philanthropist might put up $500,000 that the lender could lay claim to if the nonprofit was unable to fully repay the loan. This reduces the risk to the lender and therefore lowers the interest they are willing to accept to complete the loan. The philanthropist is willing to put up the money because the injection of a relatively small cash cushion can unleash much larger new cash flows into the nonprofit system. While the provider of the “first loss” cushion can acheive a maximum financial return of 0% (just getting all their money back if the nonprofit doesn’t default on the loan) and a maximum loss of 100%, this actually compares favorably to the guarenteed 100% “loss” that occurs when you make a grant. While a first loss capital cushion is not superior to making a grant, it is another tool to be considered by high-impact grantmakers.

This brings me to a recent announcement by Schwab Charitable (the national donor advised fund) of its pioneering program to allow their donor advised funds to put up capital to guarantee microfinance loans. The program is being run in collaboration with the Grameen Foundation. According to the press release:

“We are excited to be partnering with Schwab Charitable to expand the reach of microfinance loan programs around the world,” said Alex Counts, President of Grameen Foundation. “Historically, guarantee programs have only been open to large foundations or to the very wealthy. This program opens up participation to a much broader range of donors, democratizing access and building a solid base of ongoing support.”

…Donors who agree to participate will recommend that up to 10 percent of their Charitable Gift Accounts be set aside for a period of 24-36 months to help guarantee microfinance loans. Any funds used to guarantee microloans will stay in their accounts, will continue to be invested for the entire period and will be applied to the guarantee only if the microfinance program has losses in excess of reserves. In addition, Schwab Charitable will report back to participating donors on the social and economic impact that these microfinance loans provide to their various recipients.

Like all tools, structured finance can be used in inappropriate ways. As El-Erian points out in his book, the “securitization” of home loans (pooling them and reselling the loans to investors) was a positive development. However, misaligned incentives encouraged excessive risk taking that is now coming back to haunt the mortgage markets. Structured finance is a powerful tool and powerful tools can be dangerous, but I think the development of social capital markets towards more sophisticated forms of structured finance is inevitable. Let’s work on getting it right.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Effective Giving, New Philanthropy, Philanthrocapitalism, Philanthropy, SoCap2008, microfinance | Comments (0)

SoCap 2008: Breaking Silos in Philanthropy

October 14, 2008 – 4:07 pm

At SoCap today, I had to decide between a session titled Breaking Silos and one called Capital Cohabitation that was described as being about “how to break down silos”. Yesterday I published a post about… you guessed it, how important it is that we “break out of our silos”. The SoCap Conference is shockingly cross-disciplinary in the background of the attendees. Sometimes it seems like people are speaking different languages, but I think that’s OK. At least they’re trying to communicate.

Personally I’m focused on the intersection of wealth management and philanthropy. But those are just two of the silos that must be broken down for the social capital markets to thrive. I know that people on the inside of a trend tend to think it is more important than it really is. But I still believe that we are at a true turning point in the development of this field.

On my way over to the session I’m currently in, I heard a woman on a cell phone saying “I can’t believe it, there’s 600 people here and they’re all deeply interested in this stuff. I know they’re not all in our target market, but it is still amazing”.

That’s the thing, when you break down silos, the people on the other side aren’t always “in your target market”, but that’s inevitable when you’re building an entirely new marketplace.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Information Sharing, New Philanthropy, Philanthropy, SoCap2008 | Comments (1)

SoCap 2008: New Wealth Management Panel

October 13, 2008 – 4:35 pm

I just moderated what ended up being a standing room only session at SoCap 2008. Don’t tell the fire marshal, but the the audience was a exponentially larger than the room posted limit of 49. It was actually rather exciting to see the “demand” side of equation for social investments beyond capacity and to see the “supply” side consisting of panel members from UBS, Merrill Lynch, Guggenheim Partners, Veris Wealth Partners and my own firm Ensemble Capital Management.

Prior to the session I ran into an acquaintence who works for the The Institute for the Future. She was explaining to me that trends take 30-50 years to play out. So the Internet was first developed in the 1960’s, but it took 30 years for the internet to go mainstream and yet we’re still likely 10+ years from the Internet being fully “mature” in its growth cycle. I think the same is true in social investing. The first socially responsible investment fund was launched in the 1970’s, so we’re now 30 years into the trend. I have the sense (and the panel today was a nice affirmation) that we’re hitting the “knee in the curve” of growth in social investing. But that means that if you compared our industries to the growth path of the Internet, we’re probably sitting at around 1995.

