Wall Street 9, Charity 0

The news last week was stunning, but at the same time utterly unsurprising: When The Chronicle of Philanthropy compiled its annual Philanthropy 400 list of the nonprofit organizations that had raised the most money in the United States last year, the top dog was not United Way or the Salvation Army, but Fidelity Charitable.

The finding sparked a series of stories around the country: The New Yorker,  The Washington Post , The San Francisco Chronicle, The American Prospect, and National Public Radio, to name a few. Journalists are gob-smacked by the idea that an affiliate of a financial services firm could claim the title of top charity – and that it did so by the hefty margin of $900 million over United Way Worldwide. (Last year Fidelity’s take rose 20%; United Way’s dropped 4%.)

But those of you who have been reading my rants about the commercial donor-advised fund industry have seen this coming for five years. It’s like watching the sea levels rise from climate change. We’ve long known what was going to happen. Now, the evidence is incontrovertible. I take some grim satisfaction in the news, but mostly I feel despair.

For those of you who are new to the issue – and those of you who aren’t – here are some questions and answers about what’s going on.

Why is Fidelity’s ranking as the nation’s largest charity a big deal?

Because Fidelity Charitable is not an actual charitable organization that provides services. Fidelity Charitable received public charity tax status from the IRS in 1991 in a frankly unfathomable ruling. Fidelity Charitable is an affiliate of Fidelity Investments, and its staff and operations, as I explained in an earlier post, are inextricably tied to its parent corporation. Fidelity Charitable is a NINO: a Nonprofit In Name Only.

Fidelity Charitable, like other donor-advised fund sponsors, is a black hole. Money goes in, but it may never come out, and in any case the public does not have access to account-by-account information of its grantmaking activities. The dollars in a particular donor-advised fund do not actually have to go out to operating charitable organizations – not this year, not next year, not ever.

But the organization Fidelity Charitable replaced at the top of the list is United Way. Isn’t United Way a similar kind of outfit: one that that accepts money and then distributes it to operating charities?

Actually, not at all. United Ways raise money and distribute the funds (minus its overhead for running the campaign and determining allocations) in the year the money is given. So if a million dollars is raised by United Way in 2016, the whole million is more or less spent that year to support core social service organizations in the region.

A million dollars given to Fidelity sits at Fidelity. Yes, it can all go out the door in Year One and Year Two. But many accounts barely move, or have just enough distributions (a $100 grant here, a $250 grant there) so Fidelity does not consider it to be dormant. And the federal laws don’t require any activity at all.

In fact, much of the marketing material for Fidelity and other donor-advised fund sponsors speak to the way the funds can grow over time and be left as a charitable asset to children and grandchildren. There is pervasive and persuasive messaging that people should add to their funds and allow the principal to build.

But what’s wrong with building philanthropic funds? Isn’t that a good thing?

If the donor-advised funds at Fidelity and elsewhere added to the nation’s charitable pie, it would indeed be positive. But overall charitable giving as a percentage of disposable personal income in the US has remained stuck at about 2% for 40 years, according to Giving USA, the most respected source of research in American philanthropy. If more and more money is going into DAFs, less and less is going to soup kitchens, Boys and Girls Clubs, schools, and museums.

What’s behind the growth in donor-advised funds?

Two things.

First, a donor-advised fund is undeniably attractive to donors. It’s a have-your-cake-and-eat-it-too vehicle where the donor gets a full charitable deduction and still retains practical control on the use of the funds. It’s especially attractive for people dealing with large capital gains, perhaps from the sale of a business. A donor-advised fund is also a salve for the ego. It’s nice to have a fund with your name on it to use for charitable purposes.

Second, the financial services industry is making a mint from donor-advised funds, and the financial incentives involved have turbo-charged the growth of the industry. Certainly, the corporate sponsors benefit. Most of the funds in Fidelity Charitable, for example, are invested in Fidelity mutual funds. Fees generated from those investments flow to the corporation. But even more importantly: the donors’ financial advisors often serve as investment managers of donor-advised funds, and they consequently draw fees for their services.

The financial advisors have a personal financial incentive, therefore, a) to get donors to put their money in a commercial donor-advised fund rather than making an outright gift to charity, and b) to keep the funds undistributed. The longer the funds sit there, the more the financial advisors earn in management fees. I should note that over the years many people have criticized me for highlighting this arrangement, but no one has denied the basic structure. I once debated a supporter of donor-advised funds who spoke glowingly of how DAFs expand charitable assets by creating an army of tens of thousands of financial advisors to serve as de facto charitable development officers. But why do tens of thousands of financial advisors push donor-advised funds? Because they receive compensation for it, of course.

Isn’t there something unseemly about having financial advisors draw fees off of charitable gifts?

Yes. And it’s a violation of fundraising ethics. According to The Association of Fundraising Professionals, staff members soliciting charitable gifts should not be paid a percentage, fee, or commission. That’s essentially how financial advisors are compensated for gifts to commercial donor-advised funds.

