This article is the second in a two-part series focused on ways advisors can help their clients feel secure about their philanthropic investments.
The sudden demise of two prominent social service organizations-the Jane Addams Hull House Association of Chicago and the YWCA of the Greater Triangle in Raleigh, N.C.-early this year highlights the severe challenges nonprofits face in this unstable economic environment. In both cases, donors were blind-sided by the charities' closures; they had believed in the veneer of vitality the organizations promoted. The fact that these closures happened in quick succession has triggered concern among donors. After all, the unexpected failure of one organization can lead donors to question all of their charitable contributions.
Advisors who are equipped to help their clients give confidently during these difficult times provide a valuable service that strengthens client relationships and differentiates their advisory practice. The following are a few concrete tactics that advisors can share with clients to ensure that they make informed and effective philanthropic investments.
Due Diligence
Hull House and the YWCA both showed signs of trouble: an over-reliance on government funding, decreasing revenues, mounting expenses, and weak leadership. To recognize these kinds of warning signs, donors must proactively examine an organization's financial and programmatic operations.
Unfortunately, studies indicate that relatively few donors conduct meaningful research into the organizations they support. This is particularly true if an organization is well known. Findings from Hope Consulting's Money for Good II donor survey, released in December 2011, indicate that while the majority of donors want to give to reputable organizations that make the most of their gifts, only one-third conduct research on an organization before making a contribution.
One of the most effective ways to get meaningful information from organizations is to request a written proposal describing the work for which they seek funding. In addition, advisors can encourage clients to review recent audits or Form 990s, request a list of the organization's funders, compare the projected and actual budgets, and learn more about the boards and staff leadership. This puts donors in a position to notice problems such as an over-reliance on government funding, the charity's inability to meet expenses or ineffective leadership. Nonprofit financials are often complicated, so tools such as Guidestar and the Nonprofit Finance Fund's Financial Scan can help donors translate financial data into meaningful and accessible information that sheds light on an organization's long-term sustainability.
While reviewing proposals and financial documents is helpful, nothing compares to seeing things first-hand to get a good understanding about the state of a nonprofit. Going to organizations and meeting with the staff, board and program beneficiaries are often important steps in deciding whether to fund a particular nonprofit. By observing the organization in action and conversing with staff, donors are better able to formulate accurate perceptions about management effectiveness, board engagement and the organization's ability to stay nimble, survive and grow. If clients are uncomfortable with or unavailable for in-person visits, consider bringing in a philanthropic advisor-a professional with extensive nonprofit expertise who can provide tips on how to maximize the effectiveness of site visits and how to avoid common pitfalls that can compromise donor-recipient relationships.
Open Relationships
In the absence of trusting relationships with their donors, nonprofits often fear scaring donors away with the difficult truth about finances. The Nonprofit Finance Fund's 2012 State of the Sector survey revealed that only one in five charity leaders feels comfortable talking with donors about cash-flow concerns; only 6% are comfortable talking to individual donors and foundations about debt. This lack of transparency hinders a donor's ability to know when an organization needs help.
Advisors should encourage clients to cultivate strong partnerships with grantees-ones that are based on mutual respect, clear communication and a commitment to learning from each other. Nonprofits are less likely to sugarcoat things when donors have laid the groundwork for candid dialogue. Donors must be careful, however, to not run away too quickly when an organization shares its concerns. Sticking with an organization during difficult times and taking an interest in constructively addressing its challenges shows that a donor is truly invested in the organization's long-term success.
Capacity Building
While accounts differ about how much donors knew about the struggles of the YWCA and Hull House and how they may have tried to help, many nonprofits facing similar financial hardship have remained viable because donors have made targeted gifts for capacity-building efforts such as hiring fund-raising consultants, updating software systems and providing additional training to development staff.