The fun thing about the panel was that we didn’t have to explain why social investing was important. The crowd got that. So we got to surface some core disagreements between the panelists. Is there a trade off between social returns and financial returns? Is there enough deal flow for everyone who wants to invest with social impact to be able to find opportunities?

This is going to be a good conference. You can follow along with the blog team via the official SoCap blog.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Mission Related Investing, New Philanthropy, Philanthropic Investment Strategy, Philanthropy, SoCap2008 | Comments (1)

Off to SoCap

October 13, 2008 – 12:56 pm

I’m off to SoCap where I’ll be moderating a panel this afternoon. You can follow along via the large blog team (including me) who will be posting on the official SoCap Blog.

If you’re going to be at the conference, come up and say hello!

By Sean Stannard-Stockton | Also posted in Philanthropy | Comments (0)

A New Model for Community Foundations

September 25, 2008 – 11:34 am

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.

By Sean Stannard-Stockton | Also posted in Effective Giving, Grantmaking, New Philanthropy, Philanthrocapitalism, Philanthropy | Comments (9)

No Minimum Donor Advised Funds

September 24, 2008 – 9:53 am

In response to my post yesterday asking who would follow Network for Good’s lead and try to execute one of the “surprises” from my list in the Chronicle of Philanthropy, David Lynn of Social Venture Partners-San Diego writes:

We’ve been working on a plan for #8. If any other readers would like to discuss, we’d be happy to. We’d love to see it happen.

“# 8: A no-minimum national donor-advised-fund will be launched in partnership with a bank.”

My thought on this idea was that banks have made it very easy to save money, by linking savings account products to their checking accounts. Some banks have even created programs where purchases on your debit card are rounded up to the nearest dollar with the excess being rolled into your savings account. ING Direct has created huge national awareness of their online, high yield savings accounts that can be linked directly to other institutions checking accounts.

At the same time, banks have invested in online banking capabilities so that it is now easy and free to pay your bills out of your checking account. So why can’t a bank offer a donor advised fund that is linked to your checking account and allow for free checks to be sent out of the account to nonprofits? They could even offer benefits if you set up a standing order to transfer a portion of your direct deposit paycheck into your donor advised fund.

From a regulatory standpoint, this idea has some problems. For instance only nonprofits can offer donor advised funds, but Schwab and Fidelity have found ways to offer donor advised funds so I don’t see why banks couldn’t do the same thing. The other issue is the overhead involved in operating donor advised funds with no minimum balance. Schwab and Fidelity now have their minimums down to $5,000, but the last leg down to $0 might be difficult. One of the reasons that I thought partnering with Network for Good made sense, was that doing so outsources the charity vetting process to them. I don’t see why a bank couldn’t mail checks out to any nonprofit within the Network for Good database using their existing bill pay functionality. I don’t mean to downplay the fact that there would be some hurdles to this plan, but it sure seems doable.

To tell you the truth, I’d go one step further. Why can’t for-profit firms offer donor advised funds? I know that’s blasphemy, but assuming all of the same rules regarding the use of the funds was followed, what would the problem be?

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropy | Comments (6)

Philanthropy as a Business

September 3, 2008 – 9:54 am

In response to my recent posts on “philanthropy spending vs investing”, “paying for philanthropic advice” and “how much philanthropic advice is worth”, Phil Cubeta offers a post titled, “Why Philanthropy as Business is Foolish and Will Fail” in which he calls my posts “false poetry”.

Cubeta:

We can jabber on about how this is really social investing, a philanthropic industry, a social capital market, but donors (or social investors) will likely see through the high quality, MBA-inspired, BS and realize that we are battening on their gifts, extracting tolls and levies and loads designed to make our cushy lives better. We are cynically exploiting the charitable motive, as capitalism exploits all motives…

…What then is the answer, if loads [fees] there must be? Align the load with social benefit. Have the entity extracting loads be mission-aligned with the donor. Have the load-extractor positioned within the donor’s circle of trust, love, and concern. Have the load-extractor be a beloved nonprofit, and mainstay of a community in which the donor and the donor’s family dwells in solidarity, kneels in prayer, or works as a volunteer in a spirit of shared service.

