Why Capacity Ratings are Bunk and What You Can Do About It

moneyflowchartSMby Rhode Warrior Blogger, Mark Noll

I was approached once by my then Vice President of Development and asked a simple and forward question: “How confident are you in these numbers?” His question was regarding the Net Worth-to-Capacity-to-Ask Amount, the hop, skip and jump of Prospect Research, for the prospect he was going to solicit on his trip to the West Coast.

At the time I had been a researcher for about four years and given all that I had been taught, I was confident in those projections. Sometimes it’s not what you know but what you don’t know. The more I learned, the more my suspicions rose, especially in the case of the wealthiest of our prospects.

The Pseudoscience of Capacity Ratings

As Prospect Researchers, we gather information on asset holdings and/or lifestyles and then apply a sort of pseudoscience calculation to determine someone’s net worth and then reverse engineer a capacity rating. This capacity rating is then adjusted to calculate “the ask amount.”

In mathematical terms, we can say we are solving for y based on x. But how sure are we about x? Sure it is an estimate, but since factors are missing, how confident can we be even in an estimate?

Fact is, the higher the wealth of the prospect, the more likely we are missing major holdings. The top 1% as they’ve become known, take advantage of opportunities available to them to invest their wealth, minimize taxes and increase their holdings.

With the exception of those whose wealth is derived strictly from an inheritance, the wealthy didn’t accumulate their holdings by having money fall on them. They made sound business and/or investment decisions. So why would we be naïve enough to think that their holdings are restricted simply to what we can see on asset search?

Taking it one step further, these are people who not only take advantage of investment opportunities the average citizen does not have, but they also have the best accountants and lawyers counseling them on how to maximize their investments and minimize their taxable income. Their investments are not in plain view for everyone to see.

Where the Wealth Hides

The wealthy likely hold assets in hedge funds and other private investments we never see. They can hide assets in off shore account, set up Revocable Living Trusts to move the needle in another direction and even place assets in a Limited Liability Corporation.

When Forbes magazine makes a calculation on someone’s wealth and states that they are worth $500 million, what they are in fact saying is that they are worth at least $500 million based on their research and calculations.

If Forbes cannot figure out their net worth, why would we even venture to make wealth estimates on what may represent only a small percentage of the holdings?

Mission Impossible

I once spoke to a University President who was upset that his top Prospect Researcher completely missed the mark on estimating someone’s wealth that was resultant from the sale of a private business. As best as I could, I tried to tell the president that unless one had inside information on the sale amount, no researcher was going to be able to determine the exchange price of the private company. And don’t get me started on some of the ways researchers exercise futility in comparing a private company to a similar public company.  The differences are too far reaching to make that analogy.

The fact was that this poor Prospect Researcher was tasked with solving the impossible as we are often asked to do.

This inability to see the whole picture works both ways in that we can both underestimate someone’s capacity as easily as we can overestimate. We can look at a subscription database or even Zillow to see the value of one’s real estate holdings; we can also see stock holdings of highly placed executives in public companies; we have reasonable access to salaries, credit card holdings as well as our own internal data. From this information we apply calculations to estimate net worth and capacity. Some subscription databases will go as far to do those calculations for us.

Given all these wonderful pieces of information, we get a sense of security in spewing our final capacity ratings or ranges. But I am often left wondering just how far off the mark we really are. Do we know their debt levels? We are not privy to bad investments or poor private business decisions. Is there a health issue or other personal matters lying in the weeds that reverse our best efforts at determining capacity? We have access to asset information but little data on debt.

My first Vice President told me that if he makes an ask and the prospect doesn’t choke on his drink at that very moment, then we left money on the table. And he is correct. The ask should shock the prospect because it should be at the top of his/her capacity. Make too low an ask and the prospect’s nonchalant reaction speaks volumes of how far away we were from their capacity.

What You Can Do About It

There are “blind spots” in our calculations. Some researchers deftly use the hold harmless phrase (read: Disclaimer) of capacity being based on “known assets.” I like that because it leaves open the possibility of missing assets or debt that compromises our estimates.

We do not see assets derived from personal investments, inheritances, private company profits and other areas. On the other hand, we also do not see losses from bad investments, expensive hobbies or habits, tuition payments to grandchildren and other liabilities that offset our capacity estimates.

