The economy is slowly starting to improve, but its after-effects will have a profound impact on prospect research and fundraising. In this article, Ian T. Wells of Ian T. Wells & Associates discusses some of the challenges of the post-recession economy.

Research in a Post-Recession Economy

Prospect Research has always provided a significant return on investment, but the need for it has never been greater than it is today. Economic events have had a profound impact on the finances of the American people, and subsequently will impact what funds are available for philanthropic endeavors. Just as Americans are adapting to new economic realities, development offices must do the same, and effective Prospect Research processes will help them navigate their way through this transitional period.

Although the Great Recession technically ended in July 2009, its aftershocks continue to reverberate throughout the country. Five years after the financial crisis began, 93% of Americans had yet to recover their financial losses.¹ In 2003, the average American household had a net worth of $87,992 [figures have been adjusted for inflation and are presented in 2013 dollars]. Ten years later, the net worth of that household had collapsed by 36% percent to $56,335.² For elite households, however, that trend reversed. In the same period, the top 5% of American households saw their net worth jump from $1,192,639 to $1,346,834; a gain exceeding 14%. While the average American’s net worth was devastated by the Great Recession, the wealthiest members of society have prospered.

Similarly, the finances of the federal government are the worst they have been in generations. The national debt has increased from 30% of the nation’s Gross Domestic Product 40 years ago, to 99% today.³ As of August 31st, 2014, the National Debt exceeded $17.7 trillion.⁴ Unsurprisingly, politicians are under increasing pressure to reduce government spending to more sustainable levels. Threats of government shutdowns are now a regular part of our political discourse, and cuts to needy programs are viewed as “trimming the pork”. Even research grants to the world’s best scientists are being cut,⁵ leaving noteworthy programs adrift without funding. Nonprofits will not be able to rely on government grants for endless support into the future. Yet their need for this money will remain.

Improved Annual Fund appeals may be able to mitigate some of these changes, but they cannot do so alone. This is not to suggest that Annual Fund efforts are insignificant. As will be explored in a future study, many Annual Fund initiatives have untapped potential that can be better utilized with thorough analytics. The success of the Ice Bucket Challenge was a testament to what can happen when a populist philanthropic effort goes viral. Yet, there are 966,599 public charities listed in the United States.⁶ When the zeitgeist aligns with a philanthropic effort, it can literally bring $100 million to a single charity, but that does little to help the remaining 966,598 organizations.

For institutions of higher education, further challenges await in the years ahead. Studies indicate that younger alumni do not share the devotion to their almae matres exhibited by their forebears, and three-quarters of Millennials would prefer to donate to other organizations before supporting their own colleges.⁷ This development may not necessarily be a surprise, given the increasing cost of education. Over the past three decades, the cost of tuition has increased 1,120%, and Americans now collectively owe more than $1 trillion in college loans.⁸ As young graduates begin their adult lives with an average student debt of $33,000,⁹ they are less likely to perceive their universities as cash-strapped organizations in need of philanthropic support. As young graduates continue to take on greater amounts of debt to finance their education, fundraising models that have historically relied on a large base of grateful alumni will yield diminishing returns in the years ahead.

Amid this dire news, it may be easy to conclude that the philanthropic industry is headed for a dark age devoid of donations. But the truth is just the opposite: America’s GDP remains the greatest of any sovereign nation.¹⁰ The Dow Jones Industrial Average has regularly broken old records for the past two years, and once-unthinkable averages are all but taken for granted. Luxury goods continue to thrive in the market: a hedge fund manager just purchased the most expensive home in the United States for $147 million in May,¹¹ while last year saw the completion on construction of a record-breaking 590’ yacht. There are so many billionaires today that hundreds of them are too “poor” to be listed on the Forbes 400. There are more dollars to go around than ever before, and they are held in fewer hands.

Those who are familiar with the Pareto Principle may already expect 80% of their funds to come from the top 20% of prospects. But this effect is becoming even more pronounced in our economy, and leading nonprofits may expect as much as 90%+ of their funds to come from the top 5% of their prospects. Now, more than ever, the fate of nonprofits will hinge upon their ability to cultivate the interests of the elite. Bake sales and telethons will yield limited results compared to the enormous financial potential of just one elite prospect. In order to be successful, nonprofits will have to adopt more efficient strategies to discover and manage the prospects with whom their frontline fundraisers will work. This is where Prospect Research will make its impact.

Greater investments in Research-related processes – such as devoting more time to proactive identification efforts, or implementing portfolio management strategies to better cultivate top prospects – will help nonprofit organizations in their efforts to attract and motivate their most affluent constituents. By adopting better prospect development protocols, development offices will better adapt to this challenging environment. Indeed, many may thrive more than they have in the past by undertaking such measures. While some organizations may question if they can afford to significantly invest in prospect research, the opposite question should be posed: can they truly afford not to?

¹ Pew Research Center: A Rise in Wealth for the Wealthy; Declines for the Lower 93%
² The Russell Sage Foundation: Wealth Levels, Wealth Inequality, and the Great Recession
³ Kimberly Amadeo: National Debt by Year Compared to GDP, Recession and Other Major Events
⁴ U.S. Treasury: Monthly Statement of the Public Debt of the United States
⁵ The Boston Globe: Grants for Research get Scarcer; Harvard Scientists Face Funding Gap, Sept. 23, 2014
⁶ Nation Center for Charitable Statistics: http://nccs.urban.org/statistics/quickfacts.cfm
⁷ The Chronicle of Higher Education: From Millennial Donors, Little Loyalty to Alma Mater, September 8, 2014
⁸ Daily Finance: The High Cost of Higher Education Explained in One Simple Graphic, March, 13, 2013
⁹ The Wall Street Journal: Congratulations to the Class of 2014; The Most Indebted Ever, May 16, 2014
¹⁰ data.worldbank.org
¹¹ Forbes: Most Expensive Home Sale Ever: East Hampton Estate Sells for $147 Million, May 5, 2014