As that continues, investors will need investment advisory services, like The Motley Fool, Raymond James, MorganStanley SmithBarney and others. They’ll seek advice on where to place their money to get maximum return on investment. There are companies providing such services today, but they all serve wealthy donors investing in our charitable sectors.
The need for this expertise will reach modest investors, just as Motley Fool offers a comparatively low-cost, web-based advisory practice for people who need not have millions in investible assets. They recommend buying, selling, holding or watching individual stocks.
I expect we’ll see the same spring up for charities, where recommendations will be made to invest in, avoid or watch particular nonprofits, and it will be a startling change for the U.S.’s roughly 1.3 million public nonprofits. An organization could find itself on a “do not invest” list. This also raises provocative questions.
What will the sectors look like? Will they be mission based? Regional? I see them cutting across mission and geography, to give us the highest yield domestic violence shelter in San Antonio; or the “invest first” recommendations for mentally retarded and developmentally disadvantaged adult services in Illinois; or, what will cause the most turmoil, the “do not invest” advice for social justice in the southeast.
What will investment recommendations be based on? Most likely return on investment. Dr. Penna and I will discuss that this Friday.
What will ROI advice be based on? Probably outcomes and impact, and you’ll hear more about those different measures on Friday.
Rating services like Charity Navigator and GuideStar will be necessary to the investment advisory process, but will others enter that game? Will the advisory services perform their own ratings? Will they compete on the basis of their ratings models? Do the models have to be public, or might they be proprietary, as they are for today’s advisors in stock and bond markets? Will GuideStar and its ilk provide investment advice themselves?
This will all be a natural progression of charitable giving, as that phrase is replaced by “social investing” and as the pressure increases on charities to make, measure and show return on investment.
I don’t know whether this is good or bad. It is unavoidable: our nonprofit community it turning into capitalist nonprofit competition.
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20 thoughts on “If Donors Are Investors, They Need A Motley Fool”
Thanks for sharing your first-hand experience, Dorothy.
I disagree with Larry about donors working with a third party prior to investing in a charity. Unfortunatley not all donors are ‘discerning’ and request all the necessary information prior to making their donation. Look at all those who believed were real estate ‘experts’ and made poor judgment calls before the market collapsed. Many CFPs work closely with their clients on all apsects of their financial plan, including charitable giving. I personally worked with a client once who had benefitted greatly from his long-time employer’s IPO (to the tune of $40 million), and one of his first goals was to research and support a charitable cause with a significant leadership gift. He and his wife appropriately sought advice from their attorney and CPA as well. As a team we provided guidance and input into the decision making process.
Another example is the client who is considering a Charitable Gift Annuity or a Donor Advised fund, iwhich both can vary in fees, restrictions, distributions, etc.. For an astute advisor who has engaged the services of a financial planner it would be unwise not to discuss this part of their plan.
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Great conversation! In the changing philanthropic climate, it seems obvious that something has to give. Fewer dollars at the table and greater need in the economy means that what’s coming in the door has to come in smarter and in a much more targetted way. The online services now are a really good place to start, but fail to tell the whole story…or even to compare apples to apples.
Grassroots organizations are often the most efficient channel to address social issues, but require a much more hands-on approach to due dilligence. Case in point, the overhead costs of a shelter for pregnant women will have significantly inflated administrative and staffing costs when compared to a regular shelter for women. There is no way around, if for no other reason than for the strict government regulations for maternity homes. It takes a trained eye to interpret that data in a way that gives a fair picture of the worthiness of the shelter.
The other problem I see is that, while nonprofits do need to be run efficiently, as Kathleen said, the returns are the successes of the organization…the degree to which they actually accomplish their stated Mission. Some of those accomplishments are difficult to quantify. For those serving the complex needs of the homeless, for example, the nature of the problem makes longterm tracking hard to do, and “success” may be defined as simply “preventing further worsening of someone’s plight. How can you quantify what DIDN’T happen? How do you take into account this type of reality when evaluating “success?” Or do you simply not entertain donating to organizations that serve the most difficult of issues. It seems that this is where experience is required to really evaluate the potential of the investment and the return on investment afterwards. I just don’t think that due dilligence process can always be boiled down to something “countable” like standard investment evaluation.
Adrian, It is possible that a nonprofit was able to raise all of their money from their boardmembers or the organization was endowed by a wealthy family, but I too find it suspect. I was wondering which advisory organization rated higher marks for the zero cost fundraising. Nonprofits are just as viable as any business and require the same overhead to run (e.g. facilities, utilities, and payroll) and I find it inconceivable that nonprofit organizations are believed to be able to operate without any costs and that 100% of a donors contribution can go to fund an organization’s programs. It is the responsibility of these philanthropic advisory groups to educate people about the nonprofit organizations, their programs, and an acceptable range of cost to operate.
Hmm – I’m singularly unimpressed by the work of these organizations as many of them don’t seem to understand the first thing about the economics of nonprofit organizations. At least one of them awards top marks to organizations that claim to have zero costs of fundraising. So in other words if you outright lie – you graduate with honors. I’ve no problem in principle with a new generation of advisors, but we need to be absolutely sure they know what they’re doing.
