Commissions for "selling" planned gifts?

A reader of this blog submitted a question to me looking for "examples of compensation agreements that are based on other factors besides the amounts contributed, but still reward success and provide incentives for competence and performance?" In other words, he is looking for one of the shangri la's of planned giving - gazillions of motivated and aggressive professional financial salesmen "selling" planned gifts for your organization (albeit with commissions).

The questioner also mentioned that he represented a non profit that issued charitable gift annuities ("CGA") and paid small commissions based on the amounts contributed. It wasn't clear if his question only involved CGAs or all types of fundraising (for this post - I am focusing only on CGAs and planned gifts).

The email was missing another important fact, which we can make an educated guess at: Who are the "salesmen" of CGAs for the non-profit? If the "salesmen" are in-house fundraisers, the answer could be a bonus system (regardless of the general ethical problems inherent with any bonus system in fundraising). We are forced to assume that the "salesmen" are non-employees - most likely financial advisors.

Instead of vilifying the questioner or the org he represents (which many in the planned giving world might do), let's think about it.

Firstly, if you read my pieces on Robert Dillie - the Ponzi schemer CGA issuer (click here http://plannedgift.blogspot.com/search/label/ponzi%20schemes), one thing you should have noticed is that this guy (through his Mid-America Foundation) issued over $55 million in CGAs to over 400 donors over 5 years. Few charities can come anywhere near that production - and the gifts were to a new foundation with no history of anything!

On the flip side, the Pension Protection Act (PPA) of 2005 very specifically states that for CGAs issuers to be free from SEC regulations, CGAs can not be issued with commissions to salesmen (The practical legal implications of the PPA will be the topic of an upcoming blog post. My wonder while reading the Dillie case was why didn't the court just look at the PPA to determine that the CGAs in question - all sold with commissions - weren't afforded PPA exemptions and were automatically considered investment products? Why the whole analysis in the case when the answer was in a statute?)

Ok, I have to admit, as a consultant, it has crossed my mind that should I ever find myself on my own (I work for a large fundraising consulting firm and previous worked in-house in planned giving after leaving law practice), is there any way I could be compensated based on the gifts closed? This is not about greed on my part, more out of a practical consideration: many charities have actually approached me and wondered if I could help them (but they couldn't afford to pay out of existing cash flow). In other words, charities looking for a "contingency fee agreement" in lieu of standard planned giving consulting fees.

Putting aside the PPA (which basically forbids commissions with CGAs and possibly with other planned giving vehicles), is there any way for someone to get paid for closing planned gifts for an institution on some sort of contingency?

When it comes to planned gifts (CGAs and CRTS in particular), there are options outside of "dreaded" commissions.

CGAs: There are two ways a third party can be paid for helping an organization receive CGAs.

1. Administrative/investment management fees - if a third party provides administrative and/or investment management services for a CGA program, it is perfectly reasonable for the issuing charity to pay a fee out of the CGA pool for those services. Mind you, there needs to be legitimate "services" provided (not just uncovering CGA prospects) and fees for administrative services can not be based on the size of the gifts (rather the fee should be commensurate with the services provided). Not being an expert in SEC regs or investment law, I would throw out a word of caution to those non-investment managers trying to get a piece of the annual basis point fees traditionally taken by investment firms. What I have seen is third party administrators providing real administrative services and charging flat fees per annuities. I have also seen licensed stock brokers providing "free" planned giving consulting services in exchange for investment management fees they will receive when funds come in that the broker manages. As an aside, this is one of the knocks I have on those investment providers that claim to offer free planned giving consulting services: they have no interest in future bequests (no investment management fees from future bequests) but that is where 80% or more of planned giving revenue lies.

