Overcoming Outmoded Skepticism: Seeing National Donor-advised Funds for What They Are

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In years past, community foundation execs would gnash their teeth at the advent of Vanguard or Fidelity purporting to provide a service to the charitable sector as they created autonomous nonprofit arms in the donor-advised fund market that community foundations thought was pretty much theirs. Now, nonprofits are generally quite aware of the existence of the national donor-advised funds, or DAFs, managed by Fidelity, Vanguard, Schwab, and others. Billions of dollars are being held and managed by these national corporate funds linked to mutual fund companies, as well as independent entities such as the National Philanthropic Trust. Billions of dollars have gone through these entities as grants to hundreds of thousands of nonprofits. Nonetheless, the nonprofit sector’s skepticism of national corporate-sponsored or corporate-linked DAFs lingers in some quarters without justification. Why?

We chose to explore the question with two of the national managers who have to answer these challenges regularly: Kim Laughton, the new president and CEO of Schwab Charitable, the number two national DAF manager behind the Fidelity Charitable Gift Fund, and Eileen Heisman, president and CEO at the National Philanthropic Trust, which manages its own national fund as well as some other national funds, working with multiple financial services firms for investments.

Schwab Charitable serves as a venue to capture and stimulate the charitable giving of some of the three million investors in Schwab, Inc. funds, while the National Philanthropic Trust (NPT) is not aligned with a specific mammoth financial services firm, though it is still among the top 25 grantmakers in the U.S. NPT’s Heisman says the criticisms of the national DAFs are “based on old thinking” and “stale arguments.” In her words, “The national donor-advised funds are here to stay.” These national DAF programs generate charitable giving, they make giving easy, and they take care of the record keeping. Other than the fact that they might be lodged at some of the biggest financial firms on Wall Street (whose role in the concentration of wealth and power has been adequately documented and decried by the Occupy Wall Street movement), what could be wrong with that? We have some ideas as to why the nonprofit sector seems to fall into a default position of skepticism and suspicion toward the national DAF managers.

Hypotheses and Answers about Nonprofit Skepticism of National DAF Sponsors

First, unlike private foundations, the donor-advised funds established at community foundations or national corporate sponsors are generally anonymous. Donors can make their names known to their grant recipients and sometimes do, but there is no reporting requirement to link grants to specific DAFs and their donors. The lack of transparency behind the DAFs is a legitimate issue, but it’s not unique to DAFs; rather, it’s built into the structure of 501(c)(3)s that are not private foundations—and Schwab Charitable, the National Philanthropic Trust, and your local community foundation are 501(c)(3) public charities governed by the same principle. Over the years, the DAFs have at least begun to report long lists of grants in their 990s, naming the charitable recipients, and it would be a fabulous service if some entity would develop a database to track DAF grantmaking the way the Foundation Center tracks foundation grantmaking (Hello, Foundation Center! Hello, Guidestar!).

But given the anonymity, the suspicion among nonprofits, one imagines, is that the people behind DAFs are making grants to pay for their own expenses or to charities where they are the primary beneficiaries. Back in 2004, Sen. Chuck Grassley (R-Iowa) launched Senate Finance Committee hearings into charitable abuses and found an example of donors using DAFs to pay their personal expenses, including utility bills and alimony payments. Such abuses regularly landed DAFs on the IRS’s annual “dirty dozen” list of tax scams to watch out for. But with the passage of the Pension Protection Act of 2006, followed by the Internal Revenue Service’s PPA-mandated study of DAFs, this kind of abuse has subsided and, to the extent we can tell, is not tolerated among the corporate and community foundation DAF managers. As a result, the IRS dropped DAFs from the dirty dozen list a couple of years ago and they haven’t reappeared there.

A second reason behind some of the nonprofit sector’s skepticism of DAFs may the very concept of people establishing DAF accounts as small as $5,000 (at Fidelity or Schwab), $10,000, or $25,000 (at NPT or Vanguard) and simply making their own grants, often without formal outside advice beyond perhaps checking out nonprofits on Guidestar, the Wise Giving Alliance, or Charity Navigator. This rubs some the wrong way, and presents a challenge to the world of charitable advisors.

Who are these small donors with the hubris to make their own charitable donations without being guided by smarter people who supposedly know so much more about giving wisely than they do? Actually, they’re the same people we trust to make other kinds of important decisions in their lives, including determining who should sit in the White House. If we don’t want to sell the American voter short on picking the right candidate for the White House, why are we so willing to sell the American donor short as being somehow unable to sort through information to pick the charities that best reflect the donor’s values and beliefs? And in reality, many people make as much in the way of charitable donations from their checkbook as these investors creating donor-advised funds do. But for those donors with the wherewithal to create $5,000 or $10,000 donor-advised funds, the act of establishing a DAF and having access to tools for examining one’s history of charitable giving may lead to more strategic giving than writing checks to charity.

NPT’s Heisman brings up the question of whether a typical small donor using a checkbook can remember what he or she gave to last year or the year before, and whether he or she can find which envelope the receipts or letters from the charitable beneficiaries were placed in. At one of the large funds (and increasingly at community foundations that have upgraded their technological platforms), one can pull up one’s grantmaking history to better assess the overall direction of one’s philanthropy. According to Schwab’s Laughton, “Once you have a [DAF] account, you start to think about [your giving] more strategically, you become over time more strategic about it, and our sense is that over time it builds giving.”

