[Note: This post was co-published in The Chronicle of Philanthropy on July 22, 2020.]
A great magician relies on diversion. The eyes of the audience go where the magician is drawing their attention — perhaps to his right hand, snapping fingers above his head. Meanwhile, with his left hand, he is slipping the ace of spades into his pocket, or sliding a silver dollar into yours, to be revealed — voila! — a moment later, to oohs and aahs from the audience.
Fidelity Charitable and its fellow commercial donor-advised-fund sponsors similarly draw our attention to what they want us to see, not to what we should be examining.
During this year’s pandemic and economic crisis, the commercial DAF sponsors want us to pay close attention to how much money is flowing from DAFs to charity. Fidelity Charitable’s home page features a running tally of the total amount of grants going to Covid-19 relief. Fidelity and other commercial DAF sponsors have also been churning out press releases reporting how much their grants have increased in 2020 relative to 2019.
As it calls our attention to these distributions, Fidelity Charitable is trying to distract us from seeing how enormous its assets have grown.
Fidelity doesn’t want us to recognize that the amount going to Covid-19 relief, while a large number, is not a particularly big percentage of the organization’s total assets.
Fidelity also wants us not to notice — there’s that left hand slipping something into the pocket! — that of course grants have gone up in 2020 partly, yes, because of donors’ response to the crises, but also because Fidelity Charitable’s assets are simply larger than they were a year ago. There’s more to draw from for grant making.
But the biggest secret of all, what the commercial DAF sponsors absolutely do not want us to notice, even though it’s right in front of our eyes, is that they do virtually nothing of substance to encourage their donors to distribute grants. Yes, commercial DAF sponsors provide information on causes and organizations to support, but precious little to get donors to actually direct money from their funds.
That’s why some outsiders are turning to Congress and to donors themselves to ensure more goes to charity. There’s a movement led by Scott Wallace, co-chair of the Wallace Global Fund, in partnership with the Patriotic Millionaires, to encourage Congress to require all foundations and each individual donor-advised fund to give out at least 10 percent annually over the next three years.
Meanwhile, a group of donors led by Jennifer and David Risher is encouraging fellow DAF holders to pledge to “#HalfMyDAF” — that is, to distribute 50 percent of their donor-advised funds by September of this year.
But the DAF industry desperately wants to keep the federal government from imposing requirements on the minimum that donors need to give annually or imposing time limits on how long funds can last.
To make their case, DAF sponsors are working to show that donor-advised-fund holders are already very generous. Moreover, they claim that donor-advised-fund sponsors have effective self-policing measures in place to ensure that funds don’t lie idle.
This PR campaign has largely been successful. For example, a group from the Stanford Center on Philanthropy and Civil Society recently suggested that critics are wrong to worry about donor-advised-fund sponsors’ financial incentives to hoard the assets and delay charitable distributions, writing, “Rather than try to reason from these abstract premises, we think it’s more valuable to look at actual practices — for example, the sponsors’ practices of nudging donors to recommend grants and the sorts of advice that they offer donors.”
So, what are these “nudges”? Or, moving from nudges to real-life policy, how much grant making do the commercial DAF sponsors require of their donors?
The answer is: hardly any.
What Account Holders Are Told
I recently called around to the Big Three of the commercial DAF world: Fidelity, Schwab, and Vanguard. I provided my real name to the people I spoke with, and I asked each of the representatives, “If I were to open a donor-advised fund with you, how much would I need to distribute to charity, and over what period of time?”
It turns out that Fidelity Charitable requires a single $50 grant every two years. I asked: “Only $50 in total grants, no matter the size of the donor-advised fund?” Correct, the woman I spoke with reassured me: One $50 grant every two years would keep me in good standing, even if I had a fund of $100,000 or $1 million. (The average DAF is $166,653, according to the most recent report from the National Philanthropic Trust.)
Schwab Charitable was even more lenient, as its donors have a full 30 months to make that same $50 grant. (In addition, the person I spoke with assured me that if I had a major charitable project I was saving up for, I could ask Schwab to waive that grant requirement.) Meanwhile, Vanguard Charitable proved to be the stern parent of the group, requiring distributions of $500 over three years.
Let’s zero in on Fidelity, given that it is, as we know, the largest fundraising organization in the country, and thus worthy of some scrutiny.
A $10,000 Fidelity DAF granting $50 in a given year translates into a spending rate of 1/2 of 1 percent. For a fund of $100,000, that becomes a spending rate of 1/20 of 1 percent. But remember, the $50 spending requirement is spread over 24 months, not 12 months. Therefore, the required minimum spending rate for a $100,000 fund is actually 1/40 of 1 percent, and it would be even less for the average-sized DAF of $166,000: 1/66 of 1 percent.