I like that, “. . . their returns are the successes of the organization . . .” Thanks.
Stewardship, accountability, and truly DONOR-CENTERED. No more negotiating or half-truths about where the gift is applied. No more wheedling until the donor says uncle – usually for the last time. Donors are investors, their returns are the successes of the organization, and we have a obligation to treat them with respect. Besides, it’s just good business.
Joel, thanks for sharing what’s coming in Australia. You’re a good guy to advocate something helpful to charities but detrimental to your business.
It is also worthwhile acknowledging that for many Boards the added compliance and responsibility associated with managing money is seen as overly onerous given what for many is a relatively small impact. This is particularly true for smaller NFPs or charitable foundations.
Here in Australia the rules are set to change (with the launch of a centralised NFP commission in July next year), but broadly speaking the rules are along the lines of: (a) you must distribute 4% of your assets each year, and (b) you must maintain the inflation-adjusted value of your portfolio.
(this is an overly simplified summary of the rules & regulations!)
To meet these expectations we see philanthropic organisations ‘chasing’ returns on their investments; the result being speculative portfolios, high fees, and high anxiety! This does not help to deliver outcomes.
One approach that we would like to see governments adopt is providing an annuity-like product whereby NFPs could invest up to a certain amount (say, $2 m?) into a government underwritten fixed-interest like investment.
As a specialist asset and risk consultant to the ‘Third Sector’ this would almost certainly have a significant and detrimental impact on our bottom line, and could even see the end of my company. I see this as a small price to pay for sector-wide reform!
Tony and Clive, you each touch on an important issue affecting the NFP sector. Clive your view is representative of the bulk of small NFPs (liquid assets or turnover less than $10 m pa). The perception seems to be that “we’re NFP, therefore a profit (or profitability) would compromise our core ethic”. Unfortunately this perpetuates inefficient and ineffective organizations. Prudent asset management can help to secure and sustain long term cashflows, contingency funds, and scale for operational and outcome-focused efficiencies. Large ($50 m+) NFPs understand and embrace these principles
Thanks a lot, Larry. When the donor is an investor, comparing a number of charities to round out her portfolio, she may need professional advice. Companies like Rockefeller do it for the wealthy now.
Not so fast. I don’t know a donor, foundation or city, state or federal funder who would use a third party to assess the “value” of a nonprofit before contributing. They will do their own due diligence and request the appropriate documentation and ask the appropriate questions before investing. Just like Charity Navigator and Guidestar, which are deeply flawed tools for evaluating anything but only the simplest metrics, a Motley Fool approach will never be satisfactory to the discerning donor.
I’m using the for-profit sector only for comparison. Outcomes related to charitable missions remain the objectives for the charitable sector.
Thank you for that resource, David. I did not know about BBB NYPAS.
I do not believe what I have just read. Investment in NfP organisations should not be based on what can be made in the way of profits. If you want profitably then invest in stock. The whole concept of contributing to NfP funding or through the giving of time is giving back to our communities in some way.
Charity Navigator and Guidestar are two fantastic resources for people to use to help make decisions with their philanthropic contributions. One other I wanted to mention is the Better Business Bureau which is long known for consumer protection. In 1986 they established the New York Philanthropic Advisory Service. They review hundreds of non-profit organization’s tax filings, financial reports, annual reports, and solicitations. They issue an online report, the Online Giving Guide which is available to anyone, with their summary of the charity’s mission, leadership, programs and activities, and their financial information.
In addition to BBB NYPAS they also have a national review called the Wise Giving Alliance. They produce a quaterly report called the Wise Giving Guide which reports on charities that meet their standards for charity accountability. The Wise Giving Guide does not rank charities, but provides information to educate donors before they make their contributions.
Yes, Clare, the entire organization must be committed to outcomes assessment and sharing data. Thanks!
Impact reporting is of growing interest here in the UK.
Stewardship yes, but this involves the whole organisation, not just fundraising. We need monitoring and evaluation, impact reports on services delivered and the difference we have made. Return on investment is not just how we’ve spent the money, but what outcomes we have achieved with it.
I totally agree with you that there is going to be increasing demands for charity evaluation tools. I have built one for Canadian donors that is being used by wealth managers and financial institutions and there is a free version at Place2Give.com.
I’ve been playing with the evaluation tool and settled on one that evaluates donor giving habits and matches those to the way that charities implement programs. It’s almost like the e-Harmony of charities. The reporting that we generate for financial service providers is called the Donor Link Charity Index(TM) and it is customized to each donor. What’s been interesting to me is how people self identify with the type of donor they are and how they search and identify with the charities that they ultimately support.
Giving to charity and the way that the charitable sector is set up has generated lots of complex problems. I don’t think that this THE ONLY solution to the charity/philanthropy equation, but I do believe that the more information that is provided in easy to digest formats the better equipped society will be in determining the needs and deliverables (i.e. accountablities).
Love your post! Thanks for sharing!