ELITE ADVISOR BEST PRACTICES
Personalized Philanthropy: Fixing the Flaw in Your Business Model - Part Two
Doing the right thing for charitable clients does not have to kill your business model. Three powerful gift designs show you how.
By Steven Meyers
- Show clients how personalized philanthropy enables them to tap into their lifetime charitable capacity at precisely a moment of their choosing—creating charitable impact and recognition that begins immediately and scales up over time.
- See how personalized philanthropy converts your fear of “divestor” clients into a cadre of “investor” philanthropists.
- Techniques such as the virtual endowment, philanthropic mortgage, and step-up gifts can dramatically change the way that you, your clients and their beneficiaries think about giving.
In Part One of this article, we discussed the importance for advisors of setting a balance between serving a client’s desire to be charitable and serving their own model of retaining assets under management. Here we’ll explore three “killer apps” of personalized gift design and the nuances of spending rate.
Three personalized gift designs—from the advisor’s perspective
To discuss the full impact of personalized philanthropy is a bit beyond the scope of this article. However, American College’s Phil Cubeta gets the difference that personalized philanthropy can make in the practices of financial and investment managers.
“Instead of making a huge gift, for an endowed program, and having the charity hold the principal and spend the income (‘the spend rate’) on the program, the newer idea is for you—the advisor—to hold the money and dole it out in stages and installments, as the work is performed.”
That should make business sense, right? “Rather than give the charity the whole lump and trust it in perpetuity, we pay it as they go along,” added Cubeta. So now, think about how this new “technology” of gift design could change how we connect to our work and our world.
The three personalized gift designs—killer apps
1. Virtual Endowment. Here a donor combines, and in effect “chains together,” a series of current gifts of a spending rate amount that will maintain a program with a future gift (a bequest or other balloon payment) to endow the program. For the first time, this approach means that even modest gifts can matter much more than you and your clients ever would have thought.
2. Philanthropic Mortgage. Here a donor’s annual gift commitment covers an amount greater than that needed for maintenance of the program (the “spend”). The surplus amount is used to gradually build equity in an endowment or a legacy fund until it is fully established and able to sustain the program for the future. You won’t have to wait until your gift is fully paid to enjoy being a benefactor. You don’t have to pay for your new house before you move in, do you? It’s the same idea in this personalized and advanced form of philanthropy.
3. Step-up Gifts. Here a donor establishes a gift at a certain starting level with an outright gift or, alternatively, current spending rate annual gifts ... and then steps it up. The impact begins now, with the assurance that scaling up, you will achieve your greatest goals over time (e.g., growing your support from a master’s scholarship to a doctoral scholarship to a professorial chair).
Endowment and spending rate
Endowments, very broadly speaking, are gifts such as investment funds in which the principal is expected to remain intact while investment income is used for charitable efforts. Donors can also express specific preferences for the use of the funds, leaving ultimate discretion to the organization. Charities usually designate a “spending rate” as a certain percentage of the assets to be used each year, which may also include interest and principal as necessary to fulfill that purpose.
When you focus on core needs and the heart of the mission, what matters to most donors is finding a source of funds to enable the mission to be carried forward.
Of course, you can support the mission by making current contributions that are to be expended immediately, or you can make a major outright gift when they have a special campaign, or you can make a planned gift through your estate plans. But often, an institution’s most highly valued source of such future streams of support comes from endowment—or endowment-like—gifts.
You might think about endowments as a “machine” for producing annual support. Endowments are often established through planned gifts such as bequests or charitable trusts, but can also be funded with outright or major gifts.
The link between current and future needs seems compelling, natural and organic. However, in the conventional fundraising and development office, that link is broken. Conventional fundraising and institutional advancement offices divide donors and fundraisers into separate departments—channels for annual, major and planned gifts. The connection between current dollars and future dollars is often severed or never even established.
The personalized philanthropy breakthrough
Personalized philanthropy is a radical rethinking of endowment, as well as annual/major/planned giving. The strategies are all about repairing and restoring this connection by eliminating the channels and gaining a clear view of the donor’s big picture over their lifetime of giving. That allows us to access the entirety of a donor’s capacity and devise new kinds of gifts that can actually bridge the gap between the current and future dollars. That means we can target and design gifts that can meet the organization’s most enduring and important needs.
The vastly underestimated power of spending rate
Each one of the game-changing strategies above leverages the power of what institutions call spending rate, the percent of the corpus of your gift that can be expended annually to support your program.
As noted earlier, the entire point of endowment and other approaches for building legacies is to create a stream of annual revenue to sustain your program. While it may not be possible to obtain the corpus initially, it may be much easier to provide that stream of annual gifts to maintain your program. In fact, you may already be giving the funds, though in a less decisive or intentional way.
With this simple approach—focusing on the stream of annual gifts first—many programs can be established that would otherwise never see the light of day. For example, a traditional endowment of $100,000 produces $5,000 of spending, with a 5 percent spending rate. Many more donors can give $5,000 per year than $100,000 as a lump sum. Multiplied by ten or 100, it still works. Thus, even modest annual gifts (in the context of lifetime and estate giving) can have all the impact and power of major gifts. Spending rate is magic.
If the annual spending commitment precedes the formal establishment of the endowment, then who is to say that is not just as valuable as having the endowment itself? Take a look at personalized philanthropy. And then take another look at your business model.