For those that don’t know the history, Phil Cubeta was my foil when I first started blogging. He welcomed me with open arms to the then budding philanthropy blogging community and then quickly skewered my writing (to my delight). When reading Phil’s rants, it is important to understand that he uses satire often and with relish. Phil has done much for philanthropy blogging and I credit him with reigning in my social capital market beliefs when I get out of line.

But Phil is dead wrong on this one.

To buy into Phil’s world view on this topic, you have to agree with him that 1) capitalism exploits the motives of all those who dare engage it, 2) that donors are best served when they receive philanthropy advice from nonprofits rather than for-profits.

I believe that philanthropy already exists within American capitalism and that it will benefit from embracing the financial systems that are used to fund for-profit enterprises. I do not believe that for-profit businesses and free markets produce the most social good (and neither do most economists who recognize that “externalities” exist in free markets). But I do think that financial markets are pretty effective at allocating funding to top performing companies and depriving poor performers of capital. Employing a more robust social capital market and encouraging donors to utilize all the tools at their disposal is not cynical nor exploitive but in the best interest of philanthropy.

I believe that philanthropic advice should be provide by both nonprofit and for-profit organizations. Donors should understand the incentives of the advisors they hire. Calling advisors (both nonprofit and for-profit) “fee-extractors” is just silly. Phil might wish that we could all exist in a gift economy where people simply helped each other out of pure good will, but frankly both nonprofit and for-profit employees need to earn a living. If they can do so in a way that produces significant social good as I demonstrated in a recent post, that’s something Phil should be celebrating instead of tearing down.

By Sean Stannard-Stockton | Also posted in Effective Giving, New Philanthropy, Philanthropy | Comments (0)

SoCap08 Offer for Tactical Philanthropy Readers

August 26, 2008 – 6:58 am

The people behind the Social Capital Markets Conference that I wrote about yesterday want you there to listen to their “rock star line up” of the social capital movement. So as a special offer, they are offering a 30% discount on the conference registration fees to Tactical Philanthropy readers.

You can find conference info here and the registration form here. Just enter the special discount code for Tactical Philanthropy readers: “TP30″. The discount is valid until September 8.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Mission Related Investing, New Philanthropy, Philanthrocapitalism, Philanthropy | Comments (0)

Social Capital Markets Conference

August 25, 2008 – 7:40 am

From October 13-15, in San Francisco, the Social Capital Markets Conference (SoCap08), will bring together a rock star line up of the social capital movement. Speakers include:

  • Matthew Bishop | THE ECONOMIST
  • Jed Emerson | BLENDED VALUE
  • Doug Bauer | ROCKEFELLER PHILANTHROPY ADVISORS
  • Carla Javits | REDF
  • Jim Fruchterman | BENETECH

In addition, there will be representatives from:

  • ROOT CAPITAL
  • GOOD CAPITAL
  • SKOLL FOUNDATION
  • IDEO
  • B-LAB
  • CALVERT
  • MILKEN INSTITUTE
  • KIVA.ORG
  • ACUMEN
  • GRAMEEN FOUNDATION
  • GOOGLE.ORG

Here’s the official overview:

Social capital. Doing well by doing good. Making money make change. Philanthrocapitalism. Whatever you call it, its the emerging approach of harnessing the power of capital to support a new breed of smart, innovative entrepreneurs committed to changing the world in big, meaningful ways.

The Social Capital Markets Conference 2008 (SoCap08) will bring together the entrepreneurs who want to change the world and the capital that wants to make it happen. SoCap08 is a new event designed to bring together all of the people and organizations with a similar deep passion to change the world through sustainable businesses. Investors and entrepreneurs will find themselves helping to build a new community, gaining encouragement as they realize that they are not alone, but are a part of something big, important – and rapidly growing. Participating organizations include Good Capital, The Economist, REDF, HIP Investors, Citibank, Stanford Social Innovation Review, Living Cities, The United Nations Development Programme and Google.org, among many others.

