It's quite likely that among your clients are a large and growing number of high net worth investors looking to make a philanthropic impact on society and the world. But though they may have an idea of which group or cause they wish to benefit, they may also be unclear on the best way to do so.
Here we will break down three key strategies that are often misunderstood by clients and unpack how advisors can help them find the model that will potentially put them on the right path to meet their goals and objectives.
Hybrid philanthropy
In this model, a client would form two entities: a for-profit company and a nonprofit organization. This is done to increase access to more sources of funding: the nonprofit can receive grants and donations and the for-profit is able to take on investors. The hybrid approach allows the client's for-profit and nonprofit entities to work symbiotically to maximize the client's impact.
The tricky thing about these hybrid structures is how they are structured. Financial advisors should caution clients that they would essentially have to run two separate organizations, each with its own board, which can pose administrative challenges. The relationship between the for-profit and nonprofit entities can either take on a parent-subsidiary or brother-sister model.
In parent-subsidiary, the nonprofit acts as the parent organization, with the for-profit a subsidiary owned by the nonprofit. In order to do this, the nonprofit would have to qualify as a "public charity," and financial advisors should caution that it has to receive most of its funding from public sources to satisfy the
In the hybrid model, the for-profit entity may donate money to the nonprofit, potentially yielding a more favorable tax outcome. But it's important to note that money cannot flow the other way — from the nonprofit to the for-profit.
Venture philanthropy
This approach deploys practices implemented by venture capitalists but in service of philanthropic goals. While there isn't one definitive way to practice venture philanthropy, organizations rely on certain strategies and years-long engagement to drive systematic change. A venture philanthropist provides a range of support services that can include coaching, planning and strategy in addition to loans, grants or other funding mechanisms.
Before going the venture philanthropy route, make sure that the client can commit to one long-term focus and identify actionable ways to partner with the organizations they are supporting.
Much more than a focused financial contribution, venture philanthropy requires a years-long commitment. Like venture capitalists, venture philanthropists look for exit strategies before they make an investment. But rather than selling or going public, the objective is reached when sustained change in a sector occurs.
Venture philanthropists often work with a wide range of stakeholders, including leaders of social purpose organizations, people helped by the organizations they support, government officials, foundations and corporations. Encourage clients to think of it more like a partnership with a purpose than a venture with an investment goal. It's real time and a real commitment.
Impact investing
A financial advisor can play a significant role in this strategy, as it relies on expanding their investment portfolio to make
Financial advisors should recommend impact investing to clients who are interested in giving back but might not have the time or ability to take on a larger commitment. This is also a suitable option for clients who would rather drive impact across various areas, as opposed to going all in on one specific cause.
One obstacle to impact investing is the concern that it doesn't offer returns comparable to traditional investing. But sustainable investing does not have to be synonymous with less attractive returns, and financial advisors have a direct role to play in helping craft a portfolio that can help advance specific environmental, economic or social goals while simultaneously striving for competitive performance.
