socially responsible donor advised funds
Financial

Socially Responsible Donor Advised Funds

Many people open donor advised funds (DAFs) to support charitable causes that are important to them. Fewer people realize that there are extra steps they can take to ensure that their donor advised funds operate in more socially responsible ways that further increase the beneficial effect of those charitable dollars. With the growing number of people opening these accounts it seems worth delving into some lesser known information about these funds as well as a few emerging options for impact investing through donor advised funds.

A Brief History of Donor Advised Funds

According to the IRS, a DAF is a “separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.”

The New York Community Trust established the first donor advised fund back in 1931. During the ensuing years, these accounts remained the purview of community foundations and Jewish federations. These funds didn’t gain regulatory recognition however, until the passage of the 1969 Tax Reform Act. Then changes enacted in the 1986 Tax Reform Act led to DAFs becoming an even more attractive giving option.

It wasn’t until the 1990’s that donor advised funds really began to grow in popularity. I imagine this may have had a lot to do with the fact that in 1991 Fidelity Investments established the first commercial gift fund (Fidelity Charitable) as an independent public non-profit making DAFs much more accessible and visible to a wider audience. Less than twenty years later Fidelity Charitable Gift Fund is the largest charitable organization in the U.S. and the largest donor-advised fund in the country.

Today DAF sponsoring organizations include community foundations, non-profits, universities, hospitals, as well as commercial financial instititutions.

Four Ways Donor Advised Funds Are NOT Socially Responsible

1) DAFs Benefit Donors Immediately and Delay the Benefits to Society – donor advised fund account holders claim tax breaks when making deposits into their donor advised funds, but much of the money remains in those accounts and doesn’t provide any benefits for society. A team of researchers from the Institute for Policy Studies (IPS) found that “For every dollar of appreciated assets donated to a DAF … U.S. taxpayers are providing as much as 57 cents of subsidy in the form of lost tax revenue….taxpayers must pick up the slack in paying for public services such as veterans’ health care, infrastructure, national parks, and defense.”

For this very reason the White Coat Investor referred to opening a donor advised fund as a “jerk move.” In this article on Physician on FIRE’s blog he suggests people donate the money to charity now so the chartable organizations can put that money to work right away.

2) DAFs Warehouse Wealth and Exacerbate the Rich/Poor Power Imbalance – Donor advised funds encourage a wealth preservation mentality in donors. There is no legal requirement for DAFs to pay out their funds to qualified charities—ever. Foundations on the other hand by law must annually distribute approximately five percent of the average value of their endowment and many critics think that’s too low.

According to one estimate, the average annual payout rate for DAFs in 2016 was 20 percent, although some DAFs give considerably less. Even as the amount of funds flowing to DAFs has increased, it seems payout rates have generally been trending in the opposite direction. I’m guessing this year (2020) will buck that trend as people are likely directing more money from their DAFs to those in need in the midst of this global pandemic.

Additionally, as Alan Cantor points out on in this video on Forbes YouTube Channel this preserving of wealth results in a power imbalance between the (sponsoring) organizations that have the money and the non-profits that need it. These non-profits are put in a very unfortunate position of not wanting to speak up to advocate for some kind of minimum annual distribution or a defined period of years from the date of the gift to distribute the gift requirement for fear of “biting the hand that feeds them.”

3) The Greatest Benefits May Be Going to the Sponsoring Organizations (and Their Employees) – This could be a good thing if your sponsoring organization is a community foundation or non-profit meeting a need that strongly aligns with your values and is regularly distributing money to local charities. However, it is my impression that most people have opened these accounts with charitable organizations affiliated with commercial entities such as Fidelity, Schwab, and Vanguard.

Fidelity Charitable, which holds more than $30 billion in assets, pays investment fees to for-profit Fidelity Investments. In this Medium.com piece Marc Gunther refers to DAFs as “profit centers” and asserts that’s “why the financial industry opposes regulation requiring distributions from DAFS. Their incentive is to accumulate assets and to collect fees — not to push money out the door to solve problems.”

On top of all of that in many cases, financial advisors are rewarded for steering their clients towards DAFs affiliated with their corporation, and financial advisors and corporate fund managers are rewarded for keeping money in DAFs once they are established. Dean Zerbe a former senior counsel to the U.S. Senate Committee on Finance sagely observed in this article in Non-Profit Quarterly “With humans being humans, managers of some DAFs—especially those managed by for-profit financial institutions (FIDAFs)—will feel in many cases a strong pull to keep funds under management. Policy-makers and supporters of working charities cannot ignore the reality that having more funds under management is the golden rule for money managers and financial institutions…”

4) What Is the Money in Your DAF Supporting? If the value of your DAF largely consists of stocks your gift may well be negatively impacting the very things you seek to improve or protect. One of my favorite voices in the regenerative investing space belongs to Marco Vangelisti, a former financial advisor and Fulbright Scholar, who founded Essential Knowledge for Transition to promote what he calls “aware and no harm investing.” Marco has a great personal story that conveys how your investments may be negating your charitable efforts.

values aligned investing
Photo Credit: Ludwig Kwan from Pexels

About ten years ago Marco was working at an investment management firm managing the investments of a leading environmental foundation. Part of that foundation’s mission was to preserve orangutan habitat. When Marco looked more closely he realized that one of the companies the foundation was invested in was a palm oil company in Malaysia that had destroyed thousands of acres of rain forest, which essentially meant that the foundation was preserving its wealth by destroying the habitat of one of the creatures it was trying to save. It was at this point that Marco left his job with that investment management firm and started down a new path, which he discusses early on in this LIFT Economy podcast interview.

