Donor-Advised Funds: By the Numbers

Last week I participated in a terrific debate about donor-advised funds with my good friend Stuart Comstock-Gay, the president of the Vermont Community Foundation. (Thank you, Planned Giving Council of New Hampshire and Vermont, for inviting us!)

Stu and I found a lot of common ground, as well as several areas where we cordially agreed to disagree. Stu made the case for donor-advised funds, saying that their flexibility and low entry point encourage charitable giving and democratize philanthropy — private foundations for the average person. He also emphasized their efficiency. I brought out my concerns (familiar to readers of this column) that donor-advised funds were attracting money that otherwise would be going to actual charities. I also pointed out that money goes into donor-advised funds more readily than it comes out, and I described the unethical financial incentives that are driving the growth at commercial gift funds such as Fidelity.

In preparing for the debate I came up with some numbers that I think illustrate the challenges posed by donor-advised funds. (Because we were meeting right across the river from Dartmouth College, by far the largest fundraising operation in Northern New England, I make references to Dartmouth in a few places.)

The numbers:


2 Ranking in 2012 (the most recent year studied) of Fidelity Charitable in the Philanthropy 400, the Chronicle of Philanthropy’s listing of American nonprofits that have raised the most money.

89% Increase in donations to Fidelity Charitable from 2011 to 2012.

13 and 18 Ranking in the 2012 Philanthropy 400 of Vanguard Charitable Endowment and Schwab Charitable, the second- and third-largest commercial donor-advised funds.

21 and 24 Ranking in the 2012 Philanthropy 400, respectively, of Harvard and Yale Universities.

105% Increase in donations to donor-advised funds between 2009 and 2012.

1:17 Ratio between what Dartmouth College raised in 2012 ($194 million) and what Fidelity Charitable raised ($3.2 billion).

1:3 Approximate ratio of the Dartmouth College endowment after 245 years ($3.7 billion) to the assets of Fidelity Charitable after 23 years ($10 billion).

201,631 Number of donor-advised funds in the U.S. at the end of 2012.

$13.7 billion Total dollars donated to donor-advised funds in 2012.

$9.4 billion Total dollars donated to all environmental, conservation, and animal rights organizations combined in 2012, or $4.2 billion less than what was given to donor-advised funds.

$45.3 billion Total dollars held in donor-advised funds at the end of 2012.

1007 Number of entities sponsoring donor-advised funds, according to the National Philanthropic Trust, including 47 financial institutions.

$75 million Estimated fees earned by Fidelity Investments on investments in their mutual funds from Fidelity Charitable (based on .75% average fee on $10 billion total assets).

70% Percentage of donations that Fidelity Charitable says involve the donors’ financial advisors (that is, where the donors’ brokers are being paid a commission for advising on the investments of the funds held there).

100% Percentage of donations that involve providing commissions or fees to donors’ financial advisors at the American Endowment Foundation, a commercial gift fund based in Hudson, Ohio.

102% Increase in donations to the American Endowment Foundation between 2011 and 2012 ($62.5 million to $126.7 million).

16% Average 2012 pay-out from all donor-advised funds.

16% What the annual grants paid by donor-advised funds would be if 20% of the donors, by fund value, paid out 80% of their funds in grants, and the other 80% of donors paid out absolutely nothing.

0% Amount that donor-advisors are required by federal law to grant out to charity in a particular year… or ever.

1 Minimum number of grants that Schwab Charitable requires its donor-advisors to recommend in a five-year period.

$50 Minimum grant size at Schwab Charitable.

Copyright Alan Cantor 2014. All rights reserved.

 

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15 Comments. Leave new

  • I have a small brokerage account at E*Trade. Yesterday I completed a survey from E*Trade that queried my interest in using a donor-advised fund they are considering implementing there. I told them I wasn’t interested because I want all the dollars I am able to donate in a given year to go to the non-profit organizations directly.

    Reply
  • Thanks, Linda. That E*Trade, the most hands-off and transactional of all brokerages, is now starting a donor-advised fund shows how ridiculous the notion is that the sponsoring organizations (that is, Fidelity or E*Trade or whoever) is making the actual charitable grant decisions. That is, the reason donors get the full tax deduction is because these are considered outright gifts to 501-c-3 organizations, and THOSE ORGANIZATIONS then control the money. The donors’ advice, supposedly, is only that — advice. Of course, that’s not at all how it’s marketed or how it works.

