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Our New Charitable ‘Fund Family’

Americans gave an estimated $212 billion to charity last year, and will do about the same this year. A lot of that money will be diverted to additional fund-raising, or simply will be wasted by ill-managed, redundant or ineffective organizations.

But there are other reasons why donors often do not get their money’s worth of good works. One is the sheer randomness of charitable giving. We typically choose to support an organization because it addresses a problem that has touched us personally, such as an illness that afflicts a family member; because we have some other personal connection to the charity, such as to the schools we attended; or because it just happens to approach us at the right moment with the right message.

All of us sometimes make gifts for these reasons. But what about giving because you really want to accomplish something, and have the means to do it? How do you get the most bang for your charitable buck? If you are deeply committed to, say, freedom of expression, or feeding the hungry, or environmental protection, how do you find the charities that best address your concerns?

In other words, how do you apply a scientific or businesslike approach to charitable giving? That is the problem my colleagues and I set out to solve when we created our own new and unique charity, Palisades Hudson Charitable Portfolio, Inc. (PHCP).

PHCP lets its donors make “big-picture” policy decisions by directing their gifts among six charitable portfolio programs. The programs support humanitarian relief, wildlife and the environment, human rights, education, science and health, and culture and the arts. The accompanying story describes the objectives we have established for each of these programs.

Click here for the 2003-2004 Charitable Giving Program, which provides a detailed description of PHCP, each charitable program, and the charities that PHCP is considering funding.

Our objectives are broad, such as the promotion of “freedom of expression” in the human rights portfolio. To turn that sentiment into something practical, we first have to set some specific priorities. Do we mean freedom of expression in the United States, which already has First Amendment protections, or in other developed countries, or in the Third World? Do we mean print, broadcast, or other media such as fine arts? Do we mean political, social or commercial expression? Once we know exactly what causes we want each portfolio to support, we will seek out and fund the charities that we believe address our priorities in the most effective, efficient and innovative ways.

We conceived PHCP as a sort of mutual fund family for philanthropy. Just as a mutual fund family allows investors to create a diversified portfolio of professionally managed investments, we want PHCP to provide a diversified, professionally managed portfolio of charities that meet our donors’ philanthropic goals.

PHCP’s approach to philanthropy requires a great deal of hard work and soul-searching. Charities release a lot of data about their activities and finances, much like publicly traded corporations, but the tools for sifting and screening these data are not nearly as sophisticated. Just finding the charities you want to consider takes a lot of shoe leather.

Moreover, setting charitable priorities is a very subjective process, as in the judgments we need to make in my example about freedom of expression. For another example, consider the issues that surround health care. Do we concentrate our resources on prevention, basic research to find new treatments, or distributing existing treatments to people who need them? Do we address health problems that are common, so we can help large numbers of people even though there may be numerous other charities trying to do the same, or do we deal with problems that affect fewer people and thus attract less attention?

We cannot take the subjectivity out of the process, but we can eliminate the randomness. For each portfolio, we are developing a set of priorities to define the portfolio’s key objectives for the coming year. Those priorities will let us screen for charities that we want to consider funding. Some charities will be eliminated because the problems they address are not among our priorities.

Charities that get past this screening will be closely examined to see how well they address our priorities (the effectiveness test), how well they use their resources (the efficiency test) and whether they address our priorities in a novel way that can set an example for other donors and charities to follow (the innovation test). All of our recipient charities must be effective and efficient. Innovation, while not a must-have characteristic, will be useful as a tiebreaker. By supporting innovative organizations that set an example, we hope to make charitable giving in general more productive.

Who will make these decisions for PHCP? A three-member board consisting of Jonathan Bergman, Linda Elkin and me. We are the three most senior people at Palisades Hudson Financial Group LLC. We share a deep commitment to our firm’s core principle of providing unbiased, independent advice to our financial planning clients. We plan to make PHCP an extension of that service by helping clients implement their philanthropic programs as effectively as possible. However, PHCP is open to any donor, not just to those who are clients of Palisades Hudson Financial Group or our investment advisor affiliate, Palisades Hudson Asset Management, Inc.