In other words, the spending requirements at commercial gift funds are laughable. The nudge is simply the most minimal of token requirements so that commercial DAF sponsors can say to critics and congressional staff members that, in fact, none of their funds lie idle. This is a rather obvious bit of trickery, but you must be looking in the right place.
On reading this, Fidelity and the commercial DAF industry will undoubtedly respond that their paltry grant requirements don’t matter, because overall their spending rate is more than 20 percent. Twenty percent is so vastly higher than the 5 percent or so that foundations put out, they’ll remind us. So, what’s the problem?
To which I respond, first of all, that 20 percent is an average, and averages deceive.
Here’s a relevant joke: Nine people are hanging out in a bar. Bill Gates walks in. Suddenly the 10 people in the bar on average are some of the richest people in America.
The same principle is at work with average distributions from donor-advised funds. Let’s say there are 10 donors, each with a $100,000 DAF on January 1, and over the course of that year, two of the donors grant out the full $100,000. Meanwhile, the other eight fund holders don’t grant out anything, not a single penny. On average, the 10 donors have a spending rate of 20 percent ($200,000 in grants divided by $1,000,000 in assets).
Suddenly, 20 percent isn’t so impressive, is it?
How Spending Rates Are Determined
Let’s also take a minute to examine how the spending rate is calculated.
The formula used by the DAF industry to determine spending rates is simple. And, actually, it’s too simple, probably by intention.
This formula takes the grants made by DAF holders over the course of the year and divides that number into the total assets at DAFs at the start of that year. In other words, if a DAF sponsor — let’s call it “Super DAF Inc.” — has $100 million in assets on December 31, 2019, and makes grants of $20 million during 2020, that $20 million in grants is divided into $100 million in assets, leading to a putative spending rate of 20 percent.
DAFs have borrowed this formula from foundations. But what works well for foundations is an imperfect way of analyzing DAFs.
We need to remember that foundations have typically been funded through a single historical transfer of assets, and foundations rarely receive new gifts during the course of the year. DAFs, by contrast, accept new donations all the time — large amounts, actually, as shown by the fact that DAF sponsors are among the largest fundraising organizations in the country. That influx of new contributions during the year distorts and inflates the widely accepted DAF spending rate.
Let’s go back to Super DAF Inc., which had $100 million in assets on December 31, 2019. Imagine that donors of existing funds recommend $10 million in grants during 2020. Meanwhile, during the year, Super DAF receives $25 million in new donor-advised funds. The donors of these new funds make recommendations for another $10 million to go out in grants during 2020.
That means that $20 million goes out in grants from assets worth $125 million (the original $100 million, plus the $25 million that was added during the year), for a spending rate, arguably, of 16 percent. But the DAF industry refuses to count the $25 million in new assets in calculating the spending rate because that money wasn’t in place at the start of the year. Instead, Super DAF Inc. will claim the $20 million in grants came from $100 million (the amount of assets as of December 31, 2019), for a spending rate of 20 percent. Abracadabra! An extra 4 percent in spending rate just materialized out of thin air!
Happy or Dismayed?
The DAF industry is feeling the heat from efforts like those of the wealthy themselves, including the Patriotic Millionaires and people like David and Jennifer Risher, to persuade donors to empty their accounts as our society faces the worst catastrophe in generations.
These efforts don’t align with the business model of Fidelity, Schwab, and Vanguard. So leaders of the commercial DAF industry try to distract us by talking about how much money they’re already pushing out the door.
That said, even the polished public-relations machine of Fidelity Charitable sometimes cracks.
One such moment came at the conclusion of a recent article in the Washington Post by Pulitzer Prize-winning journalist Will Hobson, dissecting the dynamics of donor-advised funds. Hobson presented Pamela Norley, president of Fidelity Charitable, with a hypothetical choice: If she learned tomorrow that all Fidelity’s fund holders had decided to spend at least half of their DAFs this year, causing Fidelity Charitable’s assets to drop by 50 percent, would she be happy or dismayed? If Norley were being consistent with the public pronouncements that Fidelity is all about getting funds out to charity, she would have said, “Yes, I’d be thrilled!” But, perhaps caught off guard, she simply said, “I have no comment on that.”
Here’s my comment: There’s no way on earth that Fidelity Charitable would want its donors to distribute half of their DAF assets to charity. That would undermine its business model, which is based on enormous tax advantages for the wealthy, virtually no transparency once the DAF is established, no real requirement to make grants beyond token distributions, and growing assets and fees, year after year, for Fidelity Charitable, Fidelity Investments, and the donors’ financial advisers.
Urgent Need Now
For donor-advised funds to work for the good of nonprofits and the nation, donors need much more than a nudge from their DAF sponsors.
One longstanding proposal would impose a federal requirement that each gift to a donor-advised fund, plus earnings, be distributed to charity within a specified number of years.
A more recent proposal, put forth by law professors Ray Madoff and Roger Colinvaux, would award the donors a charitable tax deduction only when grants go out from their DAF to charity.
