What’s Behind the Curtain? We Still Don’t Know.

[Note: This article was co-published in The Chronicle of Philanthropy on March 12, 2018.]

The most dramatic phenomenon in American charity in the last decade is the rise of donor-advised funds. Six of the ten most successful fundraising organizations in The Chronicle of Philanthropy’s newest “Philanthropy 400” were donor-advised fund sponsors, including organizations affiliated with financial services giants Fidelity, Goldman Sachs, Schwab, and Vanguard. This explosive dominance of DAFs on the charitable landscape demands scholarly research and analysis.

It was therefore with great anticipation that many of us awaited the arrival of the new report from Giving USA™, “The Data on Donor-Advised Funds: New Insights You Need to Know.” But to say that the report is a disappointment is an understatement.

I had assumed that Giving USA would use its notable analytical capacity to research critical issues raised by donor-advised funds.  After all, donor-advised funds are the black box of philanthropy: there is no transparency, as the public does not have access to individual fund records. Unlike foundations, where each grant is recorded on their Form 990-PF, grants from DAFs can be anonymous, not attributed to any particular donor and fund, and perhaps not disclosed at all. And, most troubling, there’s no requirement that money donated to DAFs ever needs to be distributed to charity, raising questions about inactive funds.

But Giving USA avoids these critical issues. Their report digs deeply into some of the least interesting aspects of the DAF phenomenon, skips lightly over any controversies or conflicts, and goes nowhere near any of the major questions involving DAFs’ impact on American charities.

There is some new information in the report, but frankly, none of it is surprising or of significant interest. And the fact that the report was sponsored by the Fidelity Charitable Trustees’ Initiative, and that Giving USA shared the stage with Fidelity Charitable’s president in a national webcast the day after the report’s release, raises uncomfortable questions about the judgment of Giving USA and its research partners at the Lilly School of Philanthropy at Indiana University.

I fully appreciate that the report includes some new information, and I don’t question the quality or depth of the research, as far as it goes. The problem is what Giving USA chose to study. The report chronicles the growth in giving to donor-advised funds, and upwardly revises the numbers that have been reported through the years by the National Philanthropic Trust. The Giving USA report also analyzes the distribution of grant recommendations from donor-advised funds, reporting that DAF grants track more closely to the charitable preferences of high-net-worth donors than to the public at large.

These are not exactly earth-shattering revelations. We already knew that donations to donor-advised funds were booming, whatever the exact numbers turn out to be. And finding out that grants from DAFs controlled by wealthy people are similar to direct gifts from those same wealthy people is more logical than newsworthy. It’s somewhat interesting to know that DAF grants skew toward certain charitable causes. But it’s hardly what we need to know, as the title of the report asserts.

Meanwhile, the report mentions criticism of DAFs only in passing, not in any depth. The authors devote much more space to explaining the advantages DAFs present to donors.

Here are some suggestions about what Giving USA should be researching about donor-advised funds:

  • Has the rise in giving to DAFs resulted in a net loss of contributions to what I will call “real charities” – those that provide services and advocacy – as many of us writing about DAFs suggest? That is, an enormous amount of money is going into donor-advised funds, and much of that, we assert, might otherwise have gone directly to charity. Further, we think the money going out from DAFs in grants to charity is not as much as the amount going into DAFs. Or are donor-advised funds in fact causing more money to go to these charities overall, as the DAF industry implies?
  • How many of the hundreds of thousands of individual DAFs are completely or essentially inactive? And how much money rests in those funds?
  • How often do private foundations make grants to DAFs to meet their 5-percent spending requirement? And what happens to those funds after the grants are made?
  • How many DAFs become orphaned after the donor dies, and what is the fate of that money? Does the principal of those funds get distributed to charity? Does the money remain invested at the donor-advised fund sponsor? Do the DAF sponsor trustees use the assets for their own grantmaking?
  • What does Giving USA suggest as a fair, standardized method for measuring annual DAF payout rates? (The industry has changed its methodology over the years to maximize its reported distribution rate. See my analysis from last July in the Chronicle of Philanthropy.)
  • How much do donor-advised funds generate in revenue for DAF sponsors, financial advisors, and the mutual fund industry?
  • Would instituting a requirement that all donations to DAFs be fully distributed within a certain number of years create an actual burden on sponsoring organizations and donors? And what would be the impact of this kind of spend-down requirement for charities?

These are questions nonprofits care about – not the issues Giving USA researched.

The Giving USA report came out only two weeks after a Chronicle of Philanthropy story announcing that Fidelity Charitable brought in an astounding $8.5 billion in calendar year 2017. That’s more than double what Fidelity Charitable, already the top fundraising nonprofit in America, raised in the most recent compilation of the Philanthropy 400. I would assume that the other commercial DAF sponsors will report similarly astronomical donation totals in the weeks and months to come.

