Is Wall Street Taking Over Charity?

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Americans might be forgiven for taking a dim view of our nation’s charitable practices this election cycle. GOP presidential candidate Donald Trump stands accused of diverting business income to his private foundation, using charity money to buy auction items like a six-foot-tall portrait of himself, and deploying philanthropic funds to bankroll an attorney general who was considering whether to investigate Trump University. Hillary Clinton’s family philanthropy, for its part, has drawn scrutiny for pocketing big checks from foreign donors with business before the State Department.

Now The Chronicle of Philanthropy’s newly released annual list of the nation’s top-grossing charities threatens to give the sector yet another black eye. Released on October 27, the report does contain some feel-good news about American generosity—overall giving is up by 7 percent, for example. But the ranking contains a startling revelation that could intensify scrutiny of the sector: The growth in what some have dubbed a “Wall Street takeover” of charity.

The report is sure to add plenty of fuel to an already heated debate about so-called donor-advised funds, a philanthropic vehicle that has been popularized by the financial industry. Known as DAFs, the funds function like charitable checking accounts, permitting donors to put money aside for philanthropic purposes, take an immediate tax break, and then “advise” the sponsoring institution on which charitable causes they want to support with that cash. Their exploding financial-sector use means that the nation’s most popular charity in terms of donated dollars is no longer a group like the Red Cross or the Boys & Girls Club of America, but rather Fidelity Charitable, a DAF sponsor created in 1991 by the Boston-based financial firm.

Having raised $4.6 billion in 2015 alone, Fidelity Charitable occupies the number one spot on the Chronicle’s top charities list for the first time ever. The fund took in nearly $900 million more than second-place United Way Worldwide, which had until now held the top spot for all but one of the last 25 years. Two other sponsors of DAFs administered by financial firms—Schwab and Vanguard—also now crowd the ranks of the 15 largest U.S. fundraising organizations. Others that made the top 15 include Catholic Charities USA, the Salvation Army, and Stanford University.

Critics say these commercial DAFs are sitting on tens of billions of dollars that would otherwise go directly to help those in need. While perfectly legal, such funds strike some as violating the spirit, if not the letter of the rules around charitable tax deductions. “We’re giving the same charitable deduction to someone who puts $1 million into a DAF, even if the money may well sit there forever and benefit no one but the Wall Street firm associated with it,” says Alan Cantor, principal of Alan Cantor Consulting LLC, which works with donors and nonprofits. He contrasted that with the actual benefits generated by “people who are giving to food kitchens, homeless shelters, and schools.”

DAFs were first developed by community foundations in the 1930s and are designed to allow donors to designate money for charity without having to quickly decide which worthy institutions to support. They are sometimes compared to private foundations, which have also faced scrutiny for slowing the flow of charitable donations. But unlike foundations, DAFs aren’t legally obligated to distribute even a portion of their dollars by a particular deadline.

The financial institutions, meanwhile, earn fees for managing the funds and thus have a disincentive to get the dollars out the door. “This is the most pernicious aspect of the commercial gift funds,” says Cantor.

While it’s difficult to calculate exactly how the growth of commercial DAFs might be affecting gifts to other groups, the data show that in the time these funds have ballooned in size, total charitable giving (as a share of GDP and of disposable income) has held steady.

And while a variety of nonprofits also operate these giving accounts, it’s only been with the advent of the commercial funds that DAFs have exploded. In 2015, both commercial and nonprofit DAFs received 13.2 percent of all donations to the top 400 charities in the Chronicle’s list, in comparison with just 0.25 percent in 1991.

“One of the reasons they’re doing so well is they have lots of money to spend on marketing and promoting these funds in a way that other charities don’t,” says Stacy Palmer, editor of the Chronicle.

Financial-industry executives and other DAF proponents, meanwhile, say they are perplexed by how the giving accounts have become a lightning rod, and defend them as tools for facilitating philanthropy by well-off, but not super-rich, individuals. 

