A selection of the editorial board’s responses to the financial crisis:

Lucy Bernholz Blueprint Research and Design, USA
Two areas of potential impact of the crisis concern me. First, will fear about the future make people turn away from community, look for ‘others’ to blame, and be divisive and destructive to civil society? Certainly history can provide plenty of examples of this type of civil withering. We can also find examples in which uncertainty brings out the best in people. Have we learned anything about fostering the latter and avoiding the former? Second, while individual philanthropic impulses always continue, what will happen to the ‘business of giving’ in view of the scale of current uncertainty? Assumptions about large-scale transfers of wealth have to be re-examined, as plans for retirement, medical care and family financial security are radically realigned. We also don’t know whether and how online giving marketplaces, social enterprise, social investing and other innovations born in good times will stand a downturn, short or prolonged, and how those changes will ripple across longer-standing practices.

David Bonbright Keystone, UK
What can we learn from this crisis to prevent recurrence? What is the role of philanthropy and civil society in curbing the excesses of our economic system? Looking backwards, can philanthropy ensure that we get an unbiased forensic analysis of what happened, and a ‘truth and reconciliation’-type process that will enable the victims to judge the executioners? Looking forward, can we imagine new models of regulatory oversight in which civil society plays a more robust role? Can philanthropy help to ensure that we have a more effective early warning system when investors go on their next binge, as history tells us that they surely will?

Andrew Kingman Micaia, Mozambique
We will no doubt have to watch carefully the ‘new’ funds and intermediaries that have relied on the hedge funds and other financial instruments that are now under such pressure to see if they are badly hit. However, these funds are dwarfed by foundation assets that will, one would assume, be reasonably well protected. I suspect that the most significant impact might well lie in the area of changing funding priorities for the major donors over the next few years.

If we consider the social and economic impact of the financial crisis on low-income communities in the US and Europe in particular, it may be hard for foundations to resist taking on new or expanded programmes to provide short and longer-term support. In turn this could affect funding for more ‘marginal’ issues – international giving, environmental justice, etc. Add to this scenario the likely downturn in individual and corporate giving, and a significant portion of civil society may face a severe funding crisis.

Barry Knight CENTRIS, UK
Philanthropy is the child of capitalism. Put yourself in the place of the child whose father has just had a major heart attack and can no longer work. What is she to do? She urges him to change his ways: to cut out excesses of diet, to take gentle walks in the woods, to enjoy the beauty of the planet, and above all to find a new sense of meaning. She supports him in this new life, helps him to find a new way, and scolds him if he tries to go back to the bad old ways.

Peter Laugharn Firelight Foundation, USA
In late September, while the global financial crisis was unfolding, I was visiting community-based organizations in Malawi funded by my foundation. You can picture it: a foundation from the North instructing painstakingly well-run shoestring village organizations in prudent financial management, while the people and institutions charged with managing and growing huge sums of money had been so breathtakingly reckless, with such disastrous consequences. If there was ever a moment to turn the tables in our discussions of accountability, and to require from the sources of our funding the same transparency, good faith, and reliable results that we require from our grantee partners, this was it.

For foundations themselves, I would remind them in the present crisis that the most useful foundation contribution is likely to be a combination of our two strengths: long-term vision and commitment, and short-term flexibility. Let’s use these two well, to complement government initiatives that are understandably focused on the very short term but may also take a while to roll out.

The Next Wave: Part Three
By Sean Stannard-Stockton
Originally Appeared: Wealth Manager Magazine, November 2008

This is Part 3 of 3. Please read part 1 and part 2.

The world of traditional finance is mature and well mapped. Clients do not expect their lawyer to file their taxes nor their CPA to provide legal advice. The finance discipline has been sliced and diced into numerous areas of expertise and for the most part, clients understand the role of each advisor and can identify their own needs and match them to the appropriate advisor. To the extent that clients need help identifying domain experts, they are accustomed to their wealth advisor helping them navigate the map of financial service providers. Within philanthropy and the world of social investing, this map has yet to be drawn.

To whom will your clients turn for advice on which philanthropic vehicle to create? Who will help a client family define its philanthropic mission statement? Who will analyze the financial characteristics of a MRI opportunity? Will the same person consider the social implications of such an investment? Philanthropy is still an immature industry. Philanthropy-minded clients need a concierge who understands the philanthropic landscape and can point them to the appropriate people and resources.