2. Reinsurance - If you read my earlier post about CGA risk (http://plannedgift.blogspot.com/2009/06/gift-annuity-risk.html ), you should understand that I loathe the idea of taking any principal out of a CGA pool because I believe charities generally don't understand the long term investment risks and they need to have as much cushion as possible in their CGA pools. That being said, I have become much more attuned to reinsurance. I actually think it should work for most charities, especially smaller and less sophisticated ones. And, reinsurance does open the possibility for commissions on the purchase of the reinsurance contract to a salesman. What the Hartford told me (and they are the only ones that I have found that handle New York CGA reinsurance properly) was that a "consultant" who has a valid life insurance license could receive a commission from the sale of the reinsurance contract. They said there was a percentage range (I can't remember the percentages), not so high, that the charity would see tacked on top of Hartford's own standard sales commission. In the case of reinsurance, at least the long term risk has been mitigated so giving a piece of the pie to a "salesman" isn't that bad.

CRTs: As for charitable remainder trusts ("CRT"), investment management fees are much easier to arrange. CRTs are stand alone vehicles so your charity can choose to let the investment advisor who "sold" the idea to the donor of a CRT manage the investments of the CRT. A word of caution - I have seen many cases where the donor's investment manager kept control over the newly created CRT assets and botched it royally. So again, your investment manager can still receive fees for managing a CRT, whether the charity is trustee or someone else.

Outside of investment management fees, trusteeship is the last refuge for potential fees for a "salesman." Individuals can be appointed trustee of a CRT and most states allow for a trustee to receive a fee for his or her services (usually subject to state law limitations). What if your "salesman" is appointed trustee? Depending on the size of the CRT and state law, that could be a great deal of annual "trailing commissions" for the salesman/trustee.

But the challenges of being CRT trustee are several-fold: 1. A trustee has a fiduciary duty to both the charitable remaindermen and the income beneficiaries - a legal standard of care/responsibility which sane individuals usually would want to avoid except for close relatives; 2. Managing the administration (payouts, tax returns, etc...) for CRTs are not everyday tasks, even for accountants and other financial people, and typically those not specializing in them mess them up miserably (with potential personal liability due to problem #1 in this paragraph); and 3. Overseeing the investment of CRTs, which may sound easy for financial salesmen, is in actuality not so easy and can also land the trustee a big fat law suit. Of course, as trustee, you can do what most charities do when they trustee CRTs - have a bank or trust company do all of the lifting (admin. and investing) for their fees and you sit back and take your fee - but as trustee, you are still legally responsible at the end of the day if there are problems.

In truth, the idea of an individual "salesman" serving as a CRT trustee is plain old nuts - not a good idea unless you are a bank or trust company or a charity with financial expertize in-house.

Back to the questioner's original point - how about rewarding your "salesmen" for the amounts they can bring in. I have no answer because I don't think it works (outside of the investment management fees, administrative fees or reinsurance commissions). Unfortunately for the charitable world, they are missing out on the financial industry's sales-force - which Robert Dillie tapped into and made a mint(and then went to jail). On that thought, maybe it's better to stay away from the whole "financial incentive" push that would come along with a "professional" sales-force.

If you realize that Robert Dillie received $55 million in "gifts" to his fraudulent foundation, you have to wonder how this happened. My guess: hundreds of financial salesmen - with commission incentives in hand - unknowingly pushed a bogus foundation on their clients. It makes me wonder if those salesmen had any duty to their clients to do any due diligence before recommending the "investment"/"gift" to the Mid-America Foundation? Charities are obligated to provide whoever asks a copy of their most recent 990 tax return - so finding out information about the foundation should not have been very difficult. Did these salesmen think to double-check the solvency of the "company" behind the "product" they were selling? If I were someone who lost my gift annuity in the Dillie fraud, I would be looking closely at those salesmen who probably did no due diligence before pushing a fraud on their clients. Of course, the Mid-American Foundation was probably the only one offering commissions to outside sellers of their gift annuities.

The point I am making from the previous paragraph is this: despite the "good" (i.e. dollars) a professional sales-force could do for generating more CGAs and other planned gifts, the "bad" (i.e. unethical practices that lead to law suits) far outweighs the idea. Planned gifts are already ripe for law suits from disgruntled donors - and that is where you have a generally highly ethical "sales-force" in your in-house fundraisers. I can only imagine the problems caused by having the "snake-oil" insurance sales-guy world out there hawking your planned gifts.

Sorry questioner - the commission idea is not a good one for planned giving. There is no magic answer for selling planned gifts with incentives for financial sales professionals.