Point, Counterpoint

Dear Readers:

You may be familiar with epistolary novels – that is, novels told entirely in letters between the characters.

Today is an epistolary blog post. My first! (Perhaps yours as well?)

Here’s the background:

Back in May, the Chronicle of Philanthropy published an opinion piece by me criticizing the growth of donor-advised funds, particularly those run by Wall Street. Unless you have a subscription to the Chronicle, you’ll have a hard time accessing that original piece on line, but if you’re curious, in many ways it’s a recast and updated version of Deluge, a blog post of mine dating from January.

In July, Douglas Kridler, the CEO of the Columbus Foundation, published a letter to the editor in the Chronicle criticizing my piece. And in the August 11 edition, the Chronicle published my response to Mr. Kridler.

Feel free to click on the links to the Chronicle site, or you can read the two letters, in sequence, below.

I’m honored to be in the middle of this national conversation. Clearly, I think it’s an important issue – and apparently others do, on both sides.

Please feel free to weigh in with your thoughts here or at the Chronicle website.

Most sincerely and epistolarily yours,

Al

* * * * *

July 14, 2013

Donor-Advised Funds Don’t Deserve to Be Singled Out for Criticism

To the Editor:

While I support Alan Cantor’s interest in robust and efficient charitable giving (“Donor Advised Funds Are Booming, but Nonprofits See Little Benefit,” Opinion, May 23), to borrow two words from the opening sentence of the piece, I find “something troubling” about his broadside on this valuable charitable-giving vehicle.

One of Mr. Cantor’s complaints about donor-advised funds is that they serve as “warehouses for charitable dollars.” His underlying implication seems to be that it’s wrong not to spend charitable gifts immediately.

But in that case, consistency requires that Mr. Cantor attack any kind of charitable vehicle that allows for spending over a long period of time, rather than all at once. This encompasses endowments at universities, hospitals, arts organizations, churches, and almost every other type of charity that engages in some sort of saving for the future.

Why make donor-advised funds a target of attack on this basis?

Mr. Cantor cites one anecdote for the proposition that there is a widespread problem with donor-advised funds not making enough distributions.

It is not our experience that donors are looking to hoard and immobilize their charitable giving through donor-advised funds. Simply put, there’s no personal gain in donors doing so, and donors find grant-making enormously fulfilling and satisfying.

Even a comparison with grant distributions at private foundations and endowments, many of which maintain a purposeful discipline around capping distributions at 5 percent (or less), would have been illustrative, as the payouts of donor-advised funds I am familiar with far exceed that threshold.

Another of Mr. Cantor’s concerns is that a financial-services firm obtains a fee for the investment management of assets held in a donor-advised fund.

Yet this is necessarily the case with any type of investment account that a charity holds, whether it’s a permanent scholarship fund at a university or a brokerage account that supports a private foundation’s future grant making or a perpetual endowment for the support of a botanical garden.

Again, why single out donor-advised funds?

What donor-advised funds do, over and over, is expand the amount of wealth that is devoted to charitable giving.

Mr. Cantor himself alludes to how this can happen, and we see week in and week out examples of this in action.

Given the proven attractiveness of this charitable-giving vehicle, it is an expansive leap of faith to assume that as much money would be dedicated to charitable purposes in our communities should donor-advised funds be diminished in their tax treatment from their current rightful grounds on par with other forms of charitable giving.

As a former CEO of a (non-foundation) nonprofit organization, I understand how urgent the need is for money to fund the work of our nonprofits. And as the current CEO of a (community foundation) nonprofit dedicated to creating and offering value-added practices to help invigorate charitable giving, I understand how effective and flexible donor-advised funds at community foundations can be at achieving that goal and more.

Douglas F. Kridler
Chief Executive Officer
The Columbus Foundation

* * * * *

August 11, 2013

Defending a Critique of Popular Funds

To The Editor:

Douglas Kridler’s critique (“Donor-Advised Funds Don’t Deserve to Be Singled Out for Criticism,” Letters to the Editor, July 14) of my May 23 Opinion piece (“Donor-Advised Funds Are Booming, but Nonprofits See Little Benefit”) misses several critical points.

Mr. Kridler asks why I focus on donor-advised funds when there are endowments and private foundations that also hold charitable funds for future use. Actually, I’m not a big fan of endowments or private foundations, either. They, too, warehouse money that often could be put to better use. But that’s an argument for another day and another opinion piece.

I chose to write about donor-advised funds because, unlike private foundations, which have been around in the United States for over a century, and endowments, which have been around for hundreds of years, donor-advised funds (particularly the commercial gift funds) are relatively new vehicles. Moreover, they are growing in extraordinary ways and for the most part are unregulated. This rapidly growing philanthropic sector deserves some special scrutiny.

Mr. Kridler takes issue as well with my objection to financial-services firms receiving a fee for donations to commercial donor-advised funds. He points out that investment firms charge fees for managing charitable endowments, so why do I take issue with their fees from donor-advised funds?

While financial-services firms have traditionally, and understandably, received fees for managing charitable endowments, in that role they are actually performing a service for the nonprofit: managing the funds.

On the other hand, when a financial adviser draws a fee for directing his client’s money into an in-house donor-advised fund he is simply receiving a commission, much as he would when a client invests in a mutual fund.

The financial adviser is not performing any action other than facilitating the transfer to the “charity”—that is, the donor-advised fund.

That, in my mind, is a vastly different role from managing endowments. One of the cornerstones of nonprofit development is that commission-based compensation is unethical. Yet that’s how Wall Street is building its donor-advised-fund empire, and the arrangement is unseemly at best.

Mr. Kridler mocks my “one anecdote” about the donor who creates a donor-advised fund and then essentially never authorizes a contribution.

I agree with him that this sort of abuse is not common, but I will assert that it is also not as rare as many would think.

Certainly, there’s little in the structure of most donor-advised funds to discourage this kind of behavior. A few months ago, I called a major commercial-gift fund and asked: “If I were to set up a donor-advised fund account with you, would I be required to make charitable distributions?” The woman at the other end replied, “Well, if you don’t make any grants over a five-year period, we’ll have to call you and remind you to make one.” There was a bit of a pause. Then she noted, “But our minimum distribution is only $50, so that shouldn’t be a big deal.”

Well, to my mind, it is a big deal. If Mr. Kridler feels that this kind of abuse is so rare, he shouldn’t mind the imposition of a required annual distribution for all donor-advised funds. That wouldn’t bother the majority of donors who give generously from their funds, and it would force those sitting on their accounts to get the money out where it can do some good.

Alan M. Cantor

Concord, N.H. 

Mr. Cantor is a consultant to nonprofits.

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One thought on “Point, Counterpoint”

  1. Thoughtful checks and balances guiding the distribution of “in-house donor advised funds” would ensure that philanthropic intent remains in the room….there would be no downside to the donor or the charity….

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