What are the implications of that jaw-dropping growth on American charities? That’s what nonprofit leaders – and policy-makers – need to understand. As much as I enjoy finding colorful words to describe the DAF phenomenon – “tsunami!” “kudzu!” – I am heartsick over the implications of Wall Street’s takeover of the charitable world through donor-advised funds, and I am not alone in hoping for the institution of common-sense reform measures.

My late mother was fond of a Yiddish proverb: “When the house is on fire, don’t worry about the curtains!”

Giving USA has taken a very different tack. Its report describes the donor-advised fund curtains in the finest of detail, analyzing the lace, linen, and stitching, while the rest of us can’t help but notice that the larger nonprofit house is ablaze.

Meanwhile, the people most affected – charitable leaders – though deeply concerned, are reluctant to speak up.

That’s for good reason. As Paul Streckfus, Editor of the EO Tax Journal, wrote in one of his recent newsletters, “Part of the problem is that real charities are afraid to raise their voices. If they object to DAFs siphoning off billions of dollars into investment accounts, the DAFs can take them off their approved distribution lists. If they object to foundations hoarding or misspending funds, they can be cut off. If they object to tax provisions favoring the well-to-do, such as reduced estate taxes, they can be cut off. The result is that real charities are afraid to speak up even as their funding dries up.”

The perception that Giving USA was avoiding difficult topics in its donor-advised fund report isn’t helped by its association with the report’s underwriter: The Fidelity Charitable Trustees’ Initiative. I’ve been assured by the report’s researchers that Fidelity’s sponsorship played no role in their work, but surely Giving USA could and should have been more thoughtful in its choice of sponsors  for this project. The leaders of Giving USA then amplified the problematic association when, in its March 1 webcast presenting the report’s findings, they tacked on a presentation by Pam Norley, President of Fidelity Charitable, who walked through several slides about Fidelity’s own internal surveys and donor studies.

I have been in touch with the researchers from the Indiana University Lilly School of Philanthropy who wrote the Giving USA donor-advised fund report. They confirm that they did not review the methodology or raw data of the Fidelity internal study that was co-presented in the Giving USA webcast. Giving USA also referred to the internal Fidelity study within the body of its own report, quoting the finding that two-thirds of Fidelity donors say they give more to charity because of donor-advised funds. (That strikes me as about as scientifically valid as an assertion that two-thirds of churchgoers say that formal religion makes them better people.)

But here we are. The Giving USA report weighs in at 56 pages, replete with beautiful full-page photos, but containing very little meaningful information on the most dramatic, disruptive, and problematic development in the nonprofit world. One of the few groups with the chops to take on the issues presented by donor-advised funds chose to dodge the critical questions. And the charitable world, ever weaker and more threatened, says nothing.

Copyright Alan Cantor 2018. All rights reserved.

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5 Comments. Leave new

  • Paul VanDeCarr
    March 13, 2018 1:04 pm

    Thanks for breaking it all down so well. I see a NYT op-ed in your future. Or have you already done one on DAFs?

  • Ha! Thanks, Paul. No NYT op-eds yet, no. Best to you, always!

  • As a 27 year veteran in the major gift space, I agree 100%. Just wish I had your writing skills, Al Cantor. Andover and Harvard should be proud. Now let’s get some transparency in the DAF world and bring more of this $$ to deserving charities.

  • Hi Alan, great post! Any thoughts on what issues are faced by non-profits who receive money from DAF’s such as Fidelity Charitable? Are the non-profits at risk in any way or do they get short-changed?

    • Hi, Aditya —

      For the most part, no. Just cash the check! The only challenges are, first of all, that the nonprofit needs to acknowledge the donors appropriately. Assuming the donors’ identity is not hidden, nonprofits need to send a thank-you to the donor advisors, though WITHOUT the language about the gift being tax-deductible. Thanking them is important stewardship. The gift may technically be from Fidelity Charitable or whomever, but the decision to send it to you was from the donors. They need to be acknowledged.

      Also, it’s very tricky if the gift is to fulfill a pledge. For a long time it was simply improper to fulfill a personal pledge with a grant from a DAF, because the notion is that the donor doesn’t have control of the DAF. Now, the IRS has softened, but they suggest that the money can go to fulfill the pledge, but that it shouldn’t be explicit in the directions to the DAF sponsor — sort of a “don’t ask, don’t tell” approach. But it’s not really the nonprofit grantee that’s in trouble if this is handled inappropriately; it’s the donor and DAF sponsor that have to be clean on this. But, again, it’s a complication.


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