Investing For Charity and Charitable Causes

The New Philanthropists

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. It’s very easy to look up the tax returns of similar charities on the Internet and then ask, ‘Why are you spending 35% of every dollar on administrative costs when this other charity only spends 25%?

New Generation Takes Over

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. To this point, 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. These donors are consulting with their Investment Advisors to develop strategies designed to realize the maximum potential of their charitable dollars.

Blended Value Strikes a Balance

One of the more innovative examples of the donation-as-investment is “blended value” investing. It’s a form of strategic philanthropy in which you invest in a mission, and expect both a financial and a societal return. 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 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.

Donor Advised Funds Provide Flexibility

Other donation models with an investment-driven component include donor-advised funds, and family, or private, foundations. Gifts to a fund 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. And while the decision about how to spend the donation ultimately rests with the charitable organization which has oversight of the fund, donors’ wishes are strongly considered and are frequently honored, unless there is a specific reason to deny the recommendation. Of course, the receiving organization must be a qualified tax-exempt organization and the donor cannot receive an unqualified benefit from the charity.

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. An Investment Advisor can be a key facilitator, explaining to families the resources and people (such as other professional advisors) they need to start a foundation.

Whatever philanthropic strategy a donor chooses, it’s important to set up regular meetings with a Financial Advisor to get your ambitious giving goals off on the right track. With open communication, donors are more likely to come away more informed about where their money is going, and more satisfied that it is being spent as intended.

The same premium on candor also applies to conversations with the groups receiving donations. Charitable organizations have become very responsive. They have to demonstrate how your donations will have an impact. It’s important for donors to have very focused conversations with the executive staff. Ask them to demonstrate how the impact of your donations will be measured, as well as how the charitable mission’s success will be evaluated.

Learn more about the charitable-giving products and services available through Frontwater Capital.

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