    This is a wink-and-nod approach to tax law. We say the donors aren’t in control, but of course, they are. But obviously, there’s money to be made in this area, and these places are making the most of the opportunity.

    Thanks for weighing in — and for giving directly to good causes!

    Reply
  • Great post Al! I wonder about the counter factual, how much of the money going to the Donor Advised Funds would not have been donated to any charity without the marketing effort of the sponsors? I agree DAF’s and for that matter the United Way were fabulous technology advances in philanthropy 100 years ago that now we have to re-examine. From a user perspective, does the paradox of choice (I need look no further than my real or electronic mailbox for dozens of worthy causes) keep people from acting in as generous a manner as they may if we delay the decision making, but lock in a final decision. Completing the philanthropic commitment that we are paying for with tax advantages seems to be the ultimate goal, and we know that the incentives work against for the players engaged in collecting the donations. I agree some controls might help, like limiting the amount of time a DAF could hold assets, but my sense is we are reaching parts of new markets with the commercial DAFs (folks with less philanthropic intent or inclination). I don’t have the data to know if growth of these organizations, in a manner that has a profit or sustainable financial model, is ultimately growing the philanthropic pie, or just taking a bigger slice.

    Reply
    • I really suffer from a lack of spell check

      Reply
    • Good thoughts, Art, and great to hear from you.

      I think that, certainly, some people are setting up donor-advised funds who otherwise would not make a charitable gift. And, absolutely, some people are setting up DAFs instead of private foundations, which I think in most cases is the right choice. But given that overall charitable giving is fairly flat (up 1.5% after inflation in the same year that Fidelity went up 89%), and given that charitable giving has consistently run at about 2% of individuals’ income, my conclusion is that the bulk of the money that is going into DAFs would otherwise be going to operating charities. I don’t think DAFs are expanding the pie (or we’d see rising charitable giving). I think for the most part they’re re-defining what charity is. Instead of giving money away to good causes, now it’s a matter of putting it in an account that you can grant from in the future.

      You’re absolutely right that there are so many charities that it can cause real donor fatigue, confusion, and paralysis. And I counsel charities to cut through that clutter by developing personal relationships with the donors — to stand out as something other than simply another request for funds in the in-box or mail. But I don’t think the number of charities making an appeal is why DAFs are booming. They’re booming because the commercial gift funds are booming, and they’re booming because of the financial incentives for advisors and companies.

      I wish the IRS had not given Fidelity its 501-c-3 status back in 1991, but you can’t unscramble that egg. But if we could have a seven-year spend-down requirement, that would serve to flush the money out to charitable causes, while keeping DAFs as an effective way for donors who are dealing with a liquidity event (such as the sale of a business) to make a significant tax-wise charitable gift quickly.

      That is, in my humble opinion! Thanks again!

      Reply
  • Awesome resource, Alan! I’m including some of these stats in my Oct board presentation!

    Reply
  • I started an account with a DAF from a brokerage house two years ago for several reasons.

    1. There was a tax advantage to contributing appreciated securities now as opposed to later (5 yrs and beyond) when I am retired and will likely be in lower tax bracket.

    2. I would prefer not directly donating the amount now because I am not 100% sure of who to donate to. I am donating ~20% of NAV of my DAF account over the past 2 yrs and plan to continue this.

    3. For the total amount that I plan to put in my account (100 -500k), it does not make sense to set up a foundation.

    Rather than criticize the DAF’s, I think the non-profits need to make a more concerted effort to communicate with people like me. Social media, blogs, organized meetings for DAF account holders would be great. Being more visible and articulating their goals would make me more likely to donate more in the future.

    Reply
    • Thank you for weighing in, RT.

      You do a good job of explaining the motivation for starting a donor-advised fund, and you may be surprised to find that I agree with you in many ways. Yes, for an account that size, starting a private foundation makes no sense. In fact, starting a private foundation rarely makes sense. (Because I am a critic of DAFs does not make me a defender of private foundations.)

