Charities are just like stocks: some are blue chip others are penny stocks. Which one is right for your client?

Jessica Bowman

Introduction

There is a huge diversity in charities. To assist your clients in fulfilling their desires to “give back”, think of the charity sector as you would the stock market. Some clients may desire security and predictability over their donation, while others may wish to gamble on high risk-high reward type donations.  There is no one-size fits all approach to picking charities: financial advisors must understand their clients financial circumstances, risk profile and values in order to develop a successful philanthropic plan and find the right charities for their clients.

Types of charities

Often when we think of charities we think of those with recognisable brands (e.g. Guide Dogs, Red Cross, World Vision). However, these charities represent a tiny minority of charities in Australia. In fact, there are over 57,000 registered charities in Australia. That’s 25X the number of companies registered with the ASX. Each one of those charities are different. They have different objectives and are run by different people that have different ambitions. They each have a different risk profile.

Generally, you can characterise a charity into one of the following three categories:

• Blue chip – charities that have been operating for more than 15 years, have established systems and ways of doing things and a solid financial base. These charities have a high degree of predictability over their outcomes, but may have poor administration ratios.
• Start up – charities that have been operating for less than 15 years, are driven by the power and passion of the founder, are experimenting with the best source of funds and operational model. These charities can deliver a great bang for your buck, have aspirations for growth, but may have unpredictable donor services and outcomes.
• Grassroots (penny stocks) – charities that are consciously focused on delivering a service to a niche problem and/or geographic area, and have usually operated for a long time. These charities usually rely heavily on volunteers and are conservative with how they use their money. They don’t tend to have aspirations for growth and can get bogged down in personalities and politics. Having said that, it is usually easy to understand how your money will be used.

Understanding charity quality

Charities vary substantially in quality. It’s important not to assume that a big charity with a recognisable brand name is synonymous with quality. It’s also important to never be complacent with a charity as they can change dramatically over time.

Discerning the quality of a charity is similar to analysing stocks or investment funds. A high performing charity will have:

• financial integrity – the financial records will show that the organisation is using funds as described, that money is strategically allocated and that they aren’t over/under spending
• high quality leadership and governance – their leaders will demonstrate the relevant skills and experience to be able to guide the charity
• strong strategic direction – quality charities will measure KPIs, and/or implement sophisticated evaluation and improvement systems. They will be consciously monitoring their outcomes and sharing the results of their work with their broader network.

Like any organisation, a charity’s performance will fluctuate over time depending on their leadership and circumstances. There are times where both the government and private donors are more concerned about some social/environmental issues than others. This has a direct consequence on the kinds of talent that a charity can recruit and their ability to fundraise. For example, during the 2019/20 bushfires, a number of grassroots charities raised millions of dollars. These organisations had to re-strategise and upskill the board and executive team to reflect the new budget. Today, those charities look vastly different from before the fires.

Conclusion

Charities, like stocks, are diverse. By looking beyond the recognisable brand names, you will find a broad array of different organisations with varied risk profiles and performance rates. These organisations are dynamic and will change over time depending on their leadership and circumstances. To engage your client in giving, understand their needs and preferences, and find charities that suit them.

By Jessica Bowman, Co-Founder