Enacting either of these policies would mean that donor-advised funds would finally support charitable organizations in the way their proponents claim they already do. But until these or similar changes are enacted, I suggest we tune out the self-promoting blather of the commercial DAF industry.
The breathless descriptions of their overall grant making is simply a distraction, meant to take our attention away from the real issues about DAFs: how much tax-advantaged money continues to pile up in donor-advised funds, an utter lack of transparency, and the absurdly insignificant requirements for how much of the money has to go to charitable purposes.
Given the crises the nation is facing, and the urgent need for funding now, I suggest that charities go directly to their donors with DAFs and urge them to distribute the money in their funds today. Nonprofits shouldn’t rely on Fidelity et al. to be a force for good. That’s simply not who they are.
I should send you the glossy brochure that the UConn Foundation just sent to alums with an entire page under the heading/title: “Get to Know the Donor Advised Fund” — after the page’s text touts the DAF approach, the bottom of the page has a box “If you would like to learn more about how a donor advised fund can simplify your charitable giving or how you can use it to extend your legacy at UConn, please contact…..[name, phone number at UConn gift planning]…..
Thanks, Chris — do send that along!
I find it peculiar that charitable institutions — particularly universities — have been creating their own DAFs. Most require that 50% of the distributions go to the university itself, and meanwhile they have to administer a little grants program. I think the motivation is all about getting funds under management — but it bugs me. (And I know people at the UConn Foundation, so I’ll let them know what I think!)
Some universities start piling tax scheme on top of tax scheme. For example, I know one Ivy League university that promotes Charitable Lead Trusts, an instrument geared toward the super wealthy as a way of helping them pass assets to heirs without paying estate taxes. Charitable Lead Trusts spin off money to charity for 20 or 25 years or so, which is, of course, a good thing. But this particular university then pushed having the annual distributions go into a DAF. It’s clever, for sure, and these donors are avoiding all sorts of taxes. But hardly anything is going to charitable purposes.
So can I assume that you’re NOT going to create a DAF at the University of Connecticut Foundation?!
Chris — I spoke to the person I know at the University of Connecticut Foundation, and I looked at their website. It seems as though their appeal to you was to get you to send them money from your DAF (that is, the DAF you don’t have), not establish one with them. The wording is a little clumsy. There are some universities that actually have their own in-house DAFs (Cornell, for one, has had a DAF for years), but what UConn is doing is more innocent, and even positive, trying to encourage giving from DAFs.
One thing that smart nonprofits are doing is to bring up DAFs when they’re talking with donors about planned/legacy gifts. There are a lot of people out there with large donor-advised funds — what I rail about constantly. If’s important for nonprofits to remind their donors of these balances and encourage them to donate them at their death (or sooner, of course).
One other thing: There seems to be a third-party interface on the UConn Foundation site — and I saw the same one at the University of Michigan. You enter your DAF sponsor, and it takes you right to their page to make your grant recommendation. Clever.
Brilliant, Al. Thank you for keeping this issue alive.
Aw, shucks! Thanks, Rick!
Al: Thanks for the very informative article. I am guessing you are not expecting any job offers from Fidelity, Schwab, and Vanguard any time soon. I like the Gates walks into a bar joke as well. Hope you are well and safe. Quick thoughts on yes or no on mlb?
Hi, Stef — Well, as much as I’d love to see my Sox clobber your Yanks in the ALCS, I’m guessing that MLB won’t get that far this year. But I confess that I do welcome the diversion, even if my favorite Sox player of the last decade just signed a 10-year deal with the Dodgers…
And yes, we’re well. I trust you are staying out of mischief and away from viruses? Thanks for writing, and best to Linda!
As usual, Al, your observations and assessment are spot-on. Thank you for often being the lone and sane voice in the DAF wilderness. We share your blogs with our clients and colleagues. Thank you!
Thanks so much, Elena. You’re very kind!
Thank you Al for bringing further clarity to the issue. In nonprofit fundraising we have virtually no influence -or perhaps have shied away from attempting to exert influence- on the institutions failing to distribute the percentage of DAFs that would justify the tax avoidance that drives their creation. It truly is institutional sleight of hand, keeping money that could create tremendous good out of circulation. By failing to educate, promote, and facilitate appropriate levels of distribution to their donor advisors, they also fail and dishonor the donor whose sincere intention in establishing a DAF was to do good.
Thanks, Linda. I of course agree with you.
I am often asked by journalists who they can interview in the nonprofit world to verify my observations about DAFs. I joke that they have to find someone who is retiring next week… and dying next month! But some nonprofit leaders are stepping up. CalNonprofits has 400 nonprofits that are supporting the DAF reform measure in front of the California legislature. Perhaps people are realizing that we have to speak up and take back the charitable world!
Thanks, Al, for keeping us informed and inquisitive about the machinations of DAFs.