Just as a traditional client might ask their wealth manager for assistance in evaluating a mortgage or learning more about alternative investments, philanthropic clients’ needs are not limited to the management of their investment portfolio. The wealth manager who strives to become a philanthropic concierge must build a broad network of contacts within philanthropy and know where to turn when their client asks for help.

Philanthropic investing has another characteristic that makes the role of philanthropic concierge even more important than its counterpart in traditional wealth management. In philanthropy, the social return that giving creates accrues to society at large and not just to the individual client. This means that true philanthropic concierges will benefit their clients by connecting them with similar clients and be able to identify co-funding or collaborative opportunities across their client base and ultimately throughout the philanthropic ecosystem.

The Second Great Wave of Philanthropy is going to transform both wealth management and traditional philanthropy. We must be aware that as much as financial professionals can add tremendous value to philanthropic clients, philanthropy requires much more than business knowledge. Wealth managers who recognize the value they can provide to philanthropic clients will discover a whole new frontier to explore. Like any frontier, the landscape is difficult, but the adventure is worth it.

This is Part 3 of 3. Please read part 1 and part 2.

This is Part 2 of 3. Please read part 1 and part 3.

The Next Wave: Part Two
By Sean Stannard-Stockton
Originally Appeared: Wealth Manager Magazine, November 2008

Mission  related investing (MRI) is the term used to describe investments made by philanthropic entities in the pursuit of both financial and social returns. Unlike traditional socially responsible investing that relies on “negative screening”—the avoidance of public companies that do not pass certain social criteria—MRI implies proactively seeking investment opportunities that produce a blend of financial returns and social impact that are in line with the philanthropy’s mission. Still an emergent issue, MRI is characterized by limited deal flow, especially in deals that have minimums low enough to allow widespread participation. But MRI brings philanthropic advising directly into the domain of the wealth manager.

In the late 1990s, the board of the F.B. Heron Foundation posed the question, “Should a private foundation be more than a private investment company that uses some of its excess cash flow for charitable purposes?” Traditionally, foundations have erected a firewall between the investment side of the house and the program side. F.B. Heron was asking, “What about the 95% of our assets that are not given away each year?” The answer they found was mission-related investing, toward which they now dedicate 24% of their endowment.

MRI opportunities have been available in the debt arena for some time. Community reinvestment bonds are debt backed by loans made to build affordable housing or other community development projects. Banks have been required to make these sorts of loans since the Community Reinvestment Act of 1977. However, philanthropists are now exploring the full range of MRI, including equity investments. Heron makes grants to nonprofits seeking to revitalize inner city and rural communities. But according to the foundation, they also “invest in private equity funds that provide needed equity for commercial real estate projects in these communities (often in cooperation with community-based groups) and financing for businesses seeking to expand in or relocate to these communities.”

The interest in MRI is spurring product creation that over time should make MRI investing more accessible to private investors. San Francisco’s Good Capital is a venture capital fund that invests in nonprofits and for-profit entities with a social mission. Their goal is to provide positive but below market-rate financial returns and strong social impact. The Bay Area Equity Fund, managed by JPMorgan, is a venture capital fund that strives for full market-rate returns while investing in companies that generate high quality jobs in low and middle-income neighborhoods of the San Francisco Bay Area.

One of the problems of MRI’s equity side is the fact that a donor/investor cannot take a true equity stake in a nonprofit. Since nonprofit accounting has no entry equivalent to equity, all incoming money must be booked as revenue. But an effort is underway to change this. Nonprofit Finance Fund, which has long financed nonprofits via debt products, has recently launched NFF Capital Partners. This project, run by Capital One founding executive George Overholser, has developed the SEGUE accounting system, which “provides philanthropic investors with a clear and auditable record of the organization’s progress towards self-sustaining operations, along with a clear record of how much growth capital is consumed along the way.” SEGUE units are often referred to as “philanthropic equity.”

Just as today’s wealth manager creates portfolios of assets that fit the financial risk and return goals of their clients, philanthropic wealth managers will need to help their clients navigate the rapidly evolving MRI field. Matching financial and social risk/return expectations to each client will be a necessary role for wealth advisors hoping to provide clients with best-in-class service.

This is Part 2 of 3. Please read part 1 and part 3.

Today, May profiles Bill Somerville and briefly references the debate Bill had with Paul Brest at the Tactical Philanthropy Forum:

When it comes to giving away money, Bill Somerville doesn’t mess around.

