Fidelity Charitable Gift Fund, the nonprofit arm of behemoth Fidelity Investments, now raises more money than United Way via donor-advised funds. It could soon eclipse the Gates Foundation as America’s biggest grant maker. Hands down, donor-advised funds (DAFs) are the fastest growing form of giving. So what’s the problem?
DAFs don’t practice transparency in their grantmaking and they work very differently than most people think. In seeing our clients struggle with this evolution, I decided to write an open letter to DAFs everywhere.
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As development professionals, we love philanthropy and we love our philanthropists. That’s why many of us have come to loath you, Donor-Advised fund.
1. You don’t always keep your promises
Contrary to popular belief, DAFs aren’t required to pay out in any given year. Unlike a family foundation, DAFs are required to donate to a qualified 501( c) 3 eventually. Which means that the donor receives a tax incentive immediately but the funds can sit idle for as long as the donor chooses. The DAF can even be bequeathed and continue to sit idle during the next generation.
2. While you keep multiplying, charitable giving does not
There are now more than five times the number of donor-advised funds than private foundations.
From 2012 to 2017, however, total donation volume flowing into DAFs has been nearly two-thirds greater than total donation volume flowing out of DAFs (National Philanthropic Trust).
3. And this leads to some dark secrets
Financial institutions aren’t required to report itemized information on each DAF account they maintain on their 990 Schedule D so we can’t assess the impact of these funds- or much else. What we are left with is a “DAF payout rate” as a key performance indicator.
Using the IRS calculation for this, the median DAF payout rate for 2012 was slightly over 7 percent of the total value of funds held by financial institutions. More than a quarter of these reported a payout rate of less than 1 percent, including 466 institutions that reported no grants paid out at all.
4. You cheat on charitable causes while romancing advisors
When you sit idle, funds stay put and financial institutions make money. Advisors actually lose money in investment and management fees when you pay out. That seems awfully uncharitable.
5. You are interfering in our relationships
The largest investment firms, Fidelity and Schwab, make recommendations to donors regarding which organizations to support (Fidelity Charitable makes recommendations).
While this may not be a concern for our existing major donors whom we already have strong relationships with, there are many donors obscured by their DAFs that we will never be able to share gratitude with or practice the donor stewardship we believe in.
Nationwide, DAFs have exploded in popularity. As the number of DAFs grow, the average size of the funds is declining, making it harder to know and cultivate those in the middle of our pipelines.
Donor-advised funds aren’t going away anytime soon. They remain a great vehicle for many philanthropists and offer substantial tax benefit. My point is, with great power comes great responsibility.
Now that DAFs play a substantial role in philanthropy, it only makes sense to require greater transparency and accountability. And while we’re at it, we better start educating our current donors on the benefits and drawbacks of giving through DAFs because an increasing number will adopt them in the future.
I am a trusted nonprofit consultant with 21 years of experience serving mission-driven institutions. At Rose City Philanthropy we specialize in strategic, people-centered fundraising solutions. We love walking teams through feasibility studies, strategic planning, and capital campaign development. We bring a data-informed approach that is rooted in best practice and honors the unique culture and values of the organizations with whom we work.