“Billions are wasted on ineffective philanthropy. Philanthropy is decades behind business in applying rigorous thinking to the use of money.” – Michael Porter
One of the most unique aspects of the United States is how charitable we are as a country. There are now over 100,000 private foundations in the U.S. While the biggest funds tend to get the most press in the nonprofit world, almost 99% of these funds have less than $100 million in assets.
The sheer number of charitable organizations is something of a double-edged sword. More people are looking to do good with their money but there’s now more competition than ever for charitable dollars. The potential for organizational issues at these nonprofits will grow as the pressure increases. The government has already begun to cut funding to certain areas and with difficult budgetary decisions to be made in the years ahead I wouldn’t be surprised to see this trend continue.
The competition for donors will surely be heating up as more nonprofits look to step in to fill that void. In the past people would simply write a check to United Way or the Red Cross. As we begin to see the enormous wealth transfer in the coming decades there’s going to be a huge shift away from this traditional model of giving.
People are going to want to be more involved in their philanthropic giving. They’re not going to simply give money away because of a feel-good idea. They’re going to want to see actual results with the money they give away and they’re going to want to give to organizations who are operationally efficient. The stereotypical smaller nonprofit is usually known for running something of a disorganized business model even though they mean well. That model won’t fly in the years ahead because the modern day philanthropist is going to require a modern day philanthropic organization.
The modern day philanthropist is going to want to be sure that the organizations that they give to are going to be stewards of their capital. Board members and donors are going to need more education about how their money is being invested than ever before. They are going to want to be involved and have regular communication to know that their money is being taken care of.
And it’s going to be a much more entrepreneurial giving model. The behemoth foundations are much more risk averse in the projects they’re willing to fund. This is an advantage that the smaller nonprofits have. They can act as something of a venture capitalist in the charitably giving space by helping people and organizations that larger donors may not by getting in on the ground floor. Once these projects are more established the big money will eventually come pouring in from the larger organizations.
This is one of the reasons why we decided to focus our institutional asset management practice on the small-to-mid-sized nonprofits. Not only do these organizations have fewer resources and time to commit to managing their money, but they have the ability to affect change in a very real way. It’s an exciting space. The multi-billion dollar funds have all of the resources at their disposal that they wish. They’re constantly getting donations coming in. They don’t really need much help.
With interest rates at or near historic lows and more competition for donor dollars than ever before, small and mid-sized nonprofits now face risks from all directions for their future viability. In the last financial crisis many of these organizations were mismanaged and either went out of business or had to cut their funding just when those in need needed it the most.
We see the coming changes in the philanthropic model, which is why we have also partnered with firms that help nonprofits from an organizational perspective and give donors the ability to measure the impact of their donations. The operations of the business and the investment portfolio have to be in sync with one another to give the nonprofit the best odds of achieving their mission.
To sum up, here’s what we think the the modern day philanthropist will want to do:
- Increase the measurable impact of the dollars they give away
- Be more involved in tracking the money they donate
- Fund more innovative social programs that can offer sustainable results
- Manage the risks inherent with this social innovation
- Understand how their money is being put to work from a financial and philanthropic perspective
I think the Pacific Northwest is further ahead than most parts of the country on this mindset. That’s why I was so thrilled when RWM added a Portland office (Joey Fishman). It’s an exciting time in the region as people and organizations are constantly figuring out new ways to do more with their money and resources.
Next month we’re going to be spending an entire week — March 14th-18th — meeting with current and prospective clients in Portland. We’ve already had a huge response from people reaching out, but we have a few open slots left to meet with institutional investors, family offices or individuals to talk about our thoughts on all of this and how we manage money in this space.
Send email to Info -at- RitholtzWealth -dot- com, with the subject “Portland Trip.”
Or call 212-455-9122 and ask for Erika.
Further Reading:
Why We Expanded Our Wealth Management Firm to Portland This Year (Reformed Broker)
