By Paul West
Return on Investment (ROI) is a term you learn about 5 minutes into your first class in business school. Maybe the business model is elegant and the organization is streamlined, but that all begs the question: what is the ROI? How much will we make?
If you read any financial media at this time of year, in addition to reading about ROI, you’ll read about charitable giving. It’s the end of the year, and now’s the time to tie up loose ends for taxes and also the time that most nonprofits make it into the black. Those in need of help appeal to the good spirit of the holidays for people to start giving, from international aid to the bell-ringer outside the supermarket.
Maybe we can connect these two ideas: a basic cause-and-effect business concept and the more ethereal, hard-to-define-yet-universal impulse of philanthropy. Is there such a thing as emotional ROI? The question becomes especially relevant when it comes to estate planning: Should I give money now or should I leave it in my will?
I don’t think I’m the only one who feels the slightest spark of envy when I watch a celebrity philanthropist cut a ribbon. There’s more than one reason why pictures are taken of Madonna in Malawi, maybe what the young people call FOMO – “fear of missing out”? We all give in our own way, but when it comes to bequest or donating, there’s nothing like seeing the growth from the seeds you’ve planted.
Let’s look at the question of emotional ROI when it comes to charitable giving and financial planning.
Wealth is About More Than Accumulation
In a letter to Giving Pledge, Warren Buffett said:
Were we to use more than 1% of my claim checks (Berkshire Hathaway stock certificates) on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others.
As always, Warren puts it as plainly as you’d expect: Are you going to use that money now anyway? Of course, few have the resources of Mr. Buffet, but the sentiment still applies.
On the majority side, there are those of us who have “always planned” to give that $20,000 or whatever amount to our alma mater, the homeless shelter or our church. It’s set aside in our own minds and gathering proverbial dust somewhere at the bottom of a 401(k).
On the high-net-worth side, we may find ourselves in a situation where we have more money than we can spend in a lifetime, as described by Buffet above. Maybe you have those trust funds maxed out for the kids and that vacation home in Italy – do you need another one?
Let’s come back to the idea of emotional ROI, especially if you’re in that group where finances are not a concern. Will the return on another luxury car be higher than helping eliminate medical debt for real flesh-and-blood people you shake hands with? Will the emotional ROI be higher in seeing that effect now rather than knowing, in some more abstract and hypothetical way, that your bequests are going to a good cause?
Bill Gates, Buffet’s partner in good, said it well: “I can understand wanting to have millions of dollars … But once you get much beyond that, I have to tell you, it’s the same hamburger.” Not all of us may agree with his food choices, but the metaphor holds: once your financial needs and even most of your wants are met, the thrill of wealth can be a little redundant.
Can you do more with your money than simply accumulate it?
Relationship vs. Hand-Out
Your gifts as a living philanthropist can grow and develop over time – a bequest is, by nature, a one-time event. Charitable donation, as a relationship develops, leaves the possibility open-ended of how much you can give and how much good you can do.
A philanthropic relationship lets an organization develop – increasing marketing and research efforts in a way that attracts other donors. You also grow with the organization, becoming part of new opportunities as they arise. Rather than earmarking a bequest for an effort that may fail or fall apart, you can direct money as needs are met and as new initiatives are birthed.
Even as an anonymous donor, you can at least see the fruits of your investment. Staying in touch via newsletters and statistical updates from those organizations gives you the kind of three-dimensional emotional ROI that’s not available when your donation is a contract to be fulfilled after you’re gone.
Bequeathing Stress and Issues
Leona Helmsley wasn’t known as a particularly warm person during her life, to say the least. For most of her life, her bequest was to use her trust – worth somewhere between $5 billion and $8 billion – to help the poor. Late in her life, she changed it to read that it would be left only to the runner-up cause: “the care of dogs.”
After her death, the trustees diverted most of the money to charitable causes for the homeless and the poor, sparking immediate debate from the Humane Society and other animal charities. Estranged family members also came into the mix and received various amounts through public and embarrassing (and no doubt expensive) legal cases.
In short, bequests – although they have tremendous potential for good – can also call up a storm of confusion and strained relationships. Misunderstanding, misquoting and good old selfishness can come into play when the assets are divided, and the cases of remaining family members challenging charitable bequests are legion.
Taxes can also become an issue when money is left in a will. Your gift is left in the hands of executors who may or may not know the best way to transfer it to a charity with minimal tax loss. While you’re living, you can employ strategies like the RMD to QCD connection and bundling donations to circumvent tax issues for your family and for the causes involved.
Tax hassle, family tension and bureaucratic red tape can be the unfortunate side effects of bequeathing money, especially if the money is available to be donated during your lifetime. With donating, you’re at the helm of your philanthropy – your wishes are clear and you can steer through some of the obstacles before your family has to face them.
Double Bottom Line
One powerful way to take part in philanthropy is through “impact investing,” or as it’s been called “double bottom line.” This concept seeks to couple traditional investing and financial returns with putting money toward social concerns. Realizing the world’s needs are astronomically higher than the world’s giving, a double bottom line brings giving into the entrepreneurial space.
The Global Impact Investing Network (GIIN) participates in this kind of philanthropy and has helped people in poverty develop means of income. Like Janeth, a Bolivian woman who, through investments from GIIN, was able to develop her small chocolatier business into supplemental income for her family. Through GIIN associates, she is able to take accounting and business classes that never would have been available to her by traditional means.
A 2018 investor survey by GIIN found that 90% of impact investors experienced returns at or above their projections. Your investment goes beyond a handout – to fill a stomach or provide a bed for the night – into helping people develop their natural gifts and abilities and generate their own revenue. At the same time, returns come back in a way that attracts new investors. The relationship becomes symbiotic instead of parasitic.
Make It ‘Meaningful and Fun’
Stories like Janeth are the reason Bill Gates called philanthropy “meaningful and fun.” There’s a rare joy in knowing your resources have bettered the world, especially in seeing it happen first hand. When you develop an ongoing charitable relationship, you give not only your money, but yourself, and that makes all the difference.
Talk with your advisor about how to optimize your charitable giving and financial planning – the most tax savings for you and the highest amount going to the causes and organizations you support.