A Closer Look at One Donor-Advised Fund’s Questionable Pay-out Numbers

[Note: This post was co-published on July 20, 2015 in Inside Philanthropy.]

It’s one thing for organizations to spin information in a way that puts them in the best possible light. But the recent effort by Fidelity Charitable to overstate the rate of its annual grantmaking seems to be intentionally misleading. Fidelity arrives at its number through an accounting sleight of hand that demands deconstruction and rebuffing.

First, a bit of background. The donor-advised fund (DAF) industry has been on the defensive for the past several years, largely because of its tremendous success in attracting donations. In 2013, over 7% of charitable donations from individuals went to donor-advised funds, and the total raised – $17.28 billion – was more than two-and-a-half times the level of only four years earlier. Four of the ten most successful fundraising organizations in 2013 were donor-advised funds sponsors, according to the Chronicle of Philanthropy.

With this success has come attention, much of it critical, focusing on the growing accumulation of money in donor-advised funds – nearly $54 billion at the end of 2013. There has also been much discussion about a core related issue: the absence of a spending requirement for donor-advised funds. The meteoric growth of DAFs, combined with the lack of a payout requirement, has brought Congressional attention, most pointedly in the form of a 2014 proposal by Congressman Dave Camp (R-Mich.), then chair of the House Ways and Means Committee, that would require all donor-advised fund contributions to be paid out within five years.

Unsurprisingly, in recent years Fidelity and its fellow DAF sponsors have changed course in their public relations, de-emphasizing how much money they have attracted, and focusing instead on the grants they have distributed. Fair enough. But what is far from fair, and indeed highly questionable, is how Fidelity and other commercial DAFs have consistently changed their accounting methods in order to claim ever-higher charitable distribution rates. A recent press release from Fidelity Charitable takes this to new levels by making the assertion that its annual distribution rate had suddenly climbed to 28%. While that release gave Fidelity great press, the mechanism by which they got to that number deserves far closer scrutiny.

The distribution rate from donor-advised funds used to be a pretty simple measure. Until last year, the standard way the DAF industry calculated its spending rate was to take total distributions and divide that number by end-of-year assets. Annual distributions by this formula ran roughly 16% industry wide.

Then last year, in its 2014 Donor-Advised Fund Report, the National Philanthropic Trust (NPT) changed the formula. (Note that the National Philanthropic Trust is itself a major DAF sponsor and an unabashed booster of the donor-advised fund industry.) NPT now began calculating the donor-advised fund distribution rate by dividing charitable distributions by beginning-of-year assets. Because the beginning-of-year assets are significantly lower than end-of-year assets (after all, large amounts of new money are coming into DAFs every year), this served to goose up the total DAF distribution percentage by about 550 basis points, to about 21.5%. The National Philanthropic Trust retroactively applied this new formula to past years’ numbers, so that the old 16% distribution rate no longer appears in its report, even for the years before 2013.

The National Philanthropic Trust explained the change by saying, “This approach replicates the way in which private foundations calculate their grant payout and creates more accurate reporting when comparing donor-advised funds to private foundations.” Fine. But NPT ignores the obvious fact that DAFs, unlike most private foundations, receive new money during the course of the year. Grants from those new funds would count toward the distribution number, while the principal would not be added to the asset total, all of which inflates the reported distribution rate. NPT was certainly aware when it made the change that the revised formulation would greatly increase the reported pay-out rates. That said, the media and other commentators almost immediately began using the 21.5% number without questioning how it was calculated. From the point of view of the donor-advised fund industry, it was a pure public relations success.

But apparently that wasn’t good enough for certain people in the DAF industry. Which brings us to Fidelity Charitable president Amy Danforth’s assertion that Fidelity’s annual distribution is 28%, a number far beyond what we might have expected. A footnote in Fidelity’s press release explains that the 28% distribution rate is based on “fiscal year grants divided by a five-year rolling average of ending assets.”

What does that mean? Well, this formula borrows from the language of endowment spending rates, where the five-year-rolling average is designed to make sure that universities and other organizations take out an appropriate amount for current operations – not too much in times of robust markets, and not too little in times of falling markets. Rolling averages are a way for nonprofits not to rely too heavily on the valuation of their endowment at the immediate moment, but to look at their investment performance over time.

What does a five-year rolling average have to do with donor-advised funds? Absolutely nothing. But using the five-year average helps exaggerate the spending rate, since in Fidelity’s formula the assets are averaged over the five years, while charitable distributions are based on that year’s numbers alone. Because Fidelity Charitable’s asset base has grown by leaps and bounds in recent years, that means that there are several years of smaller asset totals included in the calculation, which serve to reduce the average assets significantly. That makes the current year’s distribution rate look much higher than it really is.

Let’s analyze Fidelity’s spending rate by the three different methodologies.

  • By traditional DAF industry standards – that is, by the formula used before 2014 – Fidelity’s fiscal year 2015 charitable grants of $2.9 billion would be divided by end-of-year assets of $14.9 billion, resulting in a distribution rate of just under 19.5%.
  • By the formula introduced by National Philanthropic Trust in 2014, Fidelity’s grants would be divided by start-of-year assets of $13.2 billion, resulting in a distribution rate of 21.9%.
  • By the formula described in the recent Fidelity press release, Fidelity Charitable’s distribution was 28% based on the five-year rolling average. For the $2.9 billion to be 28% of Fidelity’s five-year rolling average of assets, that average asset value would need to be $10.35 billion, or $4.55 billion less than its actual June 30, 2015 assets.

For Fidelity Charitable to cite a 28% distribution rate based on a five-year rolling average of assets would be meaningless, were it not so transparently manipulative and misleading.

When Fidelity Charitable and the DAF industry go out of their way to pump up their putative distribution numbers, they are implicitly accepting the notion that for DAFs to be valuable to society the money needs to get out the door to actual charities. And yet DAF leaders bridle at any suggestion that there should be a distribution requirement for donor-advised funds, or even per-account reporting requirements. If, indeed, Fidelity Charitable is all about getting money to charity, why doesn’t Fidelity join a serious conversation about the creation of a requirement that donor-advised fund monies be distributed within a period of five, ten, fifteen, or twenty years?

One final thought: Even if the average distribution rate were fairly reported, it’s a very pale measure of impact. A few very generous donors can skew the average higher by giving away all or most of their DAF assets in a given year. I, for one, would like to know what the median distribution is. I’d also like to know how many funds are completely or essentially inactive. Because they are public charities, Fidelity and its fellow DAF sponsors have asserted that they do not have to share account-by-account information. That leaves those of us observing the donor-advised fund industry to guess at what’s really going on.

Perhaps someday we will get unadulterated, accurate, and genuinely enlightening information about donor-advised fund distributions. In the meantime, whenever you hear donor-advised fund sponsors, particularly Fidelity Charitable, talk about charitable distribution rates, be sure to take their figures with the largest available grain of salt. Ask for more disclosure and transparency. And speak out for a necessary and logical reform of donor-advised funds: the simple requirement that the money going into DAFs be distributed in full to charity after a certain number of years.

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1 Comment. Leave new

  • Al,
    Thanks so much for this article, and your continued pursuit to expose DAFs for what they are—a money-grab of charitable gifts at the expense of charities. You do an excellent job here of explaining a very (intentionally) complicated scheme which very few, myself included, would have spotted had you not done your homework. Thanks again, and keep up the great work!


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