By Thomas Kostigen
Donor Advised Funds have exploded in popularity as Wall Street markets them more broadly and individuals embrace the notion of charitable investing rather than charitable giving.
DAFs are defined by The Chronicle of Philanthropy as “a little like a personal charitable savings account. A donor creates an account and makes a contribution of cash, stock, or other assets like real estate or artwork and can take an immediate tax deduction for the gift. The accounts are controlled by a nonprofit, called a sponsoring organization, that invests the assets and manages the donor’s account. Community foundations often serve as sponsoring organizations and so do nonprofit arms of financial-services firms, such as Vanguard Charitable and Schwab Charitable. Once a fund is established, donors tell the sponsoring organization which nonprofits they’d like to donate to from their accounts.”
Foundations are how and through which wealthy individuals often achieve their charitable wishes. DAFs give mainstream investors the same opportunities. They are especially popular with local communities, where people can donate to, say, their favorite museum or other cultural institution. The donation is enhanced by gains in the capital markets, augmenting their charitable gifts.
As DAFs also generate management fees for fund operators, they are a boon for financial institutions. Hence the increase in marketing of DAFs by Wall Street firms to individual investors over recent years. The number of DAFs grew by more than 50 percent accounting for nearly $30 billion in new assets under management in 2018 alone, the last year for which data is available.
There are now in existence some three-three-quarters of a million DAFs representing more than $121 billion, according to industry estimates.
Should you start one? If you are charitably minded and make serial donations annually, DAFs can increase the amount of capital you give—and therefore also enhance the impact you make—because of the returns on investment your fund achieves in the capital markets. Adding a double-digit return to annual giving, especially over time, is a strong positive for opening a DAF. (By the way, many major brokerage firms offer DAFs.)
But there are hazards, too. What if your fund manager loses money by investing the capital markets? That makes the value of your giving program less, and the amount you can ostensibly give away smaller. Also, recent investigations into how DAFs are managed have found some irregularities, such as not distributing funds, or swapping DAF assets amongst one another to provide the appearance of assets being put to charitable use when, in fact, the assets remain on the books of a sponsoring institution. That allows the sponsor to continue collecting management fees on the assets held rather than losing them to the charitable organizations for which they are intended.
To be sure, as noted, it isn’t just financial institutions that manage, or more technically “sponsor” DAFs. There are community-based organizations, religious organizations, and other cause-based institutions that do so. However, financial institutions have been the ones to step up their marketing of these investment products.
That’s why It’s smart to have an independent financial advisor conduct some due diligence on your behalf to determine which DAFs are best to fit your needs and which are reputable. Alternatively, there is software that can compare and contrast DAFs to help you make a decision about which one to invest in. And fund rating agencies such as Morningstar also have resources to help investors choose among the raft of DAFs in the marketplace.
With a thought-though charitable program and a well-run DAF, investors can shift good market returns into more goodwill and good giving.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.