If you put money in a DAF with Fidelity Charitable Fund to be able to support LGBTQ rights or fight discrimination against people of color you may be dismayed to know that Fidelity is allowing DAF holders to make charitable contributions to organizations identified by the highly regarded Southern Poverty Law Center as hate groups. In this CBS news article Brian Mittendorf, an accounting professor at Ohio State underscored that deciding where the money goes is ultimately Fidelity’s legal responsibility since once individuals transfer assets into DAFs the money is technically the property of Fidelity Charitable Fund. “Legally these are funds owned by Fidelity. Fidelity is making the choice to largely follow their donors’ wishes, but they should take responsibility for that choice and deal with the consequences.”

My Personal DAF Disclaimer

I do NOT have a donor advised fund, nor do I intend to open one for many of the reasons outlined above. It’s my impression that DAFs generally keep money in the hands of the more affluent and slow down its dispersal to those in need. It feels as if they further distance those of us with means from those among us with less. Long time readers of this blog likely won’t be surprised by this because as I wrote here previously I have divergent views on philanthropy.

Certainly, I’ve made some charitable contributions the past few months to help local non-profits doing important and much needed work in my area during these challenging times. I continue though, to emphasize volunteering my time, sharing the non-monetary assets I have with others, and striving to manage my money in ways that solve our major environmental and social problems instead of causing them. I’ve written about some of the socially responsible investments I’ve made outside of the stock market in my post audaciously titled How I’m Investing to Save the Planet and this one on social justice investing. If you found those posts intriguing you may also appreciate this one on impact banking.

5 Ways to Increase Your Donor Advised Fund’s Impact

So you’ve read this far and still want to open a donor advised fund (or increase the impact of an already existing fund). Well I do have some suggestions for how to optimize a DAFs impact.

1) Check Out These Four Socially Responsible Donor Advised Fund Sponsoring Organizations

I have not investigated the fees or many other details and fine print for these options. Their inclusion on this list is based simply on their organizational missions and approaches as well as the feedback of others I gathered directly or via the internet. Now seems a very appropriate time to remind you all that I am not a financial advisor, in fact I probably still speak Polish more fluently than I speak technical finance jargon, so do your own due diligence before pursuing any of these options.

ImpactAssets*

I learned about ImpactAssets, a non-profit financial services firm from Marco Vangelisti, whom I mentioned earlier in this article.The monies in ImpactAsset DAFs are invested in “breakthrough solutions to the world’s biggest global challenges.” This DAF was an early investor in Beyond Meat, which proved not only socially responsible, but very fortuitous. According to this CNBC article, “ImpactAssets’ initial philanthropic investments of $1.1 million in the company climbed to $16.9 million based on Beyond Meat’s opening day.” To the extent I found any articles on socially responsible DAFs while researching this blog post ImpactAssets was the most frequently recommended sponsoring organization.

Amalgamated Foundation
ethical donor advised fund

Amalgamated Foundation is the charitable arm of Amalgamated Bank, one of the larger national banks with a socially responsible focus. The bank is majority-owned by Workers United, an affiliate of the Service Employees International Union. The foundation is a newer DAF sponsoring organization having only begun sponsoring these accounts last year.

Under the leadership of Anna Fink the foundation has come on strong in terms of its socially responsible approach to donor advised funds. The foundation requires donors to distribute at least 10 percent of their fund’s assets each year. The foundation also launched the Hate Is Not Charitable campaign in response to news report about those millions of dollars donors were giving anonymously to hate groups through DAFs.

Loundy Charitable Foundation
Islamic finance donor advised fund

I learned about the Loundy Charitable Fundation‘s donor advised fund from the team at Mighty Deposits, which is an online portal that helps people use public data to compare how banks finance different projects, places, and people. This foundation is the charitable arm of Devon Bank, which is based in Illinois. Because it uses its charitable fund to direct dollars to charitable causes primarily in underserved areas of Cook, Lake, and DuPage Counties of Illinois this option will likely be of greater interest to people residing in or wanting to support that area.

Loundy’s DAF may also appeal to those who adhere to Islamic financial principles, which are governed by Islamic law known as Shari’a, and among other things don’t allow for the paying or charging of interest. Devon Bank is a leading Islamic financial institution based here in the US and offers financing options designed to avoid the conventional interest common in traditional loans for home purchases and refinancing from traditional loans.

Giving Fund

Another option worth keeping track of is Giving Fund, which is currently in the beta-testing phase. Giving Fund is striving to make donor advised funds and impact investing more accessible to individuals at-scale through their digital platform. Founded by two millennials who want to accommodate the growing interest among their peers (and Gen Zers) the company says it will charge reduced rates and offer lower minimums to open a DAF.

