The news last week was stunning, but at the same time utterly unsurprising: When The Chronicle of Philanthropy compiled its annual Philanthropy 400 list of the nonprofit organizations that had raised the most money in the United States last year, the top dog was not United Way or the Salvation Army, but Fidelity Charitable.
The finding sparked a series of stories around the country: The New Yorker, The Washington Post , The San Francisco Chronicle, The American Prospect, and National Public Radio, to name a few. Journalists are gob-smacked by the idea that an affiliate of a financial services firm could claim the title of top charity – and that it did so by the hefty margin of $900 million over United Way Worldwide. (Last year Fidelity’s take rose 20%; United Way’s dropped 4%.)
But those of you who have been reading my rants about the commercial donor-advised fund industry have seen this coming for five years. It’s like watching the sea levels rise from climate change. We’ve long known what was going to happen. Now, the evidence is incontrovertible. I take some grim satisfaction in the news, but mostly I feel despair.
For those of you who are new to the issue – and those of you who aren’t – here are some questions and answers about what’s going on.
Why is Fidelity’s ranking as the nation’s largest charity a big deal?
Because Fidelity Charitable is not an actual charitable organization that provides services. Fidelity Charitable received public charity tax status from the IRS in 1991 in a frankly unfathomable ruling. Fidelity Charitable is an affiliate of Fidelity Investments, and its staff and operations, as I explained in an earlier post, are inextricably tied to its parent corporation. Fidelity Charitable is a NINO: a Nonprofit In Name Only.
Fidelity Charitable, like other donor-advised fund sponsors, is a black hole. Money goes in, but it may never come out, and in any case the public does not have access to account-by-account information of its grantmaking activities. The dollars in a particular donor-advised fund do not actually have to go out to operating charitable organizations – not this year, not next year, not ever.
But the organization Fidelity Charitable replaced at the top of the list is United Way. Isn’t United Way a similar kind of outfit: one that that accepts money and then distributes it to operating charities?
Actually, not at all. United Ways raise money and distribute the funds (minus its overhead for running the campaign and determining allocations) in the year the money is given. So if a million dollars is raised by United Way in 2016, the whole million is more or less spent that year to support core social service organizations in the region.
A million dollars given to Fidelity sits at Fidelity. Yes, it can all go out the door in Year One and Year Two. But many accounts barely move, or have just enough distributions (a $100 grant here, a $250 grant there) so Fidelity does not consider it to be dormant. And the federal laws don’t require any activity at all.
In fact, much of the marketing material for Fidelity and other donor-advised fund sponsors speak to the way the funds can grow over time and be left as a charitable asset to children and grandchildren. There is pervasive and persuasive messaging that people should add to their funds and allow the principal to build.
But what’s wrong with building philanthropic funds? Isn’t that a good thing?
If the donor-advised funds at Fidelity and elsewhere added to the nation’s charitable pie, it would indeed be positive. But overall charitable giving as a percentage of disposable personal income in the US has remained stuck at about 2% for 40 years, according to Giving USA, the most respected source of research in American philanthropy. If more and more money is going into DAFs, less and less is going to soup kitchens, Boys and Girls Clubs, schools, and museums.
What’s behind the growth in donor-advised funds?
First, a donor-advised fund is undeniably attractive to donors. It’s a have-your-cake-and-eat-it-too vehicle where the donor gets a full charitable deduction and still retains practical control on the use of the funds. It’s especially attractive for people dealing with large capital gains, perhaps from the sale of a business. A donor-advised fund is also a salve for the ego. It’s nice to have a fund with your name on it to use for charitable purposes.
Second, the financial services industry is making a mint from donor-advised funds, and the financial incentives involved have turbo-charged the growth of the industry. Certainly, the corporate sponsors benefit. Most of the funds in Fidelity Charitable, for example, are invested in Fidelity mutual funds. Fees generated from those investments flow to the corporation. But even more importantly: the donors’ financial advisors often serve as investment managers of donor-advised funds, and they consequently draw fees for their services.
The financial advisors have a personal financial incentive, therefore, a) to get donors to put their money in a commercial donor-advised fund rather than making an outright gift to charity, and b) to keep the funds undistributed. The longer the funds sit there, the more the financial advisors earn in management fees. I should note that over the years many people have criticized me for highlighting this arrangement, but no one has denied the basic structure. I once debated a supporter of donor-advised funds who spoke glowingly of how DAFs expand charitable assets by creating an army of tens of thousands of financial advisors to serve as de facto charitable development officers. But why do tens of thousands of financial advisors push donor-advised funds? Because they receive compensation for it, of course.
Isn’t there something unseemly about having financial advisors draw fees off of charitable gifts?
Yes. And it’s a violation of fundraising ethics. According to The Association of Fundraising Professionals, staff members soliciting charitable gifts should not be paid a percentage, fee, or commission. That’s essentially how financial advisors are compensