For the career prospect research professional, the ambiguity of wealth is a constant source of angst as we are called upon to offer our educated guess on an individual’s capacity to make a gift. In the U.S., we rely heavily on “visible assets” such as real estate and business ownership to provide concrete proof of wealth.

But when it comes to the very wealthy – and very philanthropic – we risk getting lost among the numbers, especially the zeroes!

Truth: The higher the net worth, the fewer the visible assets.

As I described in my previous blog post, Lose the Ownership; Keep the Wealth, in her book, Capital Without Borders, sociologist Brooke Harrington describes how the use of trusts to separate a wealth-creator from ownership of her wealth enables the wealth-creator to shield those assets from the vagaries of scrutiny, creditors, and taxes.

She shares how high net worth individuals (HNWIs) with as little as $1 million begin to shift priorities from growing their wealth to preserving it. Regulatory arbitrage is one of the preservation strategies used for this purpose.

Wealth Preservation and Regulatory Arbitrage

While titling assets under a trust is a broad and useful strategy, it also works and plays well with other strategies, such as regulatory arbitrage. Regulatory arbitrage is a simple wealth preservation concept with a cryptic name.

Have you ever witnessed (or experienced) a child who effectively manipulates his parents, playing one against the other? If Mom says “no,” he rephrases the request to Dad in a way he knows he’ll get a “yes.”

In this analogy, the child is the global elite and the parents are represented by different countries. Wealth managers are adept at negotiating the laws of each country to provide the best results for clients.

Regulatory arbitrage is choosing legal strategies or loopholes across countries that result in the highest amount of wealth preserved / lowest cost burden.

What Does This Mean for Philanthropy?

The use of regulatory arbitrage is perfectly legal, and it helps to explain why a search in the Offshore Leaks Database on the keyword “Foundation” yields so many results for foundations incorporated in Panama.

Unlike a trust, a Private Interest Foundation in Panama is based in Civil Law, which makes it much less likely to change. The foundation is not intended to manage active company business, but holds assets for the benefit of beneficiaries.

The Private Interest Foundation has many perks, including the following:

• The owners can be anonymous and the foundation’s charter does not have to specify who does what or when; this can be handled in private agreements.
• Owners can remain completely anonymous.
• There are no taxes.
• Creditors cannot pursue claims on it and liens cannot be levied against the foundation.

And while we often think of offshore accounts and exotic wealth preservation strategies such as regulatory arbitrage being used by only the ultra-wealthy, these tactics are available much lower down the wealth scale.

As an example, I clicked through the list of foundations in the Offshore Leaks Database until I found one linked to a name I could search on. The Valorie Foundation was connected to Dr. Juan A. Chiossone Kerdel.

A quick search on name-only suggests that it might be the same person as Juan Armando Ant Chiossone Kerdel, MD, MA, FRCS who is a practicing doctor at the University of Miami Health.

Billions of Shades of Green

In 2014, Bloomberg Businessweek published an article (and a fabulous visual chart) revealing how a trio of hedge fund magnates had used offshore entities to make charitable contributions of more than $10B. By way of comparison, The Robert Wood Johnson Foundation has assets of $11B, Fidelity Charitable has $21B, and Bill and Melinda Gates Foundation has $52B.

In 2017, David Callahan wrote an article about the same hedge fund philanthropists noting:

“But it was stunning to learn that one of the largest philanthropic enterprises in American history—with assets several times larger than a well-known legacy funder like the Carnegie Corporation—had been operating in total secrecy.”

So, while fundraising research will necessarily continue to pursue the gift capacity rating game, I leave you with two parting thoughts to keep in mind as you and your organization seek to build relationships with HNWIs:

1. People give for their own reasons – understanding motivations for giving is far more important than finding an “accurate” gift capacity amount.
2. HNWIs may have less, but often much more wealth available for philanthropy than you can imagine.

Additional Resources

• Offshore Leaks Database | The International Consortium of Investigative Journalists
• Uses of Panama Foundations | POLS Attorneys | undated
• Vast Wealth, Hidden Foundations: How Much Do We Really Know About Billionaire Donors? | David Callahan | 2017
• The $13 Billion Mystery Angels | Bloomberg | 2014
• Capital Without Borders | Brooke Harrington | 2016
• What is Wealth Management? | Forbes | 2014 | Nice article describing how wealth managers are different from financial advisors

It took a vacation, but I finally read the book, Capital Without Borders, written by sociologist Brooke Harrington. Reading a well-written book like this makes it so much easier to identify key concepts and muse on how they apply to other situations, such as fundraising research, of course! There were a few prospect research insights I’d like to share, starting with the humble but mighty trust.

Lose Ownership, Keep the Wealth

A key concept upon which everything in the book hinges, is the use of trusts to separate the wealth-creator from his or her wealth. Sounds counter-intuitive, right? If I create staggering wealth, I want to retain ownership, preferably for as many generations as is reasonably possible.

There are many different kinds of trusts and the laws governing them have transformed as invisibly to the public as an alien Skrull in the recent movie rendition of Captain Marvel! But the essential premise of a trust is that ownership of an asset is transferred to the trust by the wealth-creator and under the control of the trustee. The trustee might be the wealth-creator, but for the very wealthy, it is way smarter to make the trustee your wealth manager.

The DAF Example

One way to understand the importance of the trust transformation is to compare it to the Donor Advised Fund (DAF). What are the major benefits driving people to DAFs? I’ve put the following benefits in order of importance.

1. Anonymous giving
2. Indirect ownership
3. Beneficial tax treatment (a/k/a tax avoidance strategy)

Privacy / Anonymity

Privacy is most frequently of paramount concern to someone looking to preserve great wealth for as many generations as possible. A DAF is a fund of a larger entity, such as a community foundation, and grants made from the DAF are not required to be reported to the public. Trusts also provide a lot of privacy and, when used skillfully, can offer complete anonymity.

Indirect Ownership

Indirect ownership is a means of preserving wealth, even in a DAF. When a wealth-creator gives to a DAF, s/he loses ownership of the money – but does NOT lose influence over that money, the ability to “advise” on giving. This is the same with a trust. The trust owns the assets that were transferred by the wealth-creator, but the wealth-creator retains influence over those assets, if only through his/her relationship with the trustee.

Tax Treatment and Debt Avoidance

The implications of indirect ownership are great. In the case of a DAF, the money gifted to create the DAF receives favorable tax treatment (depending upon specific tax circumstances, of course).

Generally speaking, if a wealth-creator does not technically own the assets/money in a trust, there are more opportunities to avoid taxes on that wealth, and debt owed by the wealth-creator might not be collectible from the trust. The benefit of influence over the money is kept, but the risk of taxes and debts can often be reduced or avoided altogether.

Skillfully using trusts in this way is completely legal.

Why it Matters for Fundraising and Research

Development officers have been some of my best teachers over the years. I’ll never forget the time when someone questioned my capacity rating, suggesting that holding real estate in a Dynasty Trust implied much greater capacity to give than the rating I had provided. She was right!

And now that I am in roles where I teach other prospect research professionals, I find myself frequently challenging them on the technical aspects of ownership.

For example:

• The prospect had two big tax liens in the past five years, resulting in a lower capacity rating.
• The prospect had a bankruptcy a few years ago, so there isn’t major gift capacity.
• The prospect transferred ownership of the real estate (company, plane, whatever) to a family trust and is not the trustee, so I didn’t include that in the gift capacity rating.

Now that you understand a little bit of tax and debt avoidance strategies using trusts to separate ownership of wealth from the wealth-creator, while still maintaining influence, can you see the problem with the three statements above?

The one example that sticks in my mind is a prospect I researched who was from a family of extraordinary wealth. He had a big, ugly (and public) divorce and the judge ruled that his wife should get half of his family trust. But when he and the court asked for the money from the trustee, the trustee refused. It was determined that the trustee was within his full legal right to refuse and the ex-wife was unable to collect her millions.

Chalk one up for debt avoidance and wealth preservation strategies using trusts!

Did that prospect have wealth? You bet! I’ve researched other prospects who have had multiple bankruptcies and continuously emerge from them, having assets in various trusts and companies that are all walled off from each other.