Is it illegal?

Alas, no. Though I argue that financial advisors should be required to make full disclosure to their clients about their pecuniary interests in commercial donor-advised funds.

Is Fidelity the only big donor-advised fund sponsor?

Nope. In fact, five of the top eleven nonprofits on the Philanthropy 400 are DAF sponsors. This would have been unthinkable only a few years ago.

Is there a way of reforming donor-advised funds so they work for society?


  • By requiring funds (along with their capital appreciation) to be donated to charity within 15 years of being contributed to the DAF. I have talked with scores of donors and charities about this idea. Nearly everyone  goes along with the notion. The only people resisting – and they are resisting strongly – are donor-advised fund sponsors. Like my pals at Fidelity Charitable.
  • By prohibiting private foundations from making grants to donor-advised funds. Many foundations make grants to donor-advised funds, either a) so they can meet their five-percent distribution requirement without actually losing control of the money, or b) in order to launder the donor’s identity for controversial gifts, or c) both.

Passing these two simple reforms would preserve what’s good about donor-advised funds and ameliorate the corrosive effect they’re having on the charitable sector.

Will Congress act to fix donor-advised funds?

It’s an election year – did you notice? It’s anyone’s guess what the new Congress will look like, and how beholden they will be to Wall Street. But something has to give. Maybe if everyone concerned about donor-advised funds in the charitable world called Congressional offices demanding reform, someone in DC would get the message. Despite everything, I continue to have faith in democracy. At least, if we get through the next week.

Why did I title this piece “Wall Street 9, Charity 0”?

Because it’s World Series time. In baseball, if you forfeit, the final score is officially listed as 9-0. Over the years charitable regulators and legislators have swung and missed, to continue the metaphor, on donor-advised fund issues. They’ve forfeited the game to the financial services industry. It’s time to actually deal with donor-advised fund issues instead of giving up.

Also, 9-0 is the tally of a unanimous Supreme Court ruling, including momentous decisions like Brown v. Board of Education and United States v. Richard Nixon. Or, at least that was the vote back in the day when we had nine justices, instead of the eight we have now because the Senate refuses to hold hearings on the President’s nominee. Which takes us back to the subject of the utterly dysfunctional Congress.

So here’s my recommendation to Congress: 1) fill the Supreme Court vacancy, and 2) pass donor-advised fund reform. In that order. (See! I’m not such a one-issue zealot!)

Copyright Alan Cantor 2016. All rights reserved.

Print Friendly, PDF & Email

12 Comments. Leave new

  • susan rappaport
    November 2, 2016 1:34 pm

    Talk about Making America Great Again!! Pretty sad that it’s coming down to wistful comments about completing the Supreme Court and and some obviously needed reforms to actually make charity actual charity again!! Thank you for being a clear voice of reason during this utter cacophony of noise!!! And thanks for making this issue understandable to us laymen! Carry on……….

  • Paul VanDeCarr
    November 2, 2016 2:13 pm

    If this were Facebook, I would post an angry-face emoji. In the event, however, I will thank you for a crystal-clear breakdown of the issue.

  • Brenda Peluso
    November 2, 2016 3:52 pm

    You point out that the United Way spends all the money it raises in a year, in that year, as a counter point to the fact that DAF donors don’t have to do that. It is true that they don’t have to do that, but many, many do. It is also true that the United Way doesn’t have to either, but you don’t seem to be advocating for laws to make sure they do.

    I know you have a quibble with the stats, but Fidelity DAF’s on average have a much greater payout than foundations – around 28%.

    I don’t disagree that we should be having this conversation, but I think it is really important to identify why these funds are so popular and insure that any regulations continue to encourage more charitable dollars.

    Thanks for keeping this issue alive!

    • Thanks for writing, Brenda!

      A bit of a response:

      First, when it comes Fidelity, I have more than a quibble with the way they report their spending rate. They are grossly overstating their distributions.

      I think there are three legitimate ways of calculating the spending rate from donor-advised funds. Here they are, from most generous to most conservative:

      1) Dividing the grants distributed during the year by the market value of the funds at the start of the year. (The denominator is smaller, because the funds grow during the 12 months because of market returns and additions, so the reported spending rate is highest.)

      2) Dividing the grants distributed during the year by the market value of the funds at the end of the year. (The denominator is bigger, because the assets grow during the year, so the reported spending rate is smaller.)

      3) Dividing the grants distributed during the year by the sum of the market value at the end of the year plus grants made. (This is the formula the IRS uses. It is the smallest, but I would argue the most valid, because it takes into account money that is both contributed into the DAF and granted out during the year.)

      For the record, the National Philanthropic Trust, which puts out an annual report on DAFs (and that itself is a DAF sponsor and something like 19th on the Philanthropy 400 list) used to use method 2 (and spending rates hovered around 15% to 16%), and then a few years ago they shifted to method 1 (which raised the spending rates to about 21%).