Our staff support includes Shomari Hearn, an experienced professional who already has extensive experience with many tax and investment issues that PHCP will confront, and Ana Diaz, an associate who has experienced the non-profit world firsthand in her work as a child care social worker before she came to Palisades Hudson last year.

Several dozen investment advisory firms, including major players such as Fidelity, Vanguard and Charles Schwab, sponsor “donor advised funds” to facilitate charitable giving by their patrons. In a donor advised fund, a donor might make a contribution in 2003 and thus claim a tax deduction this year, while waiting until 2004 or later to specify one or more charities that ultimately will receive the money. Donor advised funds are useful, especially for year-end tax planning purposes, but they still leave the donor responsible for selecting the ultimate charitable recipient.

PHCP has a donor advised option, too. We think ours is a more powerful and flexible tool because it can be paired with our six actively managed charitable portfolios. A donor can initially place money in PHCP’s donor advised fund, and then gradually transfer funds to support our other options, as we announce plans for those options that the donor finds attractive. Or the donor can use the donor advised fund in the traditional way, directing disbursements to charities that address the donor’s personal preferences.

Every six months, PHCP will release a disbursement program that spells out the charitable priorities we have established for each portfolio option, and identifies specific charities that we intend to fund in the upcoming period. Our first disbursement program will be released in May. If we attract enough support, our first disbursements will be made in July. Donors and prospective donors generally will have six weeks after the release of a disbursement program to reallocate funds from one PHCP option to another, or to modify any previously scheduled disbursement program.

PHCP’s minimum initial gift is $10,000 in cash or publicly traded securities, including mutual funds. Subsequent gifts must be at least $5,000, and must bring the donor’s fund balance back to at least $10,000. Donors will be required to disburse at least $10,000 or 5% of their PHCP fund balance, whichever is greater, each year. Each donor can establish a disbursement program based on the size of the donor’s PHCP fund balance and charitable objectives, and an investment program to keep the donor’s PHCP fund balance invested at a level of risk that is appropriate to the donor’s disbursement plans and risk tolerance. We will provide a set of investment management options for the donor to choose from.

Donors who give through PHCP can be completely anonymous to the ultimate charitable recipients, or they can receive recognition of their gifts by naming their PHCP fund balance, such as the Doe Family Fund at Palisades Hudson Charitable Portfolio.

Of course, it would not make sense for PHCP to try to fund efficient charities if PHCP is not itself economically efficient. Considering the active charitable management it provides, PHCP is designed to be an extremely low-cost vehicle. The organization pays standard investment management fees to Palisades Hudson Asset Management, Inc., of up to 0.9% of assets per year, depending upon PHCP’s overall asset base. It also pays Palisades Hudson Financial Group LLC 1 percent of assets per year, plus out-of-pocket expenses, to provide all staff, facilities and other overhead and operating costs. That’s it.

We believe these costs will be well below what it would cost large donors to operate a comparable private foundation, which is the traditional vehicle for families who want to engage in active philanthropy. Of course, there are important differences between PHCP and a private foundation. PHCP’s charitable programs reflect our philanthropic priorities, which are not necessarily always the same as the donor’s (except for the donor advised fund). PHCP will not employ members of the donor’s family, which sometimes occurs with private foundations. On the other hand, because PHCP is a public charity, its donors receive more liberal tax treatment than do donors to private foundations.

For a large donor, meaning someone who wants to give away $500,000 or more, the choice between PHCP and a private foundation or a different donor advised fund depends on circumstances and objectives. But for smaller donors who want our style of active philanthropic management while still maintaining that big-picture control, PHCP is virtually one of a kind.

By publishing our charitable giving programs in advance and giving donors the one-stop ability to choose our programs or develop their own through the donor advised option, we give our donors a chance to do much more good, however they define “good,” with their charitable dollars.