Fundraising Action Steps

It isn’t always possible to know a prospect’s gift capacity with any degree of accuracy, but you can almost always identify key wealth indicators that separate the affluent from the high net worth individuals (HNWIs).

• When you see a trust or multiple companies that don’t appear to have any business purpose (such as LLCs that appear to multiply faster than rabbits), you probably have a prospect who can make a 5-year pledge of at least $100,000.
• If your prospect was born into a HNW family, assume there are trusts, even if your prospect has no significant income. Every time I find a prospect who lives very well and is an artist, I immediately look for the family-wealth connection!
• When you have spotted the trappings of great wealth and realize this person is a HNWI, keep this rule of thumb in mind: the higher the net worth, the fewer the visible assets.

I hope you found this key concept useful for your work in fundraising and research. Stay tuned for next month’s blog post where I demystify regulatory arbitrage as a wealth preservation strategy. Regulatory arbitrage sounds exotic and intimidating, but fear not! I will break it down for you.

Additional Resources

• Capital Without Borders | Brooke Harrington | 2016
• Selected Works of Brooke Harrington | Harrington is an academic and has written widely on the topic of wealth; this is her personal website
• Trusts | Investopedia | 2019 | Great primer on trusts with examples
• What is Wealth Management? | Forbes | 2014 | Nice article describing how wealth managers are different from financial advisors

At the birth of The Great Recession in the U.S. in 2007, I embarked on a quest to create a lifestyle that would provide me with the freedom to travel for extended periods of time. The internet was wide open and the possibility of a free-roaming lifestyle seemed feasible.

Fast forward to today, and while I do travel widely, it’s not the utopian free-for-all I initially imagined. In May of this year I have been living and working in Amsterdam in the Netherlands.

Way back in 2007, it vexed me that NGOs were averse to telecommuting arrangements and the rigid time clock of the typical job exacerbated my health issues. I loved solving the mysteries of prospects and crafting the prose of profiles. Going solo as a consultant felt like a reasonable solution. Worst case scenario was that I would fail and have to find a job.

Initially it was terrifying! But I was fortunate to land a client on the first day I was officially self-employed. I continue to serve them to this day. I did sub-contracting work, too. I barely paid my bills, but it was a start. And in 2008, my husband and I moved to Prague in the Czech Republic for five months.

These days we still rent an apartment and travel far away once a year, but only for a month. Renting an apartment means we get to live in a neighborhood, cook meals in our kitchen, and acclimate to life in a foreign city. We buy public transit passes, learn where and how to recycle and throw away garbage, and depending upon our language skills, get to know some of the locals.

Sounds great, right? It is! But maybe not quite in the way people initially assume.

First, there is the double-edged sword of money.

When I first became a consultant, I had more time than money. I had energy in abundance to roam around a new city, immerse myself, and enjoy it. Trying to decode the Czech language in the grocery store, restaurant menu, public transportation – well everywhere – was fun and interesting.

But as my business has grown over the years it consumes a great deal more of my energy and my time. My first week in Amsterdam this year was spent working long days on my laptop in a cramped space because of an unexpected surge in tight-deadline work orders. Trying to figure out which carton is milk vs. cream in the grocery store becomes a lot less fun under those circumstances!

Second, the internet is no longer open. It has guarded country borders.

Technology makes my lifestyle possible, but as the internet has matured, it has become increasingly difficult to perform my work in another country. It’s a crazy see-saw!

I remember the first year that my trusty VOIP phone connection failed in Prague. I set everything up and when I tried to login to my account online I couldn’t – the page would not load. Calling via Skype I learned that they did not operate outside of the U.S.

Google now fails me nearly entirely when trying to perform searches on a foreign server. I’ve opted to use a VPN connection, but that means that I am requested to prove that I am human over and over again. And not just from Google, but my bank, and my subscription tools and other accounts.

Especially with the rise of GDPR in the EU, if I don’t use a VPN, many innocuous websites in the U.S. simply will not load. The country borders online have become walled gardens. I’m certain the VPN “hole-in-wall” will be plugged soon.

Nevertheless, I still find it exhilarating to live temporarily in a foreign country.

