Donor Advised Funds

The website Inside Philanthropy had a provocative blog recently from a nonprofit management consultant named Alan Cantor. Cantor argues that the triple-digit growth in donor advised funds (DAFs in the lingo of the field) is actually hurting charities.

Simply put, a DAF is a charitable fund that an individual donor can establish at an investment firm or community foundation. The term “donor advised” means that the donor can make recommendations to the fund for charitable distributions.

There is currently no mandate (i.e., from the IRS) on how much money must be distributed through gifts made from these funds, or when such gift distributions must be made. While many donors routinely use their funds to make charitable gifts large and small, there is no denying that the amount of money flowing into these funds is showing no signs of slowing down.

First, the facts:

  • Even in a recession, DAF contributions rose more than 250 percent from 2009 to 2013.
  • Charitable funds at three for-profit firms: Fidelity (number 2), Schwab (number 4), and Vanguard (number 10); are in the top 10 largest organizations in terms of charitable donations, according to the latest Chronicle of Philanthropy’sPhilanthropy 400.” Only United Way Worldwide brought in more contributions than Fidelity last year.
  • In 2010, individual gifts to donor advised funds were about 3.5 percent of all charitable donations. By 2013, this percentage had doubled, to 7.1 percent. And with the stock market still on the rise, the attractiveness of putting money into tax-advantaged DAFs is unlikely to fade anytime soon.

Cantor’s POV is that all this giving is bad for the very nonprofits that it is designed to benefit.  He argues that these commercially-run DAFs are raking in—and sitting on—big donor dollars that otherwise would go directly to charities. His take is that DAFs have no incentive to push charitable gifts out to worthy organizations and, in fact, have a powerful disincentive, because they make a comfortable living from the fees they earn for managing these funds.

Without any charitable distribution requirements in place, Cantor contends, DAFs are just a tax shelter for the wealthy and a money-maker for big financial services firms, while charities scrap and scrape for a smaller piece of the pie.

So here’s my POV: as an elite group of Americans amass more and more assets, DAFs and similar funds are a powerful and potentially game-changing player impacting the nonprofit sector. But unlike Cantor, I am less interested in assigning ulterior motives to the firms that provide charitable services than I am in making these fund managers a part of our conversations with donors.

My reasoning is that these financial advisors have a major and ongoing influence on the clients they serve—and it is in all our best interest to make sure they are informed about the mission and programs of the organizations that their donors want to support.

What do you think?  Here’s a link to Cantor’s blog.  Read for yourself, and I would be interested in hearing your POV.