      Anyway, my guess is that these formulas would give 2015 spending rates of about 20%, 15%, and 12% respectively. The Chronicle of Philanthropy, in its discussion of the issue in its Philanthropy 400 edition, pegs the overall rate at 14% (and notes that it’s been dropping over recent years). Anyway, I think that all of those are valid ways of describing the spending rates. The industry, of course, leans toward the highest calculation; we critics, the lowest.

      But what Fidelity does its calculation makes no logical sense and is simply a smoke-and-mirrors attempt to inflate its spending. What they do is to borrow the spending rate formula from charitable endowments. They take that year’s charitable grants and divide them by the three-year/12-quarter trailing average of the assets. Because the assets are growing every quarter (from market return and new contributions), by using this formula and incorporating asset values from three years ago Fidelity severely depresses its denominator. That makes the percentage HUGELY higher — like, I’m guessing 10 percentage points higher. To Fidelity’s credit, they point this formula out in their report. But I’m one of the few people nerdy (or distrustful) enough to read the fine print.

      Anyway, so let’s say that Fidelity et al. give out 18% (a close approximation to the real number, or at least a valid guess). That is, yes, much more than foundations. But we have to remember that the tax benefits for gifts to Fidelity, a public charity, are considerably more generous than gifts to private foundations. Most notably, closely-held stock, real estate, or other illiquid assets donated to Fidelity (or any other public charity) give the donor a charitable deduction worth the full market value. If given to a private foundation, the charitable deduction for that same gift would be limited to the presumably much lower cost basis. In this and other ways, gifts to Fidelity are encouraged by tax law. But those laws presumed that the funds would be really given to a public charity and that the donor would no longer have control. That the donor maintains effective control (as with a private foundation) but gets the full tax deduction (as with a public charity) is, to my point of view, an unhealthy disconnect. So yes, the 18% or so actual distribution rate is higher than with a private foundation, but I think it’s an almost irrelevant comparison, because they are very different entities under tax law.

      As for the United Ways, I have heard and read a great analysis by Prof. Roger Colinvaux of Catholic University Law School on this subject, but I’m afraid I can’t come up with the citation on line right now. Essentially, Colinvaux says that the law acknowledges that certain organizations that collect donations and then pass them through to charities are themselves charities. But the assumption is that they do this passing-on of the money expeditiously. He singles out United Way as a group that does this, and does it well. He suggests that commercial donor-advised funds should only be considered charitable institutions if they pass the money through within a five- or seven-year period. He differentiates the commercial DAF sponsors from community foundations. He notes that community foundations have many charitable purposes, so they should not be held to such stringent standards.

      As for the popularity of DAFs — yes, they are certainly attractive, and I do mention that as one of the reasons for their growth. That said, I think 95% of donors would be fine with a 15-year spend-down. And the 5% (okay, maybe 10%) who wouldn’t like that always have the choice to create a private foundation.

      Anyways, thanks for your comments, Brenda, and for your eagerness to engage on this issue!

  • Hildie Lipson
    November 2, 2016 5:54 pm

    The World Series, the Supreme Court and DAFs–all in the same post. Well done! Thanks for being my go-to guy for solid information about DAFs and endowments. I appreciate your reasonable and thoughtful approach to charitable giving and nonprofit issues.

  • Delighted to read this. For more than 20 years I have said that the IRS Private Letter Ruling allowing Fidelity to run a commercial donor advised fund was nonsensical. Partly that is because how can a public charity be under the control of one man (Ned Johnson), now the Johnson Family.

    Commercial DAFs provide no public services except distributing money as directed. Unlike community foundations (disclosure: my wife runs one) they do not vet charities beyond whether thy are current 501(c)(3) organizations.

    So why do Fidelity, Vanguard and others offer them? To inflate their assets under management (AUM).

    Congress should wind down these commercial operations.

  • Alan – good article. We’ve communicated before (I am DAF account holder) and I am completely on board with your two suggestions. In fact, in addition to your 2 reforms, I think it would be a good idea to reform the tax structure on the commercial DAF’s so that there is a tax incentive for them to have the ‘turnover’ even faster than 15 years. Not sure how this could be done but right now, there is 0 incentive for the commercial DAF’s to encourage account holders to make grants.

    • Thanks for your thoughtful comment, and it’s always good to hear from you, Roy.

      Yes, right now not only is there no tax incentive for DAFs to turnover, but there are very real incentives (investment fees) for keeping them untouched.

      There’s nothing magical about the 15 years. My instinct would be for a shorter period of time, but from my conversations with donors, they 15 years seems to be the sweet spot for them to support this kind of spend-down requirement.

      Thanks again!


Leave a Reply

Your email address will not be published. Required fields are marked *

Fill out this field
Fill out this field
Please enter a valid email address.