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Beware of charities' 'donor illusion'

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TESS VIGELAND: I make a point of saying "no thanks" at the checkout counter when offered the "opportunity" to donate there. I've chosen my causes and I stick to them -- no matter how guilty it makes me feel to say no to that extra dollar for Race For The Cure. And I put a premium on knowing where that money is going and how it's getting there.

But Ashley Milne-Tyte discovered there's often fine print involved in the promises charities make about what's happening with your donation.


Ashley Milne-Tyte: Listen to a snippet of this ad from charity Plan USA.

Plan USA ad: When we met him, 12-year-old Alex had just watched both of his parents die. The only family he has now is a very old grandmother.

Several years ago, my heart melted at a similar ad from another charity, Christian Children's Fund. I began sponsoring a little boy in India; I sent about $25 each month. It helped fund a program to support and educate local families, including his. I wrote him letters; he wrote me back.

Then the charity abruptly informed me they'd expelled the child and his family from the program. They said his parents weren't sticking to the rules and were misusing funds.

Anne Lynam Goddard: We do everything possible to keep that relationship going to benefit the child. But there must've been something that they felt the benefit wasn't going to the child.

That's Anne Lynam Goddard. She's president of Child Fund International, which recently changed its name from Christian Children's Fund. She couldn't speak to my case, but she says it's rare for the charity to end a relationship between sponsor and child -- and if it does, it's for good reason.

Goddard: You know, our good stewardship would say if the child is not benefiting appropriately, then we would need to inform the sponsor of that.

OK, so my rational side gets it. But I felt betrayed and terrible for the kid. There seemed to be a disconnect between what the charity promoted -- the joys of the sponsor-child relationship -- and the reality of cutting the cord for business reasons.

Tim Ogden edits Philanthropy Action, a Web site for donors. He says I got caught up in what he calls the "donor illusion," the promise of a direct connection between a donor and an individual recipient.

Tim Ogden: It's an illusion that's created by the marketing, and it's created because it's a powerful one for attracting donations. But the reality is, if you really care about doing the most good, then there shouldn't be that direct connection.

Because he says charities need the flexibility to respond to the situation on the ground. That could mean using a donor's money for flood relief instead of buying a family a goat -- or simply not allowing money to be misused. He says many charities expand on their business model in the fine print.

Ogden: The big problem with donor illusion is, of course, that plenty of people don't read the fine print. And when they find out the way things really work, they feel lied to or misled, and they react very negatively.

Something like that has happened recently at another organization, Kiva. The nonprofit helps donors fund entrepreneurs, mainly in developing countries, through local microfinance organizations. Until recently, plenty of Kiva donors, including me, thought they were sponsoring a specific person -- the site posts entrepreneurs' photos and stories and encourages you to pick one. But it turns out that donations actually backfill loans that have already been made.

Matt Flannery is co-founder and CEO of Kiva. He says Kiva changed the wording on its Web site soon after the controversy blew up.

Matt Flannery: We learned through this process that our users wanted to see more detail upfront about the underlying mechanics. Now, those processes were always described on the site, but I think we learned that they needed to be described more prominently.

He says donations are still flooding in. But why tout the personal connection at all? Because it pulls people in. Child sponsorship makes up the largest chunk of international giving in the U.S.

Tim Ogden of Philanthropy Action believes it would be better if nonprofits dropped the whole person-to-person idea.

Ogden: The people who are being helped, the help they're getting is dependent on the whim of the donor, not on what they really need.

He says the more clear-eyed donors are, the better it is for the people who need their help. But that doesn't mean donors like me won't miss the illusion.

I'm Ashley Milne-Tyte for Marketplace Money.

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