“The worth of a gift lies as much in the way it is offered as in its intrinsic value.”
― Aldous Huxley
For most of us, good fortune is something to be shared. Supporting worthy causes makes the world a better place and is a source of self-improvement. Charitable giving is generally a part of any financial planning.
Of course, charitable giving can also yield substantial tax benefits considering the manner and method of donation. However, just as with investing in stocks and bonds, due diligence is recommended in choosing the charities you may support.
Remember that charities are in fact businesses, even if they are run on a not-for-profit basis. Like any business, a charity has goals and fiduciary obligations. Charities operate on a “double bottom line,” being responsible for a healthy fiscal performance but also measurements of positive social impact. Just as with investing in a for-profit firm’s stocks, it’s still important to ensure that the money you put into a charity will have a good return on your investment (i.e., making sure the money you give will be efficiently put to good use) so your donated resources are not squandered.
What to look for
There are certain characteristics to consider in charitable giving. Key among these are the focus of the charity’s largesse, the quality of the organization’s leadership, and how a charity protects its contributors’ information (donor privacy).
In addition, there are financial metrics to be looked at, such as balance sheets, expense ratios, and how much of the funds raised go to the leadership’s compensation in comparison to similar charities.
The web is a wonderful source for information on charities. Here are three good sites: Charity Navigator (http://www.charitynavigator.org/), CharityWatch (http://www.charitywatch.org/), and GuideStar (http://www.guidestar.org/).
Charity Navigator evaluates two broad areas of performance: first, financial health, and second, accountability and transparency. “Our ratings show givers how efficiently we believe a charity will use their support today, how well it has sustained its programs and services over time and their level of commitment to being accountable and transparent,” their website says.
According to their website, CharityWatch aims to “research and evaluate the efficiency, accountability and governance of nonprofit organizations; to educate the public about the importance of wise giving; to inform the public of wasteful or unethical practices of nonprofits and provide recognition to highly effective and ethical charities; to advise CharityWatch members and conduct special investigations and evaluations of nonprofits; to expand and re-define our programs periodically to meet the continuing challenge of keeping the contributor informed.”
GuideStar gathers information about every IRS-registered nonprofit organization, both from the nonprofits themselves and other sources, such as public records of donation lists or the IRS Form 990 required from organizations with $50,000 or more in gross receipts. “We provide as much information as we can,” their website says, “about each nonprofit’s mission, legitimacy, impact, reputation, finances, programs, transparency, governance, and so much more.”
Characteristics of a good charity
The first characteristic of a good charity is transparency. A good charity should have tax forms such as the IRS Form 990 and some financial statements available for public review upon request. If the organization you are considering giving to will not make these forms available, that should be a red flag. For the organization to maintain tax-exempt status, most must file IRS Form 990. If the form is not available, the organization may not be tax exempt and any donations may not be tax-deductible.
Another important characteristic, one which is difficult to measure, is the quality of a charity organization’s leadership. Is the management team focused on their beneficiaries and team members? Do they compensate themselves in a reasonable manner (i.e., is compensation roughly in line with peers)? Is compensation based on long-term goals? How much time does leadership devote to the charity? If they are involved in other activities outside the charity, how are those activities separated from the charity? Otherwise, your donations may be going to other, unrelated activities than the ones you intend to fund.
One of the indications of quality of leadership is an independent review process for the CEO’s compensation. Sustainable, well-thought-out charities generally have a well-thought-out CEO compensation process that includes benchmarks against other similar charitable organizations. These compensation policies are often spelled out in the IRS Form 990.
Examining a charity’s financial metrics
Another important characteristic of a good charity is a relatively low expense ratio. The expense ratio is related to how much the charity spends on programs and services that benefit its constituents versus how much the charity spends on being in business and operating the charity organization, such as operating expenses.
Typical operating expenses include salaries, office expenses, and fundraising. Fundraising should be a key focus for due diligence. That is, if the charity spends more of its donated resources on fundraising than on helping the intended beneficiaries, it raises another potential red flag. As you review financial statements, it is important to note whether expenses are growing faster than donations. Not all charities with high operating expenses are unworthy, but a good charity would have a similar expense ratio to its peers.
Donor privacy
Just as some companies sell their marketing lists, charities may sell their donor list as a potential revenue source. Donors should have some assurance that their information will remain private and confidential and not be sold to other charities or marketing organizations without donor approval. There is nothing worse than donating to one cause and then receiving additional solicitations from other similar charities as your contact information is sold throughout a network of (sometimes fraudulent) telephone and direct-mail solicitors.
One at a time
We highly recommend that you make individual payments to each charity in a traceable form. Do not set up an automatic payment plan linked to either a credit card or a bank account. Each contribution should be handled as a one-time event.
Automatic payment plans can be very difficult to terminate, particularly with an uncooperative third party such as a bank or with the charity itself. Here’s a cautionary tale from one of our clients, who believed they were contributing to a charity that turned out to be fraudulent. When trying to stop the automatic payment plan the client had set up through their personal credit card, we encountered an issue with the credit card’s issuing bank. The local bank branch suggested that we contact the charity directly and have the automatic contributions stopped. We contacted the “charity” immediately; however, the automatic contributions continued. The bank branch informed us that even though our client had closed out the credit card and requested a new credit card with a new account number, the charity was still automatically linked and routed to the new credit card account number by the bank. The bank’s credit card division informed us that contributions charged would continue until the charity stopped submitting the monthly automatic bills. We called the bank’s credit-card fraud unit and complained. The client ended up closing the bank account altogether.
The local charity fundraising trap
Unfortunately, we have found that some local charities will align themselves to telemarketing organizations in exchange for a percentage of the funds raised after marketing expenses are met.
For example, the local fire department in town may link up with a marketing organization for a very small percentage of funds raised. On the surface, that local organization may look at those newfound funds raised as extra cash with no effort, but the contributors may be unwittingly disproportionally enriching the marketing company rather than their town’s own fire department.
Be careful to make sure that your local charity is getting the funds that you are sending in through marketing solicitations. It is often better to make a phone call, and if possible, send a check directly to the organization rather than through a third-party marketer. When you send a check directly, your charity will receive more of your money that can be put to the good use that you intended.
Do your homework
Responsible charitable contributors should handle their contributions in much the same way they would research their investments. Research into the charity is important. The more you know about the charitable organization and its management and goals, the greater the impact that your charitable giving will have. Talk to your financial advisor; they may be able to help in the evaluation process. The analytical skills are similar to those needed when examining investments.
If you have any questions about your favorite charity, please give us a call at 610-793-1001 and we will be glad to help you find your answers.
Disclaimer: While this article may concern an area of investing or investment strategy in which we supply advice to clients, this document is not intended to constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation or an offer to sell securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we and/or our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information.
Past performance should not be taken as an indicator or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. As with any investment strategy or portion thereof, there is potential for profit as well as the possibility of loss. The price, value of and income from investments mentioned in this report (if any) can fall as well as rise. To the extent that any financial projections are contained herein, such projections are dependent on the occurrence of future events, which cannot be predicted or assumed; therefore, the actual results achieved during the projection period, if applicable, may vary materially from the projections.