Sins of Commission

A central principle of nonprofit development is that individuals should not get paid on a commission basis.

According to the Association of Fundraising Professionals, paying nonprofit fundraisers commissions is unethical because the self-interest of the staff member can distort the solicitation process. A gift needs to be right for both the donor and the organization, and it needs to be driven by a genuine charitable impulse.

When the fundraiser’s compensation is directly related to realizing the gift, all sorts of bad things can happen. The conversation between solicitor and donor can turn coercive and misleading. Donors may be pressured to make the gift before they are ready. The solicitor may encourage gifts that are not in the best interest of the organization. Moreover, even if such a compensation scheme were ethical, it would rarely be fair, since the gift that arrives in 2014 is probably as much the result of earlier cultivation by the organization as the efforts of the current staff member who happens to make the ask or open the envelope.

Nonprofit staff and board members and government regulators agree: paying commissions on gifts to charity is the province of the kind of shady firms that give nonprofit fundraising a bad name.

At its essence, raising charitable dollars is different from selling insurance or cars or brokering real estate or stocks. Charitable fundraising is about people giving of their own free will to causes they care about. And though nonprofits need to market themselves and do what they can to build relationships with donors, fundraising is not about relentless efforts to make the sale. It’s about helping people do good with their money. Certainly the better fundraisers get rewarded through rising salaries. But to pay commissions is unseemly at best, and unethical or illegal at worst.

Nothing I’ve said so far is the slightest bit controversial. This has been the standard approach to nonprofit fundraising for as long as it’s been done.

Enter the commercial donor-advised funds – “charities” that are essentially subsidiaries of major financial firms. Fidelity. Schwab. Vanguard. UBS. Morgan Stanley. I call these NINOs – Nonprofits In Name Only – that provide their donors with full tax deductibility, and then house the money (with no requirements that the funds be given away) until some unspecified future point, when the funds will be distributed to charity. These entities obviously evolved from a different culture than nonprofits. And that very different lineage clearly surfaces where compensation is concerned.

As I’ve pointed out in earlier posts, in recent years NINOs have soared in popularity. And a large reason for this success is the very kind of commission that is considered unethical in the nonprofit world.

Here’s how it works. You are a client of Bill, a financial advisor at a major firm – let’s call it ABC Brothers Financial. You ask Bill to transfer some stock to three different charities you want to support. Bill counters by saying that another way of approaching charitable giving is to set up a donor-advised fund right there at ABC Brothers. He’ll note that donating stock from your client account to an in-house donor-advised fund will be simple (true), and that you’ll get a full charitable deduction at the time of the transfer (also true). He’ll explain that you can then send the funds to those organizations now, or make those gifts next year, or the year after. He’ll mention how you can choose to let those funds grow over time.

What Bill doesn’t say is that he will continue to draw a commission for those donor-advised fund dollars – the same as if the money were still in your name, not the charity’s. What Bill also doesn’t say is that the longer you keep the funds undistributed to charity, the more money he will make. Finally, Bill doesn’t say how his employer will draw a fee from the investment your donor-advised fund makes in its mutual funds. (I estimate that the largest of these NINOs, Fidelity Charitable, nets Fidelity Corporation a cool $75 million a year in mutual fund fees.)

Clearly what Bill is doing is in violation of established fundraising ethics. He is soliciting a charitable gift, and he is getting paid a percentage of that gift. The larger the gift, the larger his compensation. Moreover, he has a personal incentive not to have the funds go out to actual charitable purposes. The smaller the actual contribution to operating charities – that is, the smaller the impact on the community – the larger his compensation.

I have caught some heat for expressing my views on this. Members of the financial services community have protested against my insinuations that financial advisors are motivated by commissions when they recommend donor-advised funds. They say that they are driven to serve their clients, and that they are promoting charitable giving. To which I say: if these commercial donor-advised funds are actual charities, then the financial services community should abide by the rules that govern the nonprofit world. No commissions.

But then again: if there were no commissions and fees and profits involved, these entities would never have been created in the first place.

Copyright Alan Cantor 2014. All rights reserved.

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4 thoughts on “Sins of Commission”

  1. Throughout the history of our country, Americans of vast wealth have directed billions of dollars to establish private foundations (the Ford Fdn., the Pew Charitable Trust, the Annenberg Fdn, etc.). Income from these foundations have funded countless important initiatives.
    There are many philanthropists of far more modest means…….. philanthropists who may be deeply committed to nonprofit initiatives in their communities: they can now utilize the vehicle of an advised fund to support critically important work in their communities.
    Do we celebrate those with vast wealth who can endow a private foundation with a hundred million dollars…….. but look with a jaundiced eye at someone of more modest means who establishes an advised fund with two hundred thousand dollars??.

    1. Thanks, Norm, for your very thoughtful comment.

      I think you’re absolutely right: there should be a way for people not named Ford or Annenberg to make a significant charitable gift, particularly at a moment in their lives, such as the sale of a family business, when they might be realizing a big capital gain, and when they’re consequently in a position to make a donation that’s larger than anything they’d done before. And I think a donor-advised fund is a perfect vehicle for this. It’s simple, and it doesn’t cost a lot of legal or accounting fees to establish or maintain.

      Where you and I differ is that I don’t think the donor-advised fund should be permanently endowed. When the donor makes a gift to a donor-advised fund, he is getting all the tax advantages of a gift to an operating public charity. Those tax benefits are more far-reaching than a gift to establish a private foundation — because donor-advised funds have the same 501-c-3 tax status as a soup kitchen or the Boys and Girls Club. In other words, the federal government (through the tax deduction) is subsidizing the gift to the donor-advised fund, and it is doing so at a level that exceeds that of a gift to a private foundation. I think it’s a matter of simple fairness and good public policy to expect those funds to go out to charitable organizations that provide actual services, and that that happen in a relatively short period of time. Two different ways of doing this are to require a high annual payout (15% or 20%), or to require that funds be distributed to charity within a seven-year period. (The latter is an approach taken by Boston College Law Professor Ray Madoff, and I’m leaning in that direction.) I think think seven years is adequate time for the donors to think about which organizations could best use these monies.

      This means, of course, that if you as a donor want to establish a modestly-sized permanent charitable fund, you’re out of luck. That said, I think the societal benefits would be much greater. I have a genuinely hard time knowing that, on one hand, there are 49 million hungry people in America — a third of them children — and on the other hand seeing the amount of money warehoused in donor-advised funds grow and grow. I think the funds need to go out in a much more expeditious way.

      As for the focus of this article, the folks who surely benefit from the growth in donor-advised funds are the brokers and the financial institutions, people and entities that continue to draw fees from these accounts. (I am referring here to the commercial donor-advised funds, such as those at Fidelity and Schwab, not DAFs at a community foundation.) I am convinced that the financial self-interest of the financial services community is driving the huge growth in commercial donor-advised funds, and that the net of gifts going to operating charities is dropping as a result.

      I’ll add if someone indeed had a $200,000 or so donor-advised fund and needed to distribute it instead of keeping it in the DAF, and if keeping the family name in perpetuity was important, he or she could use the money to endow a fund at a local charity. It’s not as though I’m saying that donors who are not billionaires could not leave money to charity in a significant way. I’m only asserting that donor-advised funds established as permanent endowments are not an efficient way to help the charitable community, nor an effective use of the federal charitable deduction.

      We’ll probably agree to disagree on this, Norm. Know how much I respect you and your approach to charitable institutions and the community!

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