      And you demonstrate well how DAFs can facilitate tax-smart giving. This is particularly the case when donors experience a “liquidity event,” such as the sale of their privately-held businesses. Certainly the ability to create a DAF potentially leads to more thoughtful philanthropy than if someone tried to distribute a significant amount of charitable money with a December 31 deadline.

      I say that this “potentially leads to more thoughtful philanthropy,” however, because once the gift is made to the DAF, the I.R.S. is silent about the distribution of the assets. An individual donor can let his donor-advised fund sit invested in perpetuity, according to the feds, not making a single grant to charity. If you read some of my other pieces about donor-advised funds (such as http://philanthropy.com/article/Donor-Advised-Funds-Let-Wall/149679/), you’ll see that I support one simple fix that would ameliorate most of my complaints about DAFs. That’s the plan — first suggested by Boston College Law Professor Ray Madoff, and later echoed in more stringent fashion by House Ways and Means Chair Dave Camp — that DAFs be required to spend down their assets within seven years (Madoff’s plan) or five years (Camp’s version). You say, as I read it (I’m not certain I’m interpreting this right) that you’re distributing 20% of the value of your DAF’s market value every year to charity. If that’s the case, then you would essentially meet the terms of the Madoff/Camp proposal, because you’re getting the money out the door to charity over the course of a few years.

      So we might actually agree on most points. What would be your take on the Madoff/Camp spend-down provision?

      One final area where I might take issue with you: your sense that nonprofits need to make a more concerted effort to communicate with people like you. Yes, of course it’s true that nonprofits could always do more to connect with potential donors and to make their case. But I’m not sure why and how reaching you should be any different because you have a DAF. In both cases, you the donor (or the donor-advisor) are in position to make the charitable decision. The problem that nonprofits face is that sometimes when there’s a DAF involved it’s inherently harder for the nonprofit to connect with the donor. At times the gift is anonymous, and so the nonprofit doesn’t know whom to thank or to steward. (If the gift comes from an anonymous fund of Fidelity Charitable or the East Branch Community Foundation, there’s no opportunity to shake the donor’s hand at a reception, or to invite the donor to a special tour.)

      Moreover, some DAF sponsors act as gatekeepers for donors. This is particularly true for some community foundations. All communication needs to pass through a staff member. While I fully understand the motivation of donors not to want to be hassled by nonprofits, it adds a layer of complexity and bureaucracy, not at all conducive to the kind of communication you advocate.

      Finally, a word about the ability of nonprofits to attend to donor relations. I do not work for nonprofits, but I work with them in my consulting practice. They are already under growing pressure to find funding. Government funding is shrinking, even while demand for services is rising. Meanwhile the reporting requirements for the government grants nonprofits do get have gotten much more time-consuming and onerous. Corporate donations are less than half of what they were (as measured as a percentage of pre-tax profits) thirty years ago, and they are much more tied together with marketing schemes, rather than pure philanthropy. Foundations increasingly do not consider unsolicited applications for funding, and a generation of self-appointed evaluators of the nonprofit world (such as Charity Navigator) are making powerful judgments about organization’s value, impact, and integrity based on precious little information. Nonprofits are under siege in so many ways, and they have to deal with these funding challenges even while they are supposed to be feeding hungry people, housing the homeless, counseling the despairing, educating the ignorant, saving the environment, and all the other activities that make up nonprofit missions. Having donors expect — indeed, demand — higher levels of attention from nonprofits under such circumstances might be considered unfair.

      Reply
      • Alan;

        As I understand it, I would support a spend down requirement. I never give anonymously but don’t have a problem with those that do.

        I am new to this field. I try to read and get information about nonprofit organizations but it’s a little overwhelming. Do nonprofits work together and have symposiums like professional societies? I suspect that a lot of new DAF account holders are like me – boomers nearing retirement who have set up modest size accounts and plan to be more active volunteers and contributors after retirement. The social interaction with the nonprofit staff and other account holders would be attractive to me.

        Enjoy your blog. Thanks for the response.

