What a Donor Advised Fund CEO Advises for Nonprofits

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What’s the fastest growing segment of philanthropy? It’s the world of donor advised funds (DAF’s), accounting for $28.7 billion in assets in 148,588 accounts as of the end of 2008 according to the 2009 Donor Advised Fund Market Report,released by the National Philanthropic Trust. While much of charity and philanthropy is still reeling from the impacts of the recession, investments in donor-advised funds are rapidly increasing.

The national entities that manage donor-advised funds have grown amazingly fast since Fidelity broke into the field with the Fidelity Charitable Gift Fund in 1991 followed quickly by Vanguard, Schwab, and other investment firms. But the money behind the funds remains obscured.

One of the mysteries of fundraising for the vast majority of nonprofits is how to access the donors behind donor-advised funds. DAF’s are donations of cash, stock, or other assets to special accounts called donor-advised funds; donors receive an immediate charitable deduction for the donation to these accounts, which are typically managed by financial companies, community foundations, and some independent charities that distribute funds from the accounts based on the donors’ recommendations of specific charities or causes.

One of the smaller, though no less important, national sponsors, the National Philanthropic Trust, just announced it has raised a total of $2 billion over the past 14 years in the donor-advised funds it manages.

The Nonprofit Quarterly spoke with the National Philanthropic Trust’s CEO Eileen Heisman recently to explore exactly what makes national sponsors such as NPT tick, what distinguishes NPT from its competitors, and what nonprofits might learn about accessing these mysterious charitable assets called donor-advised funds.

Founded in 1996, the National Philanthropic Trust (NPT) is one of the nation’s 25 largest philanthropic grantmakers, offering donor-advised funds, “field of interest” funds, and supporting organizations. NPT provides these services to individual donors as well as to other financial services firms, the combination of which has helped it become one of the 100 fastest-growing charities for six years running (PDF).

This summer, NPT reached the $2 billion mark in charitable funds raised since its inception, with solid fundraising numbers coming out of the recession.  Like her peers at other national DAF’s, Heisman says she was “a little surprised initially” that the commercial gift funds like NPT weathered the recession better than other parts of the charitable sector. She attributes the resiliency of the funds to the fact that the donors are wealthy and the value of their mutual funds have largely rebounded. Equally impressive as the $2 billion it raised during its brief existence, NPT has distributed $1 billion out in 44,000 grants to charities both domestic and foreign. That is a level of grantmaking that overshadows the grants output of the vast bulk of general purpose grantmaking foundations. 

As big as the amount is, NPT’s $2 billion is much less than the amount of money raised by the big three national managers of donor-advised funds. Fidelity for example has much more than twice that amount of assets currently under management and in just the first six months of 2010 disbursed $531 million in grants alone.

That doesn’t make NPT tiny by any stretch of the imagination. While Fidelity ranked third in the Chronicle of Philanthropy’s, “Philanthropy 400,” with $1.59 billion in private support (Schwab followed at number 10 with $887 million in private contributions, and Vanguard at 18 with $670 million), the National Philanthropic Trust ranked 70th on the list, having raised $250 million in 2009.

How does NPT compete with the donor-advised fund managers that are several times larger? Heisman says that NPT operates differently than its mammoth competitors. “We’re not just a vehicle gathering assets for a financial services firm,” Heisman contends. (A characterization, we suspect, that the leaders of the Fidelity Charitable Gift Fund, the Vanguard Charitable Endowment Program, and the Schwab Charitable Fund might not buy.) The big firms, she says, have provided a huge service to the donor-advised field by demonstrating that “you can commoditize philanthropy.” Commoditizing philanthropy requires offering a product that appeals to donors who don’t need or want to pay for advice, but want a clean, relatively no-frills product with a rock bottom cost structure. These donors know what they want to do with their charity and aren’t going to pay an extra percent or two for advice they don’t need.

Although no national fund can match the level of services that a regionally focused community foundation offers its donors, Heisman suggests that NPT is very “donor focused” and tries “to make donors’ charitable giving better.” NPT plays a middle role between the mammoth national funds and the handholding offered by community foundations. NPT sees itself as supporting donors’ goals and helping them find the kinds of charities that meet donors’ complex needs. Heisman and her staff often research opportunities for donors and hire outside experts in particular fields to address donors’ specific needs. By using consultants, Heisman is able to maintain a small staff and isn’t compelled to boost fees to pay for permanent staff.