Living and working somewhere else takes me out of everything I take for granted. I am deliberately putting myself in situations that are way out of my comfort zone. It’s exhausting sometimes, but it changes my perspective. I get to view my life and my work from new angles.

I love to work. And having flexible work hours is a dream come true, but I need to balance myself. Trying to structure my days to take advantage of festivals and arts and culture in Amsterdam helps me question my choices about work.

Being able to spend an entire month in Amsterdam also means I’ve been able to schedule two meetings with local NGOs to learn about their work in the Netherlands and to share fascinating conversation about their views on fundraising. I am continually reminded how humanity is the same the world over as well as how the differences in philanthropic cultures can deeply affect relationship building, which is the crux of fundraising.

As a result of those meetings, I learned about a fantastic resource, the Center of Philanthropic Studies at the VU University Amsterdam. They perform research and provide education in the philanthropic sector.

Following is information about which philanthropic sectors receive the most giving. Enjoy a bit of the Netherlands!

The prospect research profession is gaining momentum. The truth of this is evident in many places, but especially in the number of open positions being advertised and the growing number of researchers with leadership titles, such as AVP and VP. But where is this momentum taking us?

I’m ready to risk being wrong and to make a prediction beyond today’s reality and into the future.

I had a relaxing and social weekend. For me, that’s the equivalent of letting the soup sit for a day before serving – all the separate flavors meld and settle into something delicious. When I sat down to type up a post this Monday morning, lots of different ideas had melded. It’s as if the mist had receded and my crystal ball was crystal clear.

The prospect research profession is going to grow wider AND deeper.

To hear the visionaries talk about artificial intelligence and cognitive colleagues, like Adam Martel of Gravyty and David Lawson of NewSci, respectively, one might believe that the ranks of researchers will be thinned by advancing technology. In my imagination, those visions translate to thousands of prospect research professionals clogging up a funnel that is trickling out only the best multi-skilled research talent – those individuals who can perform higher at all levels.

But three things have happened to dispel that imaginary funnel-fuelled mist.

1| I finished reading a book, Being Mortal by Atul Gawande.

Gwande is a surgeon writing about the tortured relationship physicians have with patients at the end of life. A great book for anyone to read, but especially helpful if you are involved in caring for an elderly or terminally ill friend or relative.

In the book Dr. Gawande covers much, but relevant to the prospect research profession, he suggests that most doctors treating a dying patient either take a paternal role and tell the patient what treatment is best or they take a “Dr. Informative” role and present all of the options and leave the decision to the patient.

He advocates for doctors to take a third, very different role, as a coach or guide. Through a series of questions, doctors can better understand how a patient wants to live in the remaining time, explain the options, and recommend a course of treatment that fits the patient’s needs and preferences.

I’m simplifying for the sake of brevity, but consider how this might apply to any profession, including prospect research. Doctors face similar threats from artificial intelligence. Who can read and interpret scans and tests better, and who can spot patterns among lots of drug and other treatment options? Machines, of course.

But it is only a human professional who can understand the technical options, interview a human being, and recommend a course of action. It requires competence, trust, and rapport. This applies just as well to the fundraising researcher.

And this is what I mean when I say that our profession is growing wider. New kinds of roles are opening up to us as professionals.

2| Jason Briggs wrote an article, Out of the Shadows: Why prospect research helps fundraising

In this article, Jason argues that prospect research professionals have the skills to be great leaders, which include the following:

1. Sound interpersonal skills;
2. Good decision-making; and
3. A comprehensive understanding of fundraising.

He doesn’t mention this in the article, but I happen to know that when he was employed by The University of Sheffield, he and the research team created a Philanthropy For Us Insight Report, which went on to win an Insight in Fundraising Award in 2016. What is so special about that?

The team evaluated data on the various countries where the University had alumni and made some surprising discoveries about which countries were most likely to be philanthropic across country boundaries and had a density of alumni. This is a stellar example of the kind of intel that translates to lower costs (countries close by) and higher fundraised dollars (higher gift amounts from more alumni).

When we researchers tell our story well, it’s one of raising more money – sometimes a LOT more money. I call that fundraising prowess. And yes, it is performed from behind a desk.

