Philanthropy:
The Business of Giving

Identifying the Hidden World of Philanthropy

By Sean Bailey
horsesmouth

Here's a new place to find money in motion: philanthropy. Year in and year out, Americans demonstrate a remarkable tendency to give money away. Driven by altruism and tax policy, total charitable giving in the US topped $143 billion in 1997, up 7.5%.

That's good new for brokers. Both the donors and recipients of philanthropy each have a variety of financial services needs. And the broker who understands how the philanthropic and nonprofit worlds operate can work successfully with some of the community's most powerful and influential leaders.

UNDERSTANDING THE LANDSCAPE

So, how does a broker begin exploring the local philanthropic scene? First, you'll need an understanding of the two types of organizations that make up the charitable sector: nonprofits and foundations. Here's a quick look at the organization types and some opportunities you can cultivate.

1. Nonprofits

These groups are organized under the IRS tax code 501(c)3 and come in all shapes and sizes. They typically exist to fulfill a charitable need in a community and may be as tiny as a hand-to-mouth soup kitchen and as powerful and influential as a research hospital, private university or religious organization.

The nonprofit sector has been one of the fastest growing areas in the economy during the 1900's. In 1996, nonprofits accounted for 7% of the nation's workforce and had revenues of $670 billion, according to Giving USA.

Every nonprofit has its own unique need of financial services, but all of them are in the hunt for money to support their work. That means they are constantly working on plans to raise money: building endowments, launching capital campaigns and educating the public about their work and how they can support it. Board members and fundraising committee members of nonprofits typically are high-wealth professionals.

Nonprofits need:

• Advice on how to receive gifts of stock and bonds,, an increasingly common practice in the current bull market. And once such gifts are received, they need help deciding what to do with the assets-hold or sell. Over time, organizations need help understanding risk and asset location.
• Advice on how to manage their cash. It's not uncommon to discover a nonprofit keeping a significant cash gift or large cash reserve in a money market fund or checking account.
• Help creating retirement plans. As the nonprofit sector grows and is staffed by former private-sector employees, nonprofits discover they need to create 403(b) retirement accounts, the nonprofit version of a 401(k).
• The advice and support of businesspeople. Nonprofits are not very business-savvy, but increasingly donors and foundations want them to be more entrepreneurial and watch the bottom line. Brokers can use their business experience and expertise to help nonprofits with issues such as business planning, budgeting, accounting, and marketing.
• Help fundraising for both big and small gifts. Your clients, in need of strategic tax deductions, may call for advice about which organizations in the community could benefit most from a donation. Getting a major gift donor and a local nonprofit executive together for an informational lunch that ultimately leads to a gift is a great way to build credibility and contacts in the community.

2. Private foundations

A private foundation is typically formed through one large tax-deductible gift made by an individual or family, or a series of gifts made over time. The principal fund is invested and grants to nonprofit organizations are made from investment income. Foundations may exist for a variety of purposes. Their missions may be vague, such as improving humanity, or highly specific, such as preserving Sequoia trees in northern California. All private foundations have one thing in common: in order to maintain their tax status, the IRS requires them to give away at least 5% of their assets each year to charitable nonprofits.

Like nonprofits, foundations come in many shapes and sizes. Most of us recognize the names of the nations' largest and oldest foundations, such as Ford, Rockefeller and Carnegie. These foundations were formed as part of the tax strategy for the leading oil, steel and transportation industrialists of the era. These days, as the technology and entertainment sector booms, similar new foundations are being formed with names like Gates, Turner, and Spielberg.

Broker opportunities: Private foundations had more than $266 billion in assets under management in 1996 and the number of new foundations and assets growth has been very strong in the last half of this decade. Brokers may find that:

1. Private foundations need help managing their money. Most foundations aim to operate in perpetuity and they need wise counsel on how to grow their asset base and how to re-allocate it as the market moves forward.
2. Clients want advice on their philanthropic options, such as creating their own private foundations, creating a charitable fund managed by the trust division of a brokerage firm or bank, or placing their charitable giving with the local community foundation.
3. Clients nearing retirement are ripe for giving. Clients from the Baby-Boom generation, expected to inherit an estimated $10 trillion in wealth from their parents over the next 30 years, are ready to act on their long-held, socially conscious beliefs. Now is the time to put their money where their mouths once were in the Sixties. The broker may be called upon to help them develop their philanthropic financial plans.
4. The boards of private foundations present great business opportunities. Board members, typically, are family members and friends of the person whose wealth created the foundation. Many are successful businesspeople and nearly all have their own investment needs.

THIS ISN'T EASY MONEY

Charles K. Re Corr, a vice president in the Raleigh, North Carolina office of a major retail broker, has been working the nonprofit sector for more than 26 years. "This is a huge, untapped area, if you look at the money that goes into the sector," he says. There's a tremendous opportunity to build book in this sector, Re Corr says, but it takes time and patience on the part of the broker. He warns that this sector has its own priorities and approaches to doing business, which can frustrate a broker who doesn't know the terrain.

Re Corr offers this advice for the broker considering working with nonprofits:

• Believe in the cause. Don't work with a nonprofit if you don't believe in its work or have no genuine interest in the field.
• Don't expect quick action. The time frame for making decisions is much longer than in the for-profit world. Nonprofit and foundation boards may only meet quarterly. A broker may come to a meeting to make a presentation about managing the organization's assets only to watch the meeting meander and the presentation delayed until the next time.
• Remember that nonprofits and foundations don't think like businesses. A bottom-line mentality is unusual for nonprofit organizations (hence the name "nonprofit").
• Anticipate conservatism. It's not uncommon to discover a nonprofit with cash assets almost exclusively in a money market, even though, given the organization's long-term goals, it would make more sense to put a significant portion of the funds into equities.
• Keep expectations clear and fees fair. If you raise money for a nonprofit, make it clear that you expect you or your firm will manage the money. Then charge the lowest fees you can afford.
• Keep your hands clean. If you sit on a nonprofit or foundation board, don't do business with the organization-it's a conflict of interest. Reap the rewards of contacts, visibility and credibility. Business will flow from there.
• Be prepared for politics. The majority of a board or committee leaning toward making a specific decision may find itself completely turned around by one vocal member, regardless of the soundness of his argument. People don't want to rock the boat.