        RT

        Reply
  • I know I’m discovering this debate/blog a little late in the game, but it’s a good one and perhaps that’s why the algorthims at Google suggested it to me. Mr Cantor is very knowledgable and thoroughly researched in this space, there’s no doubt about that. I also learn every time I read his articles and I love it when I come across his work . However, professionally as a planned giving consultant and an estate planning/tax attorney with 15 years experience working with families (some very wealthy, but many who are not) I could not have a more divergent opinion than his on this subject. DAFs , all forms of them , are the best friend an “operating charity” could ever dream of having, for numerous reasons. I acknowledge, and very much know, that I am in the minority on this active front, which is starting to look like Gettysburg. DAF s are here to stay, despite our intellectual ramblings. When I listen and read to these debates/articles/blogs, I can’t help but think that I’m sitting in a board room of a vinyl record or CD manufacturing company, discussing the advent of napster or better yet iTunes. Whether you are a capitalist or not, or whether you are a Darwinist or not, it’s survival of the fittest or natural selection. Those nonprofits who can find a way to adapt and embrace these amazing tools , will benefit tremendously! Just my opinion. Look forward to opinions of my fellow colleagues.

    Reply
    • Thanks for weighing in on this subject, Brad, and I welcome you to the debate! And thanks for your kind words about my writing and research, even if you disagree with my conclusions.

      Though you describe yourself in the minority on this issue, there are actually many more voices on the pro-DAF side, given that the advisor/financial services folks, as well as the community foundations and many donors, are all in favor of DAFs being regulated as they currently are. There are only a handful of us who are consistently and vocally critical of the way DAFs are growing. That said — believe me — there are tens of thousands of nonprofit leaders who a) are profoundly upset by the growth of DAFs, and b) don’t say a word publicly for fear of offending funders and donors. I feel that I am speaking on their behalf.

      I do think there’s a role for DAFs. In fact, I think a DAF is a better alternative than a private foundation for a family that is dealing with the sale of a business or a similar liquidity event. And, though I take issue with various aspects of donor-advised funds, my criticism rests on a single major concern: the need for DAFs to distribute their assets to actual charities. Otherwise, how could they be considered, as you put it, the best friend an operating charity could ever dream of having?

      Some pro-DAF folks have come to agree with my premise that there should be a spend-down requirement, but they think five or seven years is too short. I think that’s all negotiable. How about fifteen years? Twenty? The point is that donors are getting a full tax deduction for their DAF contributions — the same as if they were giving money to the food pantry. It only makes sense — and good public policy — for donors to have to get the funds to operating nonprofits within a reasonable period of time. And again, as I’ve written in several places, there’s no indication that the rise of DAFs has contributed to a rise in charitable giving overall. DAFs are not the best friends of nonprofits, as you put it, but competitors. Yes, nonprofits can put DAF widgets on their websites and all of that to take advantage of the technology, but that doesn’t change the basic facts that money that otherwise would have been going to nonprofits is going to DAFs, and much more money is going into DAFs than is coming out in grants.

      I appreciate your analogy to outdated technologies, but I honestly don’t think it’s apt. This is not an area where the markets rule. Well, to a certain extent they do: the combination of financial incentives for financial advisors and technological ease have driven the growth of the commercial gift funds. But the final word on the future of DAFs rests not with the market but with Congress and the IRS. It’s not purely the survival of the fittest, but survival of the fittest among those that are legally able to compete. Congress has shown concern for what seems like abusive behavior by DAFs, and the politicians could choose to change the rules. Whether they will or not remains to be seen — they can’t even fund the Department of Homeland Security, for goodness’ sake. But I’m convinced that if DAFs indeed want to be here to stay, they need to embrace changes that will make them more acceptable to Congress and the nonprofit community.

      All of us are colored, understandably, by our own experiences. You are working with donors. I am working with nonprofits. My nonprofit clients are not lazy or uncreative, but they are working very hard to deliver services and meet rising demand in the face of a very challenging funding environment. Government funding is down across the board. So too is corporate giving. DAFs make things easy for donors, but harder for nonprofits.

      Reply
  • Alan,
    I greatly appreciate your input. Sorry for the delay in responding , it appears that I mistyped my email address in my original post.

    I think on many discussion points we will likely just agree to disagree. However, I will say that it does make sense to impose some distribution requirements , however I don’t think one size fits all. General rule for most DAF’s , should be between 20 to 30 years on distributions. However, if congress and the treasury decide to change the rules , I strongly think that a perpetual DAF option should remain for some unique donors with multi generational giving desires and objectives. For this later category, I’d concede to reduce the AGI limitation to the lesser “for the use of” limits 30%/20% for contributions.