Growing into top leadership roles is another example of our profession growing wider.

3| I spotted a $500k+ prospect marked “unable to rate” by a screening

I can’t seem to keep my hands out of the nitty gritty of performing research and as I was fussing over trying to get two files to match on database IDs by checking the record counts, I saw some weirdness in the screening results.

Surrendering to forces beyond my control I stopped and ran a quick internet search on the name. I suspect the euphoria of successfully identifying this retired investment banker is something akin to the feeling a gambler feels when hitting the jackpot on the slot machine: total validation that my intuition is better than the odds!

Even with all of the beautiful automation of electronic screenings, sometimes the data is missing or corrupt. No matter how useful a cognitive colleague could become, there are some things people do better than programs.

And this human advantage is how our profession will go deeper.

Already specialization has begun deepening the profession. And I don’t just mean fundraising analytics or prospect management. There are researchers who have extremely deep knowledge of specific industries, such as banking or private equity.

Our profession is poised to grow wide to lead fundraising, development, and even the organization. But we are also growing deep roots of knowledge and understanding to support that leadership.

We are learning how to intuitively leap across data to identify opportunities for decision-making. We are specializing in the knowledge of how people create wealth and decide to give it away. We are coaching our front-line fundraisers to develop custom strategies for philanthropy.

Some may find our profession dull and technical, but our work has amazing results. And now in my imagination I see our profession as a prism through which fundraising refracts into rainbow of opportunities.

The future of the prospect research profession is bright and beautiful!

Additional Resources

• Can Gravyty get development officers to make more prospect discovery visits?
• David Lawson explains how Big Data can translate into Big Good
• Out of the Shadows: Why prospect research helps fundraising (requires a subscription)
• Back to the Future with #Researchpride
• Being Mortal: Medicine and What Matters in the End

Ratings… indicators… categories – whatever the name, we use them to help us make sense of too much data. We use them to solve the problem presented in the question: Where or with whom do I get started? They help us navigate the world. But they can also limit our world – and our ability to feed the prospect pipelines of the future.

As human beings we like – and need – to categorize people. We might choose to categorize by gender, skin color, nationality, ethnicity, zip code, or even by hobbies (I used to refer to the trout-fishing people that seasonally descended on my tiny neighborhood in Pennsylvania as “fisher-people”).

But as we all know, this categorizing, or profiling, can lead to a limiting bias. For example, hiding within wealthy zip codes are families struggling to make ends meet. That’s why prospect research professionals verify wealth screenings and evaluate prospects individually. We need to generalize and categorize, but we balance that by recognizing each person as an individual.

In his book, Big Good: Philanthropy in the Age of Big Data & Cognitive Computing, David Lawson tells us to prepare for resistance. Resistance against using a new technology. Resistance against ratings. Resistance against change.

With AI or cognitive computing, ratings can be sliced and diced using ever more data. Cognitive computing can reveal new perspectives and new ratings using computing power that is much better at detecting and interpreting patterns than our human brains ever will be.

But how can we trust ratings we can’t understand?

When I interviewed David in the Prospect Research #ChatBytes podcast, he conceded that if we ask the machine a biased question or feed the machine biased data sets, we will get biased results. But he also pointed out that we can leverage the power of cognitive computing to strip out known biases.

We can ask a program to include or exclude a variable such as age, gender, or zip code. And with this new powerful program that David has nicknamed our “cognitive colleague,” we can reveal new opportunities. And what do we know about new opportunities and new ideas? People will resist them!

Nevertheless, it remains our responsibility as development officers and researchers to navigate this resistance. To steer our organizations into the future we must introduce and manage our new cognitive colleague, and translate and present its findings in a way that can be understood, related to, and acted upon.

But don’t listen to me! Jump over to the podcast and listen to David yourself. He’s quite entertaining and full of visionary ideas. Even better, attend the AASP Summit in Chicago where you can hear David and Lori Lawson live, delivering the keynote presentation (Nov 14-16, 2018).

Additional Resources

• David Lawson explains how Big Data can translate into Big Good
• Back to the Future with #ResearchPride
• AI, philanthropy, agriculture, and meaning of life by David Lawson
• Humanizing Fundraising With AI