Quite possibly the Bay Area’s fastest philanthropist, Somerville gives away $5 million a year to fight poverty, granting each proposal he likes within 48 hours…

…Leveraging donations from wealthy Bay Area families who are familiar with his work, Somerville runs his three-person community foundation like a $10 million venture capital firm: taking risks to invest in bright nonprofit leaders and their startup charities…

…Somerville’s main complaint about traditional, top-down community foundations is that they wait for the proposals to come to them instead of searching out innovative charities.

If grantmakers left their offices more, they’d build relationships with nonprofit leaders and discover programs to fund, rather than being passive and possibly missing some of the best chances to have the most philanthropic impact, he says.

You can read the full article here.

This is Part 1 of 3. Please read part 2 and part 3.

The Next Wave: Part One
By Sean Stannard-Stockton
Originally Appeared: Wealth Manager Magazine, November 2008

In 1975, the SEC deregulated brokerage commissions and set the stage for Charles Schwab & Co. to create the discount brokerage business model. By unbundling the sale of advice from execution, Schwab fundamentally changed the wealth management business. Today, the intertwined worlds of philanthropy and finance are undergoing a similar shift that is transforming the wealth management industry.

Using a model similar to the full service brokerage business, community foundations have long bundled philanthropic advice with execution. In 1992, the Fidelity Charitable Gift Fund—in a comparable move—unbundled philanthropic advice from execution. By eliminating advice on which nonprofits to support, it was able to offer a low-cost product that competed with community foundations.

This seismic shift is just one indicator of the way the lines between wealth management and philanthropy are blurring. Today we are in the early stages of making philanthropy a core wealth management service.

Over the past 30 years, the wealth management industry has been radically reconfigured to serve the needs of the Baby Boomer generation. For much of that time, Boomers themselves focused on the process of saving for retirement. The Center on Wealth and Philanthropy at Boston College predicts that the next 40 years will see a $41 trillion wealth transfer between generations—the largest transfer of wealth in history. Over $6 trillion of this fortune is expected to go to charities.

Even while this shift in priorities marches forward, some wealth managers remain stubbornly focused on helping clients retain their wealth. The business is structured to encourage advisors to discourage philanthropy, and many financial professionals lack the tools needed to assist their clients with charitable giving.

In many cases, advisors simply hand off the responsibility of dealing with the client’s philanthropic impulses. While collaborating with lawyers, community foundations, CPAs and nonprofit planned giving officers might seem like a good solution, the fact is that investment management of philanthropic assets has specialized needs.

Interest in philanthropy among high-net-worth individuals has been growing for some time. But it was events of 2006 that truly introduced the modern approach to philanthropy into the consciousness of the affluent. In that year, Bill Gates announced he would be stepping down from his full time role at Microsoft to work on the Bill and Melinda Gates Foundation. Warren Buffett quickly followed with the announcement that he would give the bulk of his wealth to the Gates Foundation. This event was the tipping point in what I call the “Second Great Wave of Philanthropy.”

This phrase describes the resurgent interest in philanthropy that follows in the footsteps of Andrew Carnegie and John D. Rockefeller, who created the First Wave. While Carnegie and Rockefeller did much of their giving posthumously and thought of it separately from their business life, the Second Great Wave is characterized by the trend of giving while living. Modern philanthropy follows the leads of people like Gates, who decided to quit business to focus on philanthropy, and Buffett, who decided not to wait until his death, but to give away the vast bulk of his fortune now.

But the importance of Gates/Buffett is not simply the amount of assets in play. Instead, the Gates/Buffett announcement will come to be seen as a clarion call that encouraged people in all walks of life to embrace “giving while living” and ended the traditional decision to give to charity only at the end of one’s life.

But apart from “doing good,” both Andrew Forrest, Australia’s richest person, and Buffett cited another trend: The desire not to harm their children by plying them with too much wealth. Buffett’s mantra is to give your children “enough so they can do anything they want, but not so much that they can do nothing.”

One of the major concerns of today’s high-net-worth families is the worry that too much wealth will spoil their children. Today many families are seeking to give their children the “right” amount of wealth. There is plenty of evidence such as that presented in the book Philanthropy, Heirs & Values, by Roy Williams and Vic Preisser, (2005, Robert D. Reed Publishers) demonstrating that the best way to pass assets on in a way that preserves the wealth but does not spoil the children, is for the entire family to engage in philanthropy together.

