Those Darned DAFs

Donor-Advised Funds (DAFs) sure seemed prevalent in the press over the holidays.

The National Philanthropic Trust’s recent report on DAFs showed that, compared to 2011, in 2012: contributions to DAFs grew 34.6%, assets grew 18.9%, and grantmaking grew 6.7%. The growth in grantmaking exceeded the growth in grantmaking by private and corporate foundations over the same period, as reported by the Foundation Center. The rapid growth of DAFs likely continued in 2013, with three donor-advised fund managers reporting increases of more than 20% in giving in a December 13 Chronicle of Philanthropy article.

Community foundations and financial advisors, of course, published articles showcasing donor-advised funds as an easy, quick, and cheap means of taking care of year-end giving. Many highlighted the ease of donated appreciated stock and other assets. These articles and posts weren’t unexpected given the general increase of charitable giving advice and news in November and December.

Less expected was the amount of press generated by Professor Ray D. Madoff, of Boston College Law School. She is crusading for higher regulation of DAFs, calling them “warehouses of wealth” that are “taking over the charitable landscape” and starving “true charities” of resources. Her December 6 New York Times op-ed spawned additional coverage in the Boston Globe and Los Angeles Times. Other sources cited and commented on those articles. She rebutted the criticism she received by countering Five Myths About Payout Rules for Donor-Advised Funds.

Madoff had picked up on a thread of criticism of DAFs in the Chronicle of Philanthropy throughout 2012, including op-eds by nonprofit consultant Alan Cantor and comments by the National Center for Responsive Philanthropy’s Aaron Dorfman. Conservative commentator Scott Walter labeled the criticism Unphilanthropic Carping.

I don’t share the skepticism of Madoff, Cantor, Dorfman, and others – at least, not yet. Here are my quick takes on their concerns:

1) DAFs are primarily tools for financial advisors to make money from charitable giving.

Financial advisors, accountants, and attorneys also earn money from advising private and community foundations, other trusts, and even nonprofit endowments. The critics don’t seem worried about these sources of profit. In addition, there’s no data that the advisors are making more money, per philanthropic dollar advised, on donor-advised funds.

2) Fund advisors are likely granting little from their DAFs because there is no regulation forcing them to do (e.g. no equivalent to the 5% rule for private foundations).

There is no data about DAFs stockpiling charitable funds without making grants. The National Philanthropic Trust reported an average payout rate of 16% for DAF managers, far higher than the average for private foundations. In addition,advisors to the funds may have legitimate reasons for paying less in some years and more in others, including: the timing of large gifts to the funds, using funds to engage children and grandchildren in philanthropy, developing and implementing strategic giving plans, and holding payments back to incentivize matching gifts at a nonprofit.

3) Grants from DAFs can be anonymous. At minimum, this anonymity shields donors from nonprofit fundraising appeals and prospect researching. At its worst, the anonymity is suspected of being a cover for funding of controversial issues.

Donors seek anonymity for a variety of personal reasons, including religious beliefs and fear of discrimination or retaliation. Progressive critics appear suspicious of DAFs held by conservative donors, and I suspect the converse is true. I’m not willing to remove the option of anonymity for donors just because I might not like the charities they support. See my previous post Why Your Grant Proposal is Unwanted for other reasons donors to foundation or DAFs choose to be circumspect in their giving.

4) Because the overall rate of giving in the U.S. is fairly static over time, the rapid growth in giving to DAFs means other charities are receiving less money.

This argument – the shift in the use of a limited pie of charitable dollars – seems a reasonable hypothesis, but is darn tough to prove. There are too many other variables in the equation, including: timeshifting of funds (the same dollars that would have gone to non-DAF charities are distributed later); the amount of giving to DAFs that might not have gone to charity at all if not for the DAF; the increased competition from the growing numbers of nonprofits; and other trends impacting giving preferences of different generations.

Your thoughts?

If you’re a fundraiser or grant writer, I’d love to hear from you. How have donors’ use of donor-advised funds tangibly impacted your nonprofit for good or bad?

Addendum 2/14/14: Rick Cohen from the Nonprofit Quarterly – a thoughtful skeptic of organized philanthropy – posted an article today with additional rebuttals to the DAF critics. He ends the article with this sentence: “For charities interested in reaching individual donors, getting comfortable with donors who give through donor-advised funds has to be a top priority in the new world of fundraising.”