Episode 28: Talking About Donor-Advised Funds

Welcome to another edition of “Around with Randall”. Your weekly 10 to 12-minute podcast and making your nonprofit more effective for your community. And here is your host, the CEO and founder of Hallett Philanthropy, Randall Hallett. 

Another terrific week here on “Around with Randall”. I appreciate your time joining me. Today's subject is this idea of donor-advised funds. A couple of articles caught my attention in the latter part of February, based on a report that was put out by the financial house, Fidelity. The two articles, one from Bloomberg, which was entitled, “Americans Who Made Fortunes During COVID Save Taxes by Giving it Away” and the second is from the Chronicle of Philanthropy, a publication I talk about quite frequently, entitled “Donor Advised Funds, Claims Spark Pushbacks from Critics”. 

Let's start with what the news was. Fidelity released a report indicating that $9.1 billion was given away from donor-advised funds that they have control over. Let's review for just a second. What is a donor-advised fund? That's a fund where the donor puts it into an organization, could be investment house, a lot of times it's a community foundation and that community foundation acts as the back house for much of the work that would look like a foundation. They will help the donors or family in terms of how they want to have the applications come in or help them with the investment process, or they actually do the investment most of the time. They will help them in terms of getting the money out. When the donor puts the money in it is a charitable gift and it's restricted to be given out charitably over time.

We'll talk about a couple of the challenges and the critics that had comment about this here in a second. In many ways, it acts as a pseudo foundation, and really what it does is for people who want to give money away, which is terrific. They want an easier way of doing it than setting up their own foundation because that encompasses too much paperwork, too much legality, too much accounting. All of that can be handled by a place like Fidelity or a community-based foundation. So, what was the biggest issue? Well, when you looked in the data a little more carefully, a couple of scholars said, well, wait a minute. Yes, they gave the announced largess of $9.1 billion, but they're missing the bigger story that Fidelity didn't comment as much on. Nearly $15 billion went into donor-advised funds at Fidelity. There was actually a gap or a delta of $5 billion, which brought up a whole lot of questions. 

We're in the middle of a pandemic. There are people with very big needs. Some of them are basic services, and yet it appears as if the funds are growing inside of these donor-advised funds at a quicker rate than they're actually giving them out. Which brought into question a couple of things. If you set up a foundation, there is a requirement that you give away something about 5% of assets each year towards charitable means. A donor-advised fund does not have that requirement. So, people who are putting money into donor-advised funds while doing so are incredibly good-hearted. The question becomes, well, wait a minute, if there's not a requirement, how long can those funds sit? And if we have great need, why aren't they being allocated now? It becomes a values question. 

It brought up a larger question from a couple of pundits who follow this commented on. I was surprised by some of the numbers. They estimate that there's $142 billion in donor-advised funds in the United States and $1 trillion in foundations. The question is if now is not the time for organizations to be aggressively or individuals aggressively giving out money, then when is that time? It's an interesting values question. I'm not going to get into that answer, but I do want to spend a second talking about this idea of donor-advised funds because I've had a couple of concerns over the years. 

I first ran into them early on in my career, 20-25 years ago, when working with a few donors at an organization that I represented and they had made the decision to push the back end work into the Kansas City Community Foundation, phenomenal group. They do wonderful work. But what I found as a fundraiser is I began to lose connectivity, (A) I wasn't very experienced (B) I wasn't very smart, and (C) these things weren't as aggressive as they are today, Kansas City Community Foundation was way out ahead of its time and it caused some issues because people would tie pledges to their gifts. All of a sudden I'm having to go through the Community Foundation for a relationship that I had had for a number of years. They had made the gift directly to the school and now I'm trying to track it down, which caused legal issues. I wouldn't be told when I would know that the donor wanted to make an annual gift. I had to work through the Community Foundation and they'd say we had to go through this application process and I'd be like, but the donor just told me to call you. So, there were all of these disconnects. A lot of this was because I wasn't very smart. I don't think the Community Foundation was doing anything wrong. I understand why the IRS set up this as an opportunity for people to give money away because that's good for society and part of our historic culture in America, but it brought into some concerns regarding how you operate with someone who has donor-advised funds. 

So, let me walk you through the tactical of some things. If you have a donor or have had donors who have built donor-advised funds, here's some suggestions that might be helpful in making sure your organization is still a priority with the organization, through that donor or family. Number one is to continue to build a relationship with that donor or family. At the end of the day, and we'll talk about this at the very end, they for the most part have control of where those dollars go. If you're continuing to build a relationship, there may be an extra step or two that are required, but the donor, if they value the relationship and value your mission are truly going to push for you to get that money.

Also, I would highly encourage you building relationships through the donor into the next generation. Many donor-advised funds are set up where a matriarch and or a patriarch are going to make the determination on those philanthropic dollars coming out of the fund. But when they pass or when they choose not to want to do that anymore, more often than not, it's children or grandchildren that will step into that breach. We know from studies that many children and grandchildren do not have the same interests that the matriarch or patriarch had when those decisions were made. You need to work through the people, you know best to say, can we include your children in some of these conversations? Would that be appropriate? We want to make sure the legacy of the family continues because if you don't do that and the matriarch and or patriarch disappear from that equation, you're left with a hole of how that relationship, that opportunity can be kept alive. So, you need to be thinking ahead a little bit. 

Number two, be up front -- many times you can have your charity written into the agreement that the matriarch or patriarch or the donor has with the donor-advised fund. In some cases, depending on statute and state and legality, you can say this charity is the number one priority and should be given money on an annual basis. That is hugely influential in the decision. So the more that you're open and upfront and honest to say, we don't want to lose your support and that you're doing this to make it simple on you and that's good, but can we make sure that we're seen as a number one, two, or three priority in your giving. Finding the right language and the right conversation can be incredibly important to protecting the organization in that relationship long-term. 