The result is to shift philanthropy away from being a concern primarily of estate planners, who, since most giving was in the form of bequests, traditionally played the role of philanthropic advisor. “Giving while living,” on the other hand, shifts the philanthropic advisory role squarely onto the shoulders of wealth managers. And so we see that philanthropy is a core element of wealth management in a post-Gates/Buffett world.

Why, then, have some wealth managers been so slow to respond to their clients’ growing interest in philanthropy? The primary issue is that large wealth management firms see philanthropy as a secondary customer service offering rather than a primary question of asset allocation. These still view philanthropy as akin to the touchy-feely family office/concierge service that some very high-end wealth managers offer. At the same time, major donors are not accustomed to paying for philanthropic advice. These two facts combine to create an environment where wealth managers view philanthropic consulting as a cost center with no associated revenue.

In a world where most families with investable net worth above $10 million give $50,000 or more per year to charity, clients are being deeply underserved. They are paying far more in taxes than they should, and they are missing out on the opportunity for their giving to have far more impact. In the coming decades, failure to offer philanthropic advising will be akin to a wealth manager professing ignorance of retirement planning.

However, simply understanding private foundations, donor advised funds and charitable trusts will not be enough. At least some wealth managers already have this expertise. But simply helping clients set up these vehicles is nothing more than tax planning. True philanthropic planning must embrace the growing convergence between financial products and giving opportunities and help their clients navigate the philanthropic landscape.

This is Part 1 of 3. Please read part 2 and part 3.

The global financial crisis has forced many donors to scale back their charitable giving, and nonprofit organizations are bracing for more severe reductions in 2009 and beyond. It is now more important than ever that philanthropists develop a focused strategy and strive to maximize the impact of their charitable dollars. Based on five years of research on a dozen of America’s top-performing nonprofits, here are four smart strategies for donors who seek to optimize social returns this year:

• Fund safety-net services and policy solutions
• Give fewer, bigger grants — without strings attached
• Leverage social innovation
• Look beyond conventional charity ratings

The article explains each bullet point. Most end of the year stories like this that run in major papers tend to focus on overhead expense ratios and actually encourage donors to fund organizations that have limited capacity (in direct opposition to the Hardvard Business Reviews suggestion that donors “invest in good overhead”). Leslie knows her stuff and it is great to see the Washington Post (who has recently named a full time philanthropy reporter) join the growing ranks of major papers who are starting to take philanthropy seriously.

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.

New Way To Rate Charities Sought
An alliance of prominent philanthropists and entrepreneurs is developing a rating system that they hope will radically alter the way donors evaluate whether a charity is worth their money.

The Social Investing Rating Tool would assess not only how nonprofit groups spend their money but also whether their work is making a difference. The goal is to encourage donors to think more like investors — to consider their charitable donations social investments, complete with risks and responsibilities.

“There are commonly accepted metrics to be able to say this is a good corporation or a good restaurant or a good movie, but there are none of those metrics for the nonprofit sector, and there have to be,” said Robert Egger, president of D.C. Central Kitchen, who participated last week in the first meeting of the Working Group on Effective Social Investing.

Most people, when thinking of making donations, research charities on such Web sites as http://charitynavigator.org and http://charitywatch.org, if they check on them at all. But those sources limit ratings to financial considerations — the percentage of donations spent on overhead costs is one key criteria — which experts say fail to take into account the most important factor: whether the charity is doing any good…

…”The fact is that we’re in a massive financial crisis, so it’s more important than ever that people are giving their money to organizations that are successful,” said Sean Stannard-Stockton, a Working Group member who runs a capital management firm in California and writes a blog about philanthropy. “Donors have no good way to distinguish between an organization that does work they’re interested in and a great organization that accomplishes results they’re interested in.”…

…Members of the Working Group include heads of two of the nation’s largest philanthropic organizations — Brian Gallagher, chief executive of United Way of America, and Paul Brest, president of the William and Flora Hewlett Foundation — and leaders of direct-service organizations, academic institutions and corporations. All told, almost two dozen people from across the country met last week in Washington to begin discussing how to shape the new rating system…

…Ultimately, members of the working group hope that Charity Navigator or another independent group will analyze charities using the new rating tool and make results public through the Web. Information on which charities are underperforming, combined with the economic slump, is likely to result in the demise of many of those groups, members acknowledge — and some say that’s not a bad thing.

“America is still incredibly generous, but I see a saturated market with 2 million efforts all over the map,” Egger said. “The question is, how do we get to a point where we’re using all our assets with ingenuity and real purpose?”