Yes, I write a lot about donor-advised funds. That’s because their surge in popularity is the biggest story in philanthropy – and, to my mind, a growing threat to an already-battered nonprofit sector.
Here are 2014’s eight biggest developments around the donor-advised fund phenomenon.
1. We can no longer worry that Wall Street will someday be taking over the charitable sector. That day is already upon us. According to the 2014 Donor-Advised Fund Report from the National Philanthropic Trust, giving to donor-advised funds leapt up another 23.5% in 2013 and has risen over 250% since 2009. Contributions to DAFs in 2013 comprised nearly 7.2% of all individual giving. And the tide of donor-advised funds is rising ever higher: donations to Fidelity Charitable are up 57% in the first three quarters of 2014. Fidelity will undoubtedly be the largest “charity” in the country for 2014. At a time when overall charitable giving as a percentage of disposable household income is holding steady, the huge gains by donor-advised funds represent a clear loss in direct gifts to charity.
2. The commercial gift fund industry is very defensive – as it should be. Now that they rank second, fourth, and tenth, respectively, on the Philanthropy 400, Fidelity, Schwab, and Vanguard are trying to deflect attention from how much money they are sucking in by bragging about how much money they are sending out in charitable distributions. And the DAF industry is not above resorting to a little revisionist bookkeeping to make itself look good. In its 2014 annual report the National Philanthropic Trust altered its formula for measuring charitable distributions from donor-advised funds, an adjustment that amplifies the grantmaking numbers by about 6% a year. Despite all this fancy footwork, Congress is starting to growl. Rep. Dave Camp, chair of the House Ways and Means Committee, proposed this spring that money contributed to DAFs needs to be distributed within five years. That seems like a common sense suggestion to many of us, and a godsend for a beleaguered nonprofit sector; to the DAF industry, it’s an assault on American values.
3. The commercial gift funds adamantly insist that they are nonprofits, though they themselves increasingly blur the lines with their affiliated corporations. I was chastised recently for calling operations like Fidelity Charitable “commercial gift funds.” The gift fund executive who chided me insisted that these are wholly independent nonprofit entities. That’s an argument that defies common sense, given that virtually all the DAF money is invested in mutual funds managed by the associated commercial firms, earning the corporations significant fees. Despite their pleas of independence, the commercial gift funds themselves often blend the identity of the corporate and nonprofit entities. For example, this recent job posting put out by Fidelity uses the terms “Fidelity Investments” and “Fidelity Charitable” more or less interchangeably. It’s not even clear which entity is doing the hiring. That’s because, for all intents and purposes, Fidelity Charitable is a subsidiary of Fidelity Investments. The legal separation is a fig leaf.
4. Nonprofits seem driven to set up donor-advised funds of their own. Indeed: in a strange and, to my mind, nonsensical impulse, a growing number of operating nonprofits are creating donor-advised funds within their own organizations. It would seem to make little sense to attract and manage funds that the organization itself can’t put to use, while taking on the expense and headache of distributing the grants they generate, but desperate organizations take desperate measures. These nonprofits see all the assets pouring into donor-advised funds, and they have convinced themselves that they want a piece of the action.
5. Community Foundations are getting into the business of paying financial advisors. This is a case of referral envy. Community foundations have been the staid and responsible older cousins of the commercial gift funds, but they see how Fidelity and its ilk are attracting billions of dollars each year thanks to the management fees they pay referring financial advisors. So increasingly community foundations are entering into arrangements whereby financial advisors can draw management fees when their clients open community foundation DAFs. In this typical community foundation pitch, you’ll note the phrase “win-win,” which is code to indicate that the donor’s financial advisors are getting a cut. In the past, community foundations have worked hard to distinguish themselves from the venal world of commercial gift funds, but that strategy seems to be fading. Many community foundations are now jumping into these murky waters with both feet.
6. High-net-worth individuals are increasingly encouraged to create funds rather than to fund change. In the old days, the rich won acclaim for giving their money to worthy causes. Now they are called smart and wise for putting money into their own donor-advised funds or foundations. And those who go the donor-advised route are treated like VIPs. Check out the marketing for one donor-advised fund sponsor, the Jewish Communal Fund (JCF). JCF recently created a “Private Client Group” that “offers a variety of compelling services for wealth creators, inheritors and entrepreneurs.” The entry fee for membership in the JCF Private Client Group? A DAF of a million dollars or more. (I’m not sure whether if you spend down your account – that is, if you send the money to actual charities, where it will do some good – you’ll still qualify for special treatment.) But think about it: “a private client group” for an allegedly charitable organization? I’m struck (but not surprised) by the similarity of language to that of the mainstream financial services industry.
7. “Strategic” is now the catch-all phrase describing donors who put money into donor-advised funds or foundations and let it sit there. I read more and more financial and philanthropic advice columnists disparaging direct contributions to operating nonprofits as willy-nilly, disorganized, inefficient, and lacking strategy. Donors now hear that they need to put money into a fund and distribute it from there, “strategically and thoughtfully” – as though it’s impossible to make gifts directly to charity in a strategic and thoughtful way. This attitude even showed up in a recent letter from the president of the Planned Giving Group of New England. I found her sentiments remarkable, coming as they were from the head of an association of nonprofit gift planners. (Has the charitable world gone mad?)
8. The mainstream press is finally starting to cover the surge in donor-advised funds. There was a fine overview by Vauhini Vara in The New Yorker in October, as well as a strong and thoughtful analysis co-published in Pro Publica and The New York Times this month by Pulitzer Prize-winning journalist Jesse Eisinger. Eisinger refers to the “financialization of charity” in America, a characterization that resonates with me.
Without a doubt 2015 will see more growth, more resistance, more denial, and more attention. Stay tuned. This story is not going away. In fact, it may only be in the early stages.
Copyright Alan Cantor 2014. All rights reserved.