BERLIN – Many philanthropists today want something that charitable donors a few decades ago never asked of their beneficiaries: a stronger voice in how their contributions are spent.
“People are much more astute and sophisticated about holding nonprofits accountable,” says David Ratcliffe, Director of the Merrill Lynch Center for Philanthropy & Nonprofit Management SM, of this trend. “It’s very easy to look up the tax returns of similar charities on the Internet and then ask, ‘Why are you spending 35 percent of every dollar on administrative costs when this other charity only spends 25%?’”
But the desire for accountability is just part of what makes today’s philanthropists different from those who gave in the past. They also want to perpetuate the same entrepreneurial values that, in many cases, gave rise to their fortunes. To them, contributions should provide measurable returns.
People are looking at donations not just as contributions, but as investments in a solution,” says Ratcliffe. To this point, the 2007 Merrill Lynch/Capgemini World Wealth Report noted “a growing trend toward strategic, ‘investment-like’ giving aimed at maximizing societal return on investing.” Philanthropists are now giving their charities the same kind of disciplined scrutiny they devote to stocks and bonds.
One of the more innovative examples of the donation-as-investment is “blended value” investing. For example, someone may invest in a fund devoted to a particular cause, such as creating low-income housing. The investor would receive a fixed rate of return much like he or she would from a money market or bond fund. However, the rate would be lower than that of a conventional fund because part of the return would contribute to the specified cause.
An example of blended-value investing is the Calvert Foundation’s Calvert Community Investment Notes. With these investments, buyers select the investment term and a desired rate of return (0 percent to 3 percent); the lower the chosen rate, the more Calvert puts toward causes such as affordable housing and the microfinancing of entrepreneurs in the developing world.
Other donation models with an investment-driven component include donor-advised funds, or DAFs, and family, or private, foundations. Gifts to a DAF are donations to a charitable organization, which results in an income tax deduction. The donated assets can then be managed within the donor-advised fund, which is a tax-exempt entity. The primary attraction of these funds to involved philanthropists is that donors can plan and recommend the timing and amount of their gifts — and who receives them — at any time, says Ratcliffe. And while the decision about how to spend the donation ultimately rests with the charitable organization that has oversight of the fund, donors’ wishes are strongly considered and are frequently honored.
A private foundation can provide an even greater degree of involvement and control, as family members actively manage the investments and grant-making strategies. While private foundations require added time, administration, regulatory oversight and costs to operate, “they can be an excellent way to give money to a number of charities within a specified time or in perpetuity, according to the priorities the family sets,” says Ratcliffe.
Whatever philanthropic strategy a donor chooses, it’s important to set up regular meetings with a Financial Advisor to get ambitious giving goals off on the right track. With open communication, donors are more likely to come away better informed about where their money is going, and more satisfied that it is being spent as intended.
(The writer is a Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-9084.)