How Community Foundation and Wealth Management Software Needs Are Converging
At NPact, our products enable much of our community foundation customers’ routine operations – from donor onboarding to investment allocation to grant approval and payment. This gives us a unique vantage point for spotting trends in the community foundation and broader donor advised fund (DAF) space.
It should not be news to our community that donors are donating more and more charitable assets to donor advised funds each year. Donor advised funds are becoming more accessible than ever before, with new digital-first offerings from financial institutions and commercial DAFs continuing to emerge.
This rise in donations and philanthropic activity is increasingly coming from a new wave of donors. From 2016 to 2022, millennial donors have significantly increased their annual giving by $381 or 40%, while giving from baby boomers declined by 12 percent to $2,568, according to a study done by Giving USA.
I am by no means a long-time community foundation/DAF expert – my partner Brian and I acquired NPact only around two and a half years ago. But my prior career investing in and teaching about Financial Technology at Stanford has provided me with some interesting parallels that I believe are useful to share with our customers and the broader community foundation community.
The technology needs of community foundations are quickly converging with the needs of wealth managers.
Community foundations engage in many of the same fundamental operations as wealth managers, including donor/client management and marketing, online donor/client onboarding, investing in pools of assets and allocating those pools across funds, collecting management fees, reporting fund performance (including distributions), and aggregating separately managed accounts. While the ultimate fund beneficiaries are different (grantees vs. clients), many of the underlying technology problems are the same.
We have spotted three key trends in the community foundation space which currently reflect this convergence:
- Increasing investment and operating complexity
- Focus on impact and investment transparency
- Desire for improved and modern donor experience
Much like how software has transformed the business of for-profit wealth managers over the past decade, community foundations need to adapt and change their technology and processes to meet these trends, compete with new upstart DAF providers, and ultimately survive and grow with the next generation of philanthropists. These changes are not optional – it is incumbent upon all community foundation leaders to invest in these systems before they too are disrupted.
Breakdown of the Three Trends for Community Foundations:
This new wave of donors is seeking more investment options, robust reporting capabilities, and a modern digital user experience, akin to what modern wealth management firms provide (Schwab and Fidelity are the first two that come to mind).
Increasing Investment and Operating Complexity
Donors are increasingly looking to invest their donated funds in new and innovative ways. They are seeking an increasing range of investment options, moving beyond the fairly standard and easy to administer conservative, aggressive, or money market investment pools.
This desire goes beyond simply including a liquid ESG option – many foundations now offer alternative investment programs, specific social impact loan opportunities, or venture opportunities sourced within the foundation’s community ecosystem and programmatic work. I have personally spoken to dozens of community foundation professionals over the past year who have relayed that these programs can serve as a tool to further their foundation’s mission and act as a philanthropic differentiator to current and potential donors.
Outside of offering new investment programs, donors also want foundations to aggregate reporting across DAF and brokerage accounts for a holistic view of their assets. However, these new investment programs greatly increase a foundation’s operational and administrative burdens, requiring them to collect, manage, and aggregate data often from discrete systems.
Focus on Impact and Transparency
As the demand for near real-time reporting on qualitative and quantitative grant impact metrics continues to rise, it is becoming increasingly clear that data needs to be accessible across systems to provide robust reports.
To meet this demand, foundations must focus on process transparency and optimization for donor advised grant recommendations, competitive grants, and scholarships. By breaking down these data silos across systems, they can improve their grant management processes' efficiency and effectiveness and ultimately show their impact within their communities.
Desire for Improved and Modern Donor Experience
Foundations are looking to provide donors with portals that adhere more closely to the foundation’s brand and curated donor experience. This new experience for the donor portal requires them to gradually move from a financial workflow tool to an e-commerce paradigm so they can allow their donors to give more and give more often. Think Shopify vs. Bank Teller - where foundations can provide their donors with meaningful content to make them feel connected to the communities they serve and provide automated donation and grant recommendations based on a donor’s past experience, and the behavior of similar donors, and the foundation’s recommendations.
Foundations Require Robust Integrated Systems to Handle These Business Model Changes
The existing legacy set of full-stack solutions broadly used within the community is inadequate for the growing business and stakeholder complexity of large complex foundations. We know this firsthand—NPact owns one of these legacy platforms.
It is our belief that over time, the integration-first, open architecture approach that has become dominant in many other areas of software will ultimately become the standard in the foundation vertical.
We are increasingly advising our customers to pursue an integrated, best-in-breed approach, where they can choose between a set of robust CRM and accounting systems that integrate with one another. This way, they don’t need to sacrifice configurability or functionality by choosing a full-stack solution, where the individual components of the one system (CRM, accounting, and grant/scholarship management) are rudimentary and cannot scale to meet their needs.
It may take time for the broader community to ‘see the light’, but many forward-thinking and progressive organizations have begun to take the leap to integrated cloud-based systems. They see that a robust set of integrated tools with strong outreach, automation, and reporting capabilities will ultimately enable them to grow their donor base, scale their operations, manage the generational transition, and better serve their communities.
We hope that other software organizations that serve foundations will join us in taking an integration-first approach – both our customers and we stand to benefit in pursuing this long-run partnership strategy.