Giving Fund’s website also states that it differs from other DAF sponsoring organizations by collaborating with “other fintech social enterprises to provide low-cost investment solutions, that also have a positive impact on the world.” And ayone can visit the website to take this quiz to learn which giving style best aligns with your current habits.

best donor advised funds for millennials

2) Ask Sponsoring Organizations the Right Questions about Impact Investing

It is very important when opening a donor advised fund, as with any major financial decision, to conduct a great deal of research and ask lots of questions of people in your networks who already use this product as well as representatives of sponsoring organizations.

Numerous articles outlining the questions to be asked when performing due diligence in this realm already populate the internet so I won’t go into too much detail on that here. I did however, want to share this particular article from the Stanford Social Innovation Review, which includes suggested questions specific to trying to pursue impact investing through a DAF to ask of any prospective sponsoring organization.

I will admit to not being sure how feasible it is to transfer your donor advised fund from one sponsoring organization to another, but it may be worth checking into if you are not satisfied with the impact your current donor advised fund is achieving. I certainly found information on the websites of DAF sponsoring organizations with instructions for how to transfer a DAF to their management, but saw nothing about actual transfers being conducted. There is no incentive for a sponsoring organization to want to give up these assets under their control.

I did learn on Mike Kitce’s blog that not all sponsoring organizations cooperate with outbound transfer requests to other DAFs since they aren’t required to “ acquiesce to the donor in all situations.” He recommends being sure to ask sponsoring organizations if they allow transfers to other DAF providers when conducting that initial due diligence before selecting a provider.

3) Move Your DAF $$ into SRI funds

If you want to increase the positive social impact of your already existing donor advised fund, but aren’t inclined or able to transfer it to another provider inquire as to whether your current sponsoring organization offers any socially responsible portfolio options.

The major commercial sponsoring organizations such as Fidelity, Vanguard, and Schwab all offer at least a few sustainable investing options. As this Reuters article highlights, Fidelity Charitable for example offers “ETF index funds selected for their ratings on environmental, social and governance issues, such as the Fidelity U.S. Sustainability Index Fund FENSX.O or the TIAA-CREF Social Choice Equity Fund (TICRX.O), and one is fossil-fuel free, out of about two dozen total options.”

4) Don’t Let the $$$ Languish in Your DAF

Remember that society in the form of the U.S. government grants DAF holders tax benefits upon making contributions to their DAFs. Those tax benefits reduce the amount of $$ flowing into coffers that fund public goods such as national parks, veterans’ benefits, and medicare. Society though, doesn’t receive any benefits in return until the DAF account holder gifts that money to a working charity. Most of the recommnendations I read from the experts in the field suggest that contributions be distributed within 3 to 5 years of being deposited in a donor advised fund.

5) Look into Community Foundations in Your Area

I am a big proponent of supporting our local economies. I think strong local economies and vibrant communities are extemely important to building community resilience. If I ever were to open a DAF this is the option I would explore first so I could be very hands on and make the most informed decisions possible about what my dollars are supporting, maybe even volunteering for the recipient organizations as well.

It was very encouraging to read here that Brad Harrison, co-head of impact at Tiedemann Advisors, is seeing nore interest from community foundations in establishing DAFs to support their work strengthening local economic development and neighborhood connections. Community foundations he said “are well positioned to make impact investing options available for the DAF holders to invest locally.”

Final Thoughts on Socially Responsible Donor Advised Funds

The growing interest in donor advised funds is merging with the growing interest in impact investing. People are waking up to the dissonance between their intention to do good with their DAFs and the holdings in their DAF investing portfolio, which may be exacerbating the problems they hope to solve.

As more people are seeking socially responsible donor advised funds that offer investing options which are consistent with their values and mission, new sponsoring organizations are emerging and already existing providers are adapting to meet this need.

If you are going to open a donor advised fund I encourage you to also increase the benefit of your DAF by distributing the funds in a timely manner (3 to 5 years max from the time you contributed the funds).

*After publishing this post a reader shared this article making me aware that the leadership team at ImpactAssets was previously involved with a company that was financially mismanaged. I don’t know that ImpactAssets is suffering from the same mismanagement, but as with all major financial decisions, please conduct your own due diligence.

What About You?

Do you have a donor advised fund? Have you taken steps to make it as socially responsible as possible?

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2 Comments

  • Reply
    Ingrid
    September 1, 2020 at 9:11 am

    I think you make a lot of good points here. For me, having a DAF has made me much more generous than before. It is no longer “my money”, so I’m much more likely to give it away rather than worrying about how much is in my bank account. On the other hand, I could accomplish this in other ways, like setting up a donations bank account, for example. I’m aiming for a 20% payout rate and plan to refund it every 5 years. I use our local community foundation, so the money goes to them if anything happens to me.

    • Reply
      Laura
      September 1, 2020 at 11:19 am

      Ingrid, thank you for commenting and sharing your experience as a DAF holder. It is much appreciated. I’m very pleased to learn that your DAF is with a local community foundation and that you aspire to pay it out in a timely manner. That seems to me the best way to do it.

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