Large sponsors of DAFs “are just making it quite easy for middle-class and upper-middle-class individuals to have what amount to their own tiny foundations,” says Howard Husock, vice president for research and publications with the Manhattan Institute. He says that there’s “no evidence” that other sorts of groups are being starved of funds as DAFs have grown, that the funds allow the appreciation of assets that are ultimately given to charity, and that they enable donors to maximize tax breaks in a manner that encourages greater overall giving.

Husock also says there isn’t evidence of inter-generational hoarding of money in DAFs, a point also underscored by those in the financial industry. 

“Donor-advised funds are a simple, flexible, effective way to give to charity,” says Pamela Norley, president of Fidelity Charitable, which has attracted 130,000 donors who’ve contributed a minimum of $5,000 each.

She says that Fidelity’s giving accounts donate, in aggregate, 20 percent of their assets a year, and that the fund starts distributing the money on their behalf if they make no contributions within six years. Over a ten-year period, 92 percent of donations in Fidelity’s giving accounts are distributed, the fund says. In an email, Kim Laughton, president of Schwab Charitable, said the fund gives out 20 percent a year in aggregate and 76 percent within ten years.

Methodologies for calculating payouts differ, though, and some charitable watchdogs argue that aggregate figures conceal the fact that some individual giving accounts are paying out very little. Meanwhile, other DAFs, namely those operated by funds that are smaller and face less scrutiny than Fidelity, may be giving out far less. An Internal Revenue Service study determined that the median payout for organizations that sponsor donor-advised funds was 10 percent in 2012.

In light of those figures, some charitable-sector experts say one answer is to require the funds to carry through with their charitable commitments in a timely fashion.

“I tend to look at the commercial DAFs as really being a conduit and a way to delay charitable spending,” says Roger Colinvaux, a law professor with Catholic University’s Columbus School of Law, who calls for a payout rule for DAFs in a new paper. “I don’t think they’re necessarily good or necessarily bad,” he says, and “if donors want to use them, terrific. … But let’s just make sure the money is spent within a reasonable time and not saved.”

That could happen. In 2014, then-Congressman Dave Camp, a Michigan Republican who chaired the House Ways and Means Committee, introduced a proposal requiring that donations to DAFs be paid out within five years. The plan didn’t get very far, but the issue doesn’t appear to be going away.

Just last month, the Council on Foundations, a trade group whose members include community foundations, spent nearly $6,000 on an advertisement in the Chronicle defending DAFs as a means to "encourage charitable giving," and stating that the focus should be on expanding, not limiting them.

“The fact that there was even a proposed measure from Dave Camp really surprised people,” says Palmer. “Usually in tax law, once one of those ideas is out there, and congressional staff members and members of Congress start thinking about it, it often does eventually end up in legislation.” 

Colinvaux suggests that the Treasury Department could take executive action to require such funds to distribute their assets.

Jarrett Lucas, executive director of the Stonewall Community Foundation, which operates DAFs that support LGBT causes, says he is not necessarily opposed to a payout rule, so long as it is carefully considered and wouldn’t interfere with the needs of new donors who require time to assess the effectiveness of charities and determine which groups fit their philanthropic goals. Stonewall gives out 88 percent of contributions in the same year they’re received, so it’s unlikely that imposed deadlines would significantly alter the giving habits of that fund’s donors.

The bigger concern for Lucas is the effect of the commercial DAFs, with their Wall Street patois, transactional approach, and superficial support for donors, on the philanthropic landscape. In his eyes, the funds risk replacing altruistic values with capitalist ones. “Their M.O. and marketing suggest that philanthropy is a transaction,” he says, “and position the donor as the customer, client, and first to benefit, and that framework is being imprinted on our culture of giving.”

Clarification: This article has been updated to clarify that a Council on Foundations ad defending donor-advised funds made no mention of legislation that would limit such funds.

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