When: October 13-15, 2008
Where: Fort Mason, San Francisco, California
Who: Hundreds of leading social entrepreneurs and investors from around the world
What: Bringing together the people who are accelerating the flow of capital to good
For more information go to: www.socialcapitalmarkets.net or contact info@xigimedia.net.

I’ll be speaking as well as moderator of the New Wealth Management panel:

Social investing is a wave that’s growing. Wealth managers are finding their clients want to explore and get involved in all these new alternative investment opportunities that mix social mission and impact with financial return. How do you manage your fiduciary responsibility while responding to client demand? From the client perspective, how do you explain these new things you want to get involved in to your financial advisor? Learn from some wealth managers how they and their clients who are navigating this new territory in a session designed for both the investor and the financial professional.

It should be a really interesting conference. I’d love to see a contingent of Tactical Philanthropy readers in attendance!

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Mission Related Investing, New Philanthropy, Philanthrocapitalism, Philanthropic Investment Strategy, microfinance | Comments (0)

Paying for Philanthropic Advice

August 21, 2008 – 8:57 am

My last post on Philanthropy: Spending Vs. Investing, was picked up by the Chronicle of Philanthropy yesterday. In the comments Jed Emerson weighs in with support for my view, while another reader calls me “All Wrong” and Anne Ellinger of Bolder Giving strikes a middle ground. When you think about the nine outcomes I listed to donors changing the way they think about giving, there is something that emerges from the various interconnected trends that will have a radical impact on philanthropy.

Sooner or later, donors are going to start being willing to pay for advice on how to give. This will transform philanthropy.

Currently, most donors are uninterested in paying for advice related to where to give their money. The most successful model of selling grant making advice to individual donors has been the community foundation model of charging a percentage on the assets in a donor advised fund. Donors were willing to pay because it was pitched as an “administrative fee” and the grantmaking advice was offered as a “free” add on. But the emergence of Schwab Charitable and the Fidelity Gift Fund, where they charge much less for administration (but don’t offer grantmaking advice) has unbundled the grantmaking and “exposed” the fact that donors were actually paying for advice. The wild success of Schwab and Fidelity in attracting new donor assets shows that when presented an option to not pay for (or receive) grantmaking advice, donors will jump on it.

[Update: I didn't mean to imply that community foundations were misleading in how they charged. I was trying to say that when Schwab and Fidelity unbundled the administration of donor advised funds from giving advice - much as Schwab unbundled investment advice from trade execution in the 1970's - we found that many, many donors preferred to only pay for administration]

If you think about it, most consumers refuse to pay for advice on what to spend money on as well. Consumer Reports probably has had the most success in advising people on their spending choices, but they are a rarity. On the other hand, most all investors pay for some sort of advice on how to invest. The market is thriving with everything from full service wealth managers to investing advice books and subscription based information services. On the web, where consumers are rarely willing to pay for information, we can really see the value that consumer place on investment related investing information. The Wall Street Journal is probably the only successful model of a newspaper charging for web access and sites like RealMoney, StockCharts, SentimentTrader and Briefing.com all charge for access.

As long as donors view giving as a spending category, they will be highly resistant to paying for information and advice to guide their giving. But to the extent that donors reframe giving as an investment activity… watch out, you’ll see an explosive new industry emerge to help guide the $300 billion+ that Americans give to charity each year.

By Sean Stannard-Stockton | Also posted in Effective Giving, Grantmaking, New Philanthropy, Philanthropy | Comments (7)

Philanthropy: Spending Vs. Investing

August 19, 2008 – 9:26 am

One of the big shifts that is occurring in philanthropy is a change in the way donors perceive how charitable giving fits into their overall financial picture. The most fundamental aspect of this shift is a movement from seeing giving as a “spending category” to seeing it as an “investment category”. There are a number of implications:

  1. When donors view giving as an investment category, they view it as a positive aspect of their financial picture rather than a negative cost. For example, if the cost of your grocery shopping goes up, it negatively impacts your budget. But if the amount you are saving goes up, this is a positive change to your financial picture.
  2. Donors can begin thinking about giving as a percentage of their assets rather than a percentage of their income. Wealthy donors in particular have far more assets than income and so thinking about giving as a percentage of assets would dramatically increase giving. This is the argument put forth by investment manager and philanthropists Claude Rosenberg in Wealthy & Wise. The book demonstrates mathematically that donors can give far more to charity without jeopardizing their financial well being if they think about giving as a percentage of assets.
  3. Donors can begin thinking about nonprofits as organizations they want to support rather than “sellers” of “goods” whose costs they do not want to support. When you buy something from Target, you don’t care about their operating costs, you just want the lowest price. But when you invest in Target you recognize that quality organizations take money to run and you are supportive of well spent operational costs.
  4. The value that donors expect shifts from a short term perspective (such as “buying” the right to feel like you helped someone) to a long term perspective (such as “investing” in the continued success of a high impact nonprofit).
  5. Nonprofits stop seeing donors are “customers” who they must separate from their cash (or even fight a war over) and start seeing them as investors; literally stakeholders of the organization.
  6. Corporate donors also see a shift where “corporate social responsibility” moves from being a cost that they attempt to reduce to an investment in the community from which they derive their profits.
  7. More mission related investment opportunities open up as people become comfortable with blended investments that offer financial and social returns.
  8. The field of philanthropy becomes more focused on building a philanthropic market place as the importance of functioning financial markets becomes more clear.
  9. Wealth managers begin serving the philanthropic needs of their clients as they begin to recognize that giving is not a cost for their client (that should be minimized) but is instead an asset allocation question that is directly intertwined with their clients’ broader wealth management needs.
By Sean Stannard-Stockton | Also posted in Long-Term Philanthropy, Mission Related Investing, New Philanthropy, Philanthropy | Comments (2)

Tactical Philanthropy as a Growth Industry

August 18, 2008 – 10:11 am

Recently Wealth Manager magazine wrote a very nice article about the growing trend of wealth management firms specializing in serving philanthropists and positioned my firm, Ensemble Capital Management, as being on the leading edge.

Strategy without tactics is the slowest route to victory, wrote Sun Tzu in The Art of War. Twenty-six centuries later, acknowledging, accepting and exploiting the distinction as a business model is the new new thing in philanthropy.

Strategic philanthropy refers to the big-picture goals, which is to say the popular image of organized giving. Ending poverty, curing cancer, etc. fall under the heading of strategy. The financial plumbing that supports such causes and primes the money pump is tactical philanthropy. The two sides have always been a part of philanthropy, of course. What’s different is the growing specialization of services for each—particularly when it comes to the tactics.

“Philanthropy is broadly understood as the giving of money for social purposes,” says Sean Stannard-Stockton, a principal at Ensemble Capital Management, a Burlingame, Calif. shop that specializes in philanthropic-related money management and financial services for wealthy individuals. “And yet,” he adds, “ there’s been almost no attention to how you structure those financial transactions.”

Until recently, that is. Attention is very much on the rise when it comes to the financial aspects of philanthropy, which Stannard-Stockon and others tag as tactical philanthropy. There is increased focus on the financial processes that make strategic philanthropy possible, he reports. In fact, the trend is so compelling that it convinced Ensemble Capital to re-brand itself four years ago as a specialist wealth manager in the burgeoning niche of tactical philanthropy…

…Arguably, the leading edge of the philanthropy boom is represented by the independent firms that are embracing a philanthropic-centric business model. Consider Ensemble, which was founded in 1997 as a traditional wealth manager, but four years ago began specializing in providing philanthropic services for individuals. Related efforts have since spilled out into the wider world: Stannard-Stockton started his blog, TacticalPhilanthropy.com, in late 2006, raising his profile and leading to his monthly Financial Times column “On Philanthropy.”…

… If the business model of philanthropic planning is compelling, it’s only a matter of time before debate begins in earnest on best practices. One of the emerging topics under discussion includes the question of how to provide philanthropic planning in a way that minimizes—if not eliminates—conflicts of interest. Framing the subject that way recalls the debate over fees versus commissions that first began bubbling in the wider financial services community in the early 1990s. A similar dialogue appears to be forming in tactical philanthropy as it relates to individual clients.

Stannard-Stockton has already staked out his position. “Just as we advise on investments in a non-sales format, we advise on giving in the same way,” he says. “We get paid for managing assets, so we have no conflict in helping people decide between the various vehicles.”

You can read the full article here.

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropic Investment Strategy, Philanthropy | Comments (2)