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  • Writer's pictureAri Betof

How UHNWIs Can Tackle the Charity Wealth Gap and Strengthen Philanthropy

Ultra-high-net-worth individuals (UHNWI) are defined as individuals with investable assets of at least $30 million. As the wealthiest people in the world, they control a substantial portion of global wealth, and that includes philanthropy.

Paul Schervish, professor emeritus and retired director of the Center on Wealth and Philanthropy at Boston College, coined the term "ultra-philanthropy." In TIME magazine, he noted that in the next decade "the top one-half of 1% will be giving about 30% of all the charitable dollars.”

Regardless of whether Schervish’s prediction actually comes true, it’s clear that philanthropy is becoming more concentrated among the ultra-wealthy. Wealth-X’s The New Normal: Trends in UHNW Giving 2019 report reveals that ultra-philanthropy totaled $153 billion in 2018—a similar amount to what the U.S. federal government spent on healthcare, education, and energy for the same year.

This vast sum represents generous gifts, and there is no doubt these funds can support a variety of worthy causes and have a real impact. For as much positive impact as these gifts cultivate, some critics argue that the ultra-wealthy’s impact on philanthropy has concerning implications.

The Giving Gap

The US has almost half the world’s UHNWIs, and they continue to grow while the middle class shrinks. Historically in the U.S., the middle class has a strong tradition of philanthropy. But their funding priorities and those of UHNWIs appear to be diverging.

In 2016, an event occurred that shook the U.S. philanthropy sector and provided some evidence of this sea change. That year, for the first time in 26 years, United Way was displaced from the top ranking on the Philanthropy 400, a list of nonprofits and charities that raise the most money from private sources. Fidelity Charitable, a donor-advised fund (DAF) affiliated with Fidelity Investments, displaced it. Fidelity Charitable’s donations had increased by an astonishing 20% over the previous year, while donations to United Way, a human services provider long known for its support among the middle class, had fallen.

In an article about the new rankings, The New Yorker described how the average size of a DAF was then nearly $300,000, suggesting what most people probably assume: that DAFs are primarily used by wealthy individuals and families. The New Yorker also noted that donations to arts and culture causes—including organizations often supported by wealthy donors—had grown more than any other category over the previous year, according to an Indiana University report. Contributions to elite universities had also seen double-digit increases.

A 2012 article in The Chronicle of Philanthropy also noted a wealth gap among charities and nonprofits. This gap is not solely due to the funding preferences of UHNWIs, but the weight of their contributions has a considerable impact. That year, the top 2.5 percent of charitable organizations reporting to the IRS had over 50% of the wealth of all charities. Colleges, hospitals, and healthcare facilities made up this top group. Human services organizations accounted for just 13% of revenues and 11% of assets, despite making up more than a third of all nonprofits.

To be sure, UHNWIs regularly donate to workaday social service providers like United Way and others. But the changing demographics among charitable donors and the wealth gap among charities is worth further understanding.

Making Real Change

UHNWIs have immense capacity for doing good with their funds. So how can they ensure their funds have the greatest impact?

The Milken Institute has put forward some solutions. Its report, “Stepping off the Sidelines: The Unrealized Potential of Strategic Ultra-High Net-Worth Philanthropy,” provides recommendations to UHNWIs. Here are just a few of their points of advice:

1. Diversify Philanthropy Portfolios

For many philanthropists, high risk can mean anything outside of their established networks. Such a lack of risk tolerance means giving is restricted to "safe bets" like alma maters and large organizations with experience dealing with ultra-philanthropy.

However, UHNWIs under 40 years are exhibiting greater risk tolerance. They regard giving as an ongoing moral obligation, not something dealt with at the end of life.

The report advises UHNWIs to diversify their philanthropy portfolios by:

· Stepping outside network-based giving to more intentional, impact-focused channels

· Refreshing due diligence procedures to actively source new avenues of investment

· Considering minority-led and grassroots initiatives

· Seeking out innovative initiatives aimed at closing the giving gap

2. Give Strategically

Philanthropists should apply systems thinking to create large-scale, enduring change by targeting the conditions that contribute to real problems. Such conditions include societal norms, public policies, as well as economic and political practices.

UHNWIs wishing to challenge such norms and conditions strategically should:

· listen to constituents frequently, learn continually, and take feedback seriously

· commit to scale by funding nonprofit capacity building and collaboration

· undertake “big bet” philanthropy of $10 million or more to a single nonprofit organization, since research shows big bet philanthropy is critical for mobilizing social movements and scaling solutions

3. Utilize the Ecosystem

UHNWIs can engage with the broader philanthropy ecosystem to:

· Educate themselves and gain confidence as donors

· Make use of funder collaboratives and peer-learning opportunities

· Consult with philanthropic support organizations (PSOs), affinity groups, institutional foundations, and wealth advisors

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