Answer: In a way that aligns the advisor’s incentives with those of the beneficiary. But which way does that?
Along with many others, I’m often asked to advise donors about finding good charities to support and/or strategies to make their giving effective. I’m struggling to find a structure which does that.
Time and materials?
Nope. There are two problems here – which are common to any professional service paid for by time. First, it incentivises the advisor to take ages. Hence some moves to pay lawyers on a piecemeal basis rather than hourly (why do I pay more just because you’re slow?) And second, it encourages the advisor to unnecessarily complicate their work (on the reasonable assumption that fees are deducted from the amount the donor has to give). Yes this arises even in the charitable world: I once saw an advisor claiming that managing a single, existing grant to a perfectly competently and stable organisation took him two days a week and required two foreign trips a year. Monsterous.
But there are two additional twists with charitable giving.
It’s easier (read: cheaper) to find charities in the UK than in, say, in South Sudan. So paying the advisor by time incentives the donor to support readily-findable charities. But you could easily argue that beneficiaries who are difficult to find because they’re cut-off from mainstream markets and funding are precisely where donors should focus.
Donors often achieve most by collaborating: partly because they reduce the number of programmes in existence, which reduces admin for both the donor and charities. They also therefore reduce the need for advisors. So paying advisors on a ‘time and materials’ basis disincentivises the advisors to push for collaboration (they’d put themselves out of a job). Putting that more strongly, ‘time and materials’ encourages advisors to promote fragmentation amongst donors, which is bad for beneficiaries. Furthermore, creating those partnerships can take no time at all. When I put together the one between Eurostar and the Ashden Awards, it only took about half a day, yet created substantial value for beneficiaries.
Percentage of funds managed?
Nope, because this incentives the advisor to advise against giving anything away!
Percentage of funds given away?
Nope, because this simply encourages the advisor to dish it all out at maximum speed, which doesn’t bode well for proper planning and research.
Furthermore, it disincentivises the advisor from looking at impact investing, i.e., using the capital for social & environmentally useful purposes before it is given away. And, of itself, this structure doesn’t encouraging using any other resources, e.g., time, contacts, reputation, convening power – which may amplify vastly the impact of any money given.
Success fee / performance-related pay?
Sadly this is impossible because there’s no single metric of success on which donors can judge their success. Charitable giving is fundamentally different to financial investing in that sense: the advisor can’t take 2% of the upside, because there isn’t one; they can’t take be paid based on whether the beneficiaries like the donor because they probably won’t know that the donor exists; they can’t take be paid based on whether the charities like the donor because that may be totally independent of whether the donor is really adding value.
The only other model I can think of is a fixed fee. Say £10k to fix your philanthropy strategy, irrespective of the amount you’re giving or the complexity of fixing it. That feels bizarre. It also leaves the advisor taking all the risk (they then have the incentive to opt for easily-findable charities.)
Perhaps some econo-brainbox can think of a better structure. Do give your suggestions in comments below.
I do agree that finding the right charity tu support is a tricky endavour where help is very appreciated. I always struggle with people asking me: I would like to donate to some good cause, what can you recommend or advice? Then again, I love these requests and spend a lot of time trying to come up with an answer (what cause suits them best, what NGO or charity is transparent and does good work etc…), still I find it puzzling to possibly turn this into a profitable job. Reading your post I realize it’s a reality. Strange! (Nevertheless, I do like you post very much, a very tricky question indeed! I’m looking forward to reading replies!)
For us it is quite simple. We are pure philanthropy advisors. We don’t manage anyone’s money or manage anyone’s giving. We genuinely ONLY give advice on strategies and evaluation. Therefore: we see no ethical basis for charging a % of anything. The quality of our work is not and never should be based on how deep the pockets of the foundation or philanthropist. Nor do we charge on a specific time basis for the reasons you list above plus one more: we want to encourage clients to call us or meet with us and not have them worrying about the meter.
Therefore, we charge a project fee. This fee is based on a mutual understanding of the work to be done and the amount of time it probably will take. to accomplish. Once that fee is set, we no longer look at the clock. If, on the other hand, there is a change in what is to be done, we will mutually agree on adjustments. In a few cases, we have actually reduced our fee in the middle since we were able to accomplish what we promised so efficiently that we didn’t feel comfortable charging the full rate. In other cases, the client wants to expand the work and there is a new supplementary agreement on the work and fee. But we do not charge on a strict time basis.
For my company I only do a fixed fee based on the scope of the research, if I am doing all the paper work to facilitate the transaction, managing board meetings, etc. As I don’t give legal or financial advice, it is easy for my firm to only be a fee-based model (I don’t sell product, represent a dealer or any one financial institution).
I have posted on my website the various packages that are offered to wealth managers, lawyers, tax planners and their clients.
Thanks! I checked out your links and find your work very interesting!
There remains the question of how you come up with the fixed fee, even if it’s agreed in advance. Finding charities in far-flung places will require more work, for example. So do you agree a fee of, say, £10k irrespective of the strategy work to be done & the donor’s focus areas – and sometimes make money and sometimes lose money?
Very interesting question but for me the answer is equally straight forward – a set fee is the only way to go. It establishes trust with the client who knows the meter is already set and evaluates the work on the basis of straight value for money in proportion to the advice received. It’s a case of needing to super please the client who’ll only then buy again.
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A fixed fee model based on a maximum number of hours seems to work well both in advising nonprofits and in advising grantors. The client knows what they will get for the funds they have invested. My preference is to develop a suggested structure based on specific “deliverables,” which for a philanthropic advising contract could be reviewing X number of organizations, developing a philanthropic annual plan with X number of pages and X topics, etc. This can be rolled into a 6 month or 12 month “retainer” contract. The question of dealing with charities in “far flung places” could be dealt with by setting a maximum amount of the contract for travel expenses. The client may wish to limit the number of site visits by advising the consultant to use Skpe calls and email rather than airplane trips.
As a former foundation President & CEO, I would only engage consultants on a project fee or fixed fee basis. Now that I am consulting, I use the same approach with clients but am explicit about the estimated # of days work and the per diem fee that is the basis of the proposed fee. While there is always a risk of initially underestimating the work required, a verbal understanding or clause in a formal contract with the client should allow for the possibility of a mid-course correction – with the approval of the client, of course. While I’m still a consulting novice, I’ve found that being candid with the clients up-front about some of the challenges as described by Caroline has been an effective strategy. The more certainty and clarity clients have about the amount and rationale for the fee, the more likely they are to focus on the task at hand and less likely to fuss about pricing.
a few random thoughts…If one does not know what her or his time is worth, one should try another career. Valuing your worth (more than time) is an essential of knowing your value contributed. All project fees should flow from a combination of magnitude of task, complication of task and scale of placement. Pleacing $37 million is different than chosing 3 great charities for a $50,000 donor. That is not comission but a measure of task at hand and risk.
As long as only a daily rate is the driver as well, you will never get to selling the real value and that is intellectual property. If the advising consists of just finding a couple charities that do good work, I suggest you do that for free but in advance, help the client evaluate how, when , where, who and what their philanthropy is currently doing and what it could do.
Building the template for thorough work is the key.