Still, hiring specialized experts that fit donors’ needs means a cost structure that isn’t as cheap as the big three’s. NPT’s base administrative fee is 0.85 percent for DAF’s with asset values between $25,000 and $250,000, 0.70 percent for the next $250,000, and 0.60 for the next $500,000 (PDF). In comparison, Fidelity’s administrative fee is 0.60 percent for the first $500,000 and 0.30 percent for the next $500,000. Vanguard charges 0.60 percent for the first million dollars and then drops the administrative fee greatly for the next $29 million.

In addition, as an NPT press release notes, NPT provides some fee-based premium services for donors including “educational seminars, a philanthropic news service, family meetings, site visits, and research to leverage and enhance their giving.” Heisman says that “we explain (the cost structure) to the donors and they’re pretty receptive.” It is a competitive marketplace, and community foundations are hardly sitting still. “Fees have come down,” Heisman says, “and you have to be more nimble in the philanthropic world than 25 years ago . . . There are more choices in philanthropy, and you have to be creative about how you pay for yourself.”

Scale makes a difference in the market. As large as it is, NPT is too small to reduce its minimum account sizes. For example Fidelity and Schwab maintain a minimum of $5,000. NPT’s minimum is $25,000 and its average donor-advised fund is approximately $325,000, relatively high for a major national firm. Partly, NPT serves as a “private label” manager of other firms’ national funds, such as JP Morgan, UBS, Hollencrest, and others.

We suspectNPQreaders are little interested in how NPT or Fidelity manages itself or how NPT appeals to high net worth donors. Their interest rather, is in how to access the 1,500 donor-advised funds with $820 million in assets managed by Heisman’s firm. Heisman is refreshingly candid about NPT’s policies in terms of accessing donors, which are not unlike those of Fidelity and the other big firms. Like Fidelity, Vanguard, and Schwab, NPT doesn’t pitch nonprofits to its donors. “We’re not advancing causes, we have a policy of not shopping causes to our donors,” she explains. They don’t even shop their donors’ favorite charities to other donors in the NPT family.

NPT would need a mechanism for evaluating and endorsing specific charities over their competitors, but on what basis? Cost? Outcomes? Impact? Ideology? While other donor-advised fund managers might have specific topical purposes (such as universities or religion) or might pitch specific local charities because of their geography (like a community foundation might), a national fund link NPT would be hard-pressed to make a recommendation for one charity because of the nonprofit’s pitch or a donor’s say-so.

Disappointed? Heisman has a practical alternative to offer: Cultivate major donors the old fashioned way. “I’m a development person by training, [and] I feel [grant seekers’] pain,” she admits. “I say to them, ‘Our donors are our major gift donors.’ If you’re cultivating donors for major gifts, that’s really the best way.” Donors use DAF’s, in part, to be anonymous – to sidestep the foundation-like process of having nonprofits flood their fund managers with applications. But, to the chagrin of many nonprofits, high net worth donors increasingly give through donor-advised funds, often in multiple places.

Heisman said one of her donors has a DAF at NPT, another at Fidelity, a third at one of the Jewish federations, and he also has a private foundation.  Heisman advises to learn and practice the art of major individual donor solicitation, and in all likelihood, your ongoing relationships with individual donors will result in checks signed by places like NPT or other donor-advised funds.

Despite their great impact as a funding source for nonprofits, donor-advised funds have their critics, some of whom believe that these funds serve as warehouses for the wealthy to hide assets. Heisman, like her peers, boasts a high cumulative payout rate of NPT’s fund’s, hovering around 14 or 15 percent most years. Like Fidelity Charitable Gift Fund CEO, Sarah Libbey’s contention that a majority of Fidelity donors have increased their charitable giving, Heisman believes the National Philanthropic Trust has “gotten people to put in assets that they wouldn’t have otherwise deployed for charity,” resulting in a net increase in charitable giving as a result of the tools NPT provides.

As more charitable money flows into the high volume, high payout – but largely anonymous – vehicles of donor-advised funds lodged in national firms, nonprofits are going to have to think about whether or not they can follow Heisman’s advice and gear up major individual donor fundraising efforts. Otherwise, they might find themselves out of the running for the billions of dollars flowing annually from donor-advised funds.