A third form of skepticism about DAFs is derived from the suspicion that these corporate types are influencing the donors to give to certain charities aligned with corporate interests. How could they not, right? Except that they don’t. Both Laughton and Heisman describe their firms’ approach to managing the DAFs as “agnostic” or “neutral.” They don’t recommend charities to their investors, though they will do the due diligence on them to make sure they’re legitimate and legal. The one exception, Heisman notes, is that they will recommend charities during disasters so that donors who want to make a fast response to help people in need will have ready access to the best options in front of them.

According to Heisman, “donors are intelligent, community-minded people. They love the convenience of the vehicle, but they aren’t using the [DAF managers] to help them find organizations…Most donors know what they want. If we tried to shop charitable causes to our donors, if you’re going to recommend charity A over charity B, you have to know and you have to do very careful vetting…We just take a neutral position.” Unlike other DAF managers, the National Philanthropic Trust will search for potential charitable recipients if a donor wants them to, but Heisman says, “The fact of the matter is they rarely ask us.” Donors increasingly know what they want by virtue of their own interactions with charities, their relationships with friends and peers who also give, their involvements on boards, and their own beliefs. They aren’t picking Schwab or Fidelity because of a desire to follow the charitable priorities of Chuck Schwab or the Johnson family that created Fidelity Investments. In most cases, they’re picking their own charities.

There is no way around the fourth concern about DAFs. When a nonprofit wants a grant from Schwab, they can go to the Schwab corporate foundation, but the largest of the Schwab pools is the Schwab Charitable Fund, and the reality is that there’s no way to “apply” for grants to it. Nonprofits have no “in” to accessing capital in these DAFs other than being active, visible, and effective, and thereby catching the attention of donors with the wherewithal to set up DAF accounts. “I get it,” Heisman, a former fundraiser herself, acknowledges. “It is really frustrating for the charities. Many of the donors are not known to the charities. There’s a lot of frustration that you can’t apply to the national funds for many DAFs and that gets [to] people really.”

Indeed, it is difficult and disconcerting for nonprofits to look at entities that are among the top grantmaking machines in the nation and realize that there is no portal for submitting a proposal, no venue for making a pitch, nobody really to talk to about how to apply and what the likelihood of funding might be. To the nonprofit grant seeker, the national DAFs look like black boxes—no way in, no way of knowing how donors make their grant decisions, no way of asking for and getting money out. Always among the most candid and forthright people in the nonprofit sector, Heisman understands. “I’m a CEO of a public charity,” Heisman says. “I wish I had a better answer for the charities that want to apply for grants, but I don’t.” As a result, it seems like the suspicions about the big national DAFs get magnified, particularly with the rumors that the DAFs are simply warehousing money for wealthy donors and acting as tax shelters when the reality is now just the opposite.

Donor-advised Funds as Instruments of Strategic Philanthropy

Despite all of the skepticism and suspicion, there is cause to demur and see the national DAFs sponsored by financial services and mutual fund firms as an advance in charitable giving. In the wake of the Occupy Wall Street movement’s protests against the concentration of wealth and control within a handful of firms, it may be disconcerting to some to find national donor-advised funds affiliated with or run by Wall Street financial services firms providing a valuable service to charitable donors. Nonetheless, the donor-advised fund world, particularly as managed by the national funds, has become an instrument—we believe—for making thoughtful, strategic philanthropy more accessible to people below the one percent.

For example, take a look at Schwab Charitable’s contributions and grants in recent years:

These numbers are remarkable. In Fiscal Year 2009, contributions to Schwab plunged 45.6 percent, but giving from the DAFs increased by 11.6 percent, suggesting that that this DAF actually increased its giving during the recession in response to societal need—at a time when other philanthropic donors such as private foundations largely retrenched. At NPT, Heisman says that during the height of the recession, “we saw less grant money going out, but we were making the same number of grants…and last year they started to catch up” to their pre-recession levels.

Laughton notes that Schwab Charitable’s DAF payouts routinely top 20 percent. At NPT, Heisman takes pride in the fact that, in the organization’s16-year history, it has raised $2.5 billion but given away more than $1.4 billion. These are payout ratios that are only approached in the foundation world by spend-down foundations. With payouts that high, the investments of the DAFs in mutual funds, including socially responsible funds (Schwab now offers one managed by Parnassus), move relatively quickly compared to foundation dollars that sit in banks and equities for much longer periods of time. In doing so, DAFs are part of a movement in philanthropy that stands as an alternative to ginormous foundations created by millionaire and billionaire families whose grantmaking is determined by a handful of rich board members.  In contrast, DAFs are, dare we say it, an instrument toward democratizing philanthropy, putting more philanthropic decisions into the hands of ordinary Americans who may not be charter members of the one percent club. Hopefully, as technology improves and databases on charities become more widespread and functional beyond just financial measures, and as the nation becomes more aware of easy mechanisms for charitable giving, entities such as Schwab, NPT, and community foundations will attract more donors and stimulate increases in thoughtful, strategic charitable giving.