    DAF ‘s are not competitors to nonprofit , they are friends. If more VP’s of Development at higher-Ed institutions and other charitable sectors (not you) would just sit at the table and learn more about how dAFS can be simply integrated into their development programs , all parties would benefit, greatly. For example, doing do would increase the receipt of more difficult special asset class donations (I.e those that push the nonprofit’s acceptance policy), and it would also result in increased grant making revenue streams through strategic marketing with DAF companies ( analogous to the grant making efforts of nonprofits to the big private foundations for specific programs, tea search , etc) ; these are just 2 simple ways that DAFs can be friends, big friends, of traditional 501(c)(3)’s.

    Let’s keep this thread going, I want to learn more from you and others to further understand the concerns of all parties. Good things happen with open and hearty dialogue.

    Reply
  • Michael Howard, CAP
    April 27, 2015 9:11 pm

    I just discovered your blog and this dialogue on DAF’s. Perhaps I missed it as I scanned the comments but why are DAF’s being targeted for mandatory pay down within 5-7 years but not private foundations? I recognize there are differences in control and tax deductions but why leave a 5% distribution rule in place for private foundations? If the goal is to tie the tax deduction event more closely to the distribution event (to charity), shouldn’t private foundations also come under accelerated distribution rules?

    As a former executive director of a social services agency and now as a staff member at a community foundation, I’ve seen both sides of the nonprofit community. I think the attack on DAF’s is misguided but I also think there is merit in a moderate distribution requirement.

    Reply
    • Thanks for your comment, Michael.

      Though my post focuses on donor-advised funds, I don’t mean to imply that the distribution rules governing private foundations are adequate. When the 5% minimum spend-out was introduced in 1969 (before that, there were no rules on foundation spend-out rates), it was meant to be just that: a minimum. Very quickly, for a majority of private foundations the 5% became a de facto maximum spend-out. When you consider that the 5% can include money spent on staffing the grantmaking function at the foundations, the distribution is a pittance. So yes, that spend-out for private foundations is too low and, to my mind, should be revisited. As Lewis Cullman, a NYC philanthropist who has given away $500 million in his lifetime notes, it’s bizarre that an individual setting up a private foundation gets a tax deduction for the $100 million gift establishing the foundation — and yet in most cases that corpus never goes out to charity. It simply generates income, a portion of which, yes, benefits charity.

      DAFs are attracting attention from me and others, though, for several reasons. The first is undoubtedly their burgeoning success: contributions to DAFs were 2.5 times as much in 2013 as in 2009. That’s of concern, particularly since overall giving — as a percentage of personal disposable income — is virtually unchanged. I consider this an indication that money is being diverted from direct giving to charity into DAFs. As the DAF portion of charitable giving has continued to grow, that’s a very real challenge for the nonprofit community.

      Second, contributions to DAFs provide donors with the same charitable deduction as a gift to any 501(c)(3) operating nonprofit. (Gifts to private foundations provide less favorable deductions, particularly regarding the contribution of appreciated complex assets such as real estate and closely-held stock.) To my mind, that enormous subsidy by the taxpayers creates a moral obligation that the funds not sit in the DAF indefinitely. Is five or seven years a fair length of time for getting the funds out the door? I think that’s something we can debate. There’s certainly nothing sacred about five or seven years. But that there should be a defined term of years, whether five or seven or ten or fifteen, I have little doubt. The charitable deduction is designed to encourage charitable gifts to ameliorate society’s problems. Funds that sit indefinitely in DAFs don’t do that.

      Third, there’s the issue of financial advisors having an incentive for recommending that their clients make gifts to commercial donor-advised funds. If the client makes a gift of stock to a charitable institution, then the financial advisor loses money because his book of business is smaller. If, by contrast, the financial advisor gets the donor to give that stock to a commercial donor-advised fund, then the financial advisor in most cases continues to receive a management fee. To my mind, this is an unethical conflict of interest that needs to be discussed and exposed. Fees and commissions are not terribly clear in the financial services world in the best of times. In the case of commercial donor-advised funds, the issue of compensation to the financial advisor, by most accounts, is far from transparent. But those incentives are clearly driving much of the growth in the DAF world.

      Reply

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