Not everyone is happy about donor-advised funds.
Last week I wrote about how a donor-advised fund can be a powerful philanthropic strategy at year-end.
One day after that post, a friend sent me a link to an article written by Lewis B. Cullman and published in the New York Review of Books. In his article, Mr. Cullman takes donor-advised funds (DAFs) to task and declares that DAFs constitute “philanthropic gamesmanship.”
I have a lot of respect for Mr. Cullman, a former business owner and a philanthropist in his own right. But he makes several points about DAFs which necessitate a response.
Mr. Cullman’s first swipe at DAFs compares them to private foundations, accusing both strategies of “robbing” charities:
…I want to call attention to little-known ploys in US philanthropy that rob our society of hundreds of millions of dollars earmarked for important charitable causes—leaving money stashed away in financial institutions and doing no good for anyone except money managers and other financial intermediaries. [emphasis added]
The accusation here is that DAFs (and private foundations) are harmful to charity and only benefit the financial services industry. I beg to differ.
First, donor-advised funds are not all sponsored by charitable subsidiaries of financial institutions like Fidelity, Vanguard, and Schwab. [Full disclosure: our firm uses Schwab Institutional as custodian and we manage donor-advised fund accounts for our clients with Schwab Charitable.] Many DAFs are sponsored by regional community foundations or single-focused non-profit organizations with no ties to a financial services company.
According to the National Philanthropic Trust’s 2013 Donor-Advised Fund Report, “national” charities, defined as those that are independent and national in scope, not focused on a particular region – including Fidelity Charitable but also others – held $18.88 billion in DAF assets. This compares against $18.26 billion in assets at Community Foundations and $8.21 billion at “single-issue” charities.
The conclusion: if Mr. Cullman has an issue with a financial company sponsoring a donor-advised fund program, he should realize that they account for a minority of all DAF programs nationwide.
What about the payout rate for DAFs? Mr. Cullman targets some of his frustration at private foundations, which have a minimum 5% required payout rate, whereas DAFs have no such requirement under current law. To make matters worse for private foundations, the required payout can be applied toward administrative expenses, not charitable grants.
Here again, DAFs compare favorably to private foundations. The National Philanthropic Trust’s report found that payout rates at DAFs exceeded 16% annually from 2007 to 2012 – more than three times the typical 5% payout rate for private foundations. Further, the payouts from DAFs all went to charitable purposes (because they have to) and not to administrative expenses.
Mr. Cullman appears to take exception with money “stagnating” in banks or DAFs. Does he feel the same way about charitable remainder trusts (CRTs)? CRTs can last for decades before a single penny makes it into the hands of the charitable beneficiary.
All the while, CRT funds are invested for growth or income by someone who must collect a fee for their investment services. Should CRTs be reformed also? According to the latest IRS statistics charitable remainder trusts held over $93 billion of assets – more than twice the amount of assets at DAFs.
Mr. Cullman also is unhappy with the fees imposed by donor-advised funds when the donor-advisor does not recommend a gift:
If the donor never gets around to making distributions, they stay in the account earning substantial fees for investment managers.
Let’s take a look at those “substantial” fees.
Fidelity Charitable is the second-largest charity in the United States based on donations raised from private sources, according to the Chronicle of Philanthropy – also making it the largest sponsor of donor-advised funds in the country.
Fidelity charges an annual administrative fee that is either a tiered fee or a flat fee, depending on the size of the DAF account. Accounts under $5 million are subject to the tiered administrative fee.
A DAF account with $600,000 would be subject to a fee of 0.60% (60 basis points) on the first $500,000, and 0.30% on the next $100,000. The total administrative fee in this example would be $3,300 per year, or 0.55% of the account. This can hardly be called “substantial.”
In addition, the investment allocation chosen for the Fidelity DAF account is subject to an investment expense that can run as high as 1.16% for the “International Equity” allocation pool. Donors can opt for using index allocation pools, with exceedingly low expenses of 0.06% to 0.12%. Again, not “substantial,” especially given that these investment expenses, assuming the money was invested somewhere if not the DAF, would need to be paid regardless.
What about the fees for a DAF sponsored by a community foundation? Let’s use the California Community Foundation (CCF) as an example. Using the same $600,000 account example, CCF would charge an administrative fee of $7,500 (1.25%) – more than twice the fee at Fidelity Charitable! Does Mr. Cullman begrudge a community foundation for imposing such a fee for the service it is providing to the community?
Mr. Cullman favors legislative reform to address his concerns:
There should be a simple, uncomplicated bill relating to foundations and DAFs, fair and easy to understand, requiring that donated money not come under the control of profit-making financial managers.
Notwithstanding the point earlier that less than half of DAF funds are “under the control” of charities created by financial institutions, legislative solutions are not always in the best interest of the charitable community.
Here are several other points that Mr. Cullman either fails to mention in his piece or fails to recognize about the positive role that DAFs play in philanthropy:
- Donor-advised funds provide donors with flexibility when needed. Donors who are charitably inclined but undecided as to the eventual recipient can receive a deduction now and decide on the recipient later.
- Donor-advised funds promote legacy and the passing on of philanthropic values. Donors who establish DAFs are sometimes permitted to name “successor advisors” – those who would step into the donor’s shoes to suggest grants after the donor passes on. This can be an effective way of engaging the next generation in philanthropy.
- Donor-advised funds have a very low barrier to entry. Donors can establish DAFs with as little as $5,000-$25,000, making them available to a large segment of the population, unlike with private foundations. Setting up a private foundation requires far more money and is generally appropriate only for high-net worth individuals.
Finally, Mr. Cullman’s focus on fees and “profit-making financial managers” prevents him from seeing the most important point of all. Donor-advised funds have a rich history in this country – the first one having been established in 1931 by the New York Community Trust – and since then have been a net positive for the philanthropic community. As the National Philanthropic Trust report states:
Donor-advised funds are a popular tool for donors, allowing them to allocate assets to philanthropic giving when they are available, yet make decisions about specific beneficiaries over time.
This sounds like the furthest thing from a “misuse” of philanthropy to me.
Comments or feedback? Contact me on Twitter @juanros.
[Correction (9/25/14): An earlier version of this article incorrectly named the publication in which Mr. Cullman’s article appeared. Correction (9/22/14): An earlier version of this article included an incomplete description of how the Chronicle of Philanthropy ranks charities.]