Third, it's a little more challenging with a place like Fidelity, a large investment bank, but in a community foundation, you should get to know who's on that board. You should get to know who the leaders are as employees because they have influence. One of the things that I took away from the article is the last paragraph from Bloomberg.  I knew this having done this for a long time and also having gone to law school. It was almost a throwaway, but I think it's really important. So, I want to read it verbatim. “Legally, the nonprofit such as Fidelity Charitable has ultimate control over the funds, but in practice, account holders recommend charities they want to support. When that fund is created and those dollars are put in, it's important to note that the legal control of those dollars shifts from the donor to the charity.”

So, Fidelity Charitable acts as an instrument of the bank, community-based foundation. This was always my greatest concern. What happens if nobody wants to manage the funds in terms of making recommendations on where to go, then who does? Which brings me back to where I was getting to know those individuals on the board and those leaders can help you because we're finding more and more funds have less and less control from the families that originally put them in there. Which means another group of people will make the determination of where those dollars will go. That's a little concerning. I'm a big believer in donor intent. If the donor truly didn't intend to put any restrictions on it. I suppose that's one thing, but my bigger concern is what happens if the donor had intended, but it was never put in writing. What happened? What happens? I think that this is going to become more of a question in the future, but from a tactical perspective, your ability to reach out and get to know your community foundation leadership and board, get to know who these people are, might help your organization find resources that may not have a destination like they used to in years past. So the tactical build a relationship with the donor, stretch that into the next generation, be up front. See if you can, can be a part of the language or the ideal of what the donor's original intent is. And number three, get to know your community foundation who have a lot of these types of funds or anything else that's related to it, where it's appropriate so you can be seen as an important player in the community. Donor-advised funds -- there's going to be more conversation about this and something to pay attention to. 

As mentioned on the last podcast, we had two emails communicating concerns about podcasts. I want to bring them both up because there are times maybe I don't get it fully right. I miss something. In both cases, I think that it was incredibly important. The first comes from Courtney who said in my four-part series, particularly on asking. I said something about it should only take a couple of meetings and efforts to get to an ask. What I failed to indicate, and Courtney did a great job of bringing this up. The larger the gift, the longer the cultivation. If you're asking for $25 million, that could take a year, I negated and that's on me to say.  I was really intending those to be first time major gifts $10,000, $15,000, $20,000, $25,000 maybe up to $50,000.

You don't need 15 cultivation moves to get a $10,000 gift, but you may need 150 for a $50 million gift. I really appreciate Courtney pointing that out and the nuance that I missed in that particular podcast, so thanks, Courtney. 

The other was from Melissa who asked about accountability, listening to a previous podcast, which would have been in the first, probably month or month and a half of doing these, and said, well, what about accountability for finance and for marketing? I thought, well, gosh, I didn't bring that up. That's a good point. Everybody should have accountability. What I would recommend is that you take the opportunity to do some non-quantitative accountability measures. I think organizations that do surveying and internal polling about how people feel about the organization or departments in the organization are incredibly wise and forward-thinking. To give you an example, what happens if every six months or a year a 5-7 question survey came out to everybody internally that said, do you feel as if finance or marketing is partnering with you correctly? Maybe there is a Likert scale like you think that they're creative and that they listen and that they are an integral part of the team and that they are willing to think creatively and they're willing to adjust their thinking. Melissa's question was going to the heart of what I think is really important when a nonprofit’s at its best, everybody's pulling in the same direction and it's not intended, but sometimes I find marketing and finance are a little bit, (2-3 degrees) off of what philanthropy is trying to do, and our responsibility is to help them see what we're trying to accomplish and how we do it. I also think the organization could take some responsibility with non-quantitative, qualitative thought process evaluation accountability to see are the places that don't drive dollars supportive of that effort. And so, Melissa, thanks for your question. A way for you to think about, and for all of us to think about, how to build accountability in non-metric, non-KPI, nonfinancial ways of asks and dollars, but use some qualitative about being a part of the team.

Which brings us right to the email reeks@hallettphilanthropy.com. If you disagree with something or think I missed something, send me an email. I'm glad to do this. I appreciate when people give me a sense of what they're hearing and maybe something else I missed or just got plain wrong. If you have a podcast subject, you'd like to bring up. Please feel free to email me at podcast@hallettphilanthropy.com. That's two L's two T's, hallettphilanthropy.com. Don't forget about the website and the blog posts all the time. Just wrote one here recently on someone who lived their life in obscurity for 99% of it and in the last year was knighted by the Queen because of fundraising -- worth 90 seconds of your time. You've never heard of him is my guess. 

As always, let me finish up with this. I think what we're doing is really important here. What you're doing for your nonprofit and your community is changing lives. Sometimes it's tough to see. Sometimes it's tough to feel, but it's true. No matter if you're the administrative assistant, the major gift officer, the annual fund director, the special events person, the chief development officer, or the president, we all have a role to play.

My all-time favorite saying, which you've heard me say over and over. “Some people make things happen. Some people will watch things happen. Then there are those who wondered what happened.” Nonprofit work is about being people who make things happen, partnering with people in our community, the philanthropists, the donors who want to make things happen for people who are wondering what happened.

COVID-19 has allowed us a window into the importance non-profits can play even at a higher level. I hope you feel like you're a part of it. It's vocational; it's a calling and I wake up every morning thinking, how am I so lucky to be a very, very, very, very, very small part of my client's world and what they're trying to do. I hope you feel the same. If you don't, take a second, think about people that your organization's affecting for the positive and how you're making a difference. I appreciate your time today on “Around with Randall”. We'll see you next time and don't forget, make it a great day!