An estimation of wealth combined with a Development Officers ability to secure more information over the course of their cultivation is essential in recalculating capacity and closing the chasm that may exist between our early estimates and our final ask amount.

There are simply too many unseen factors involved for us to apply a universal logic of wealth and capacity.

We are information gatherers. The more information we have, the better we can do our job. But the financial playing field is not level. Calculations for those in the middle of the pack may well work but the further from the norm in terms of wealth, the more likely we are dealing with the unknown. This unknown upsets the apple cart in our calculations.

Just know that, like Forbes, any calculation you make may well reflect a minimum capacity.

Continuing the Conversation

About the Author

Mark Noll is an Advisory Board Member of The Prospect Research Institute and Associate Vice President of Research and Development Services at the University of Rhode island Foundation. A member of AASP as well as APRA, he spends his free time at Starbucks and excels in the art of mediocrity.

12 thoughts on “Why Capacity Ratings are Bunk and What You Can Do About It

  1. Great article Mark. It says all the things that need to be said. Some people may not be familiar enough with the terrain to understand that you CANNOT know everything, and voicing these ideas (to some people) sounds as if you are making excuses or just aren’t good enough at your job. It needs to be said out loud and generally recognized, so that researchers don’t feel overconfident when they shouldn’t be, or incompetent when their bosses find fault with their reports.

  2. Nice one, Mark. This is the very reason why I religiously consume Million Dollar Listing (take your pick of cities). The buyers and sellers – who they are, the nature of their businesses, and how much they offer on luxury properties – provide insight on what wealth really looks like in North America now.

    I think we could get closer to figuring out a prospect’s true wealth if we partnered with our gift planners on some of their prospective activity. They’re privy to comprehensive financial and estate plans that may make you salivate!

  3. Mark, you hit the nail on the head with this article! It is important that our fundraising partners understand about capacity ratings, but more so that prospect researchers themselves truly understand what they are saying in their research.

    For years, I have sat through webinars and conferences, have read countless prospect research articles describing how to calculate this or that, and was always uncomfortable with what seemed to be the main emphasis…getting that dreaded capacity range. Perhaps I was uncomfortable with the fact that prospect researchers have been placed in this precarious position in the first place. After all, how much freedom does one have to argue with a director of development or president who is requesting the magic number? The expectation is they hired you and this is what they are requesting. Even as an independent contractor, I realize that more often than not, this is all the client is looking for. Fortunately, I am not held by the same confines as “captive employees.” I have the freedom to state the obvious: it’s not just about capacity. Are the prospects even philanthropically inclined? If so, are they or would they be interested in your mission? Are you looking at them as prospects just because of their wealth? After all, we’re talking about people here, not just dollar signs.

    Prospect research is an art and a science. Number crunching based on what we know about wealth — more often than not, real estate holdings — does not provide the complete picture of the individual. If a prospect researcher were to research himself/herself based on research tools and the internet , would he/she agree with the findings regarding the capacity rating? It’s an interesting exercise and one that might help to ground us researchers when we begin to delve too deeply into our calculations, or are requested to do so by our supervisors. We just can’t possibly know everything….

  4. Great comments! Capacity ratings really do a good job of demonstrating just how human we all are. Capacity ratings have a way of seducing many in fundraising into a false confidence in a number. Vendors seeking to inspire trust in their product don’t debunk that false confidence and we wouldn’t expect them to. Nevertheless, it sure does cause tension! I wonder if Forbes has as much angst about its net worth estimations…

  5. Hi all Just curious about comment regarding access to credit card holdings…
    What type of access are you speaking of?

    1. Hi Ann,

      Subscription databases such as WealthEngine have within their household profiles information on whether or not the person has premium and/or upscale credit cards.

  6. Totally agree with you, Mark! I tell our development officers that the capacity rating is directional information that can aid with segmentation. But don’t base your ask off of it.

  7. Don’t undersell this essential, analytical work though. The impartiality of research processes can make input from sources closer to a prospect that much more meaningful.

  8. So nice to be affirmed in what I know and have felt. Shine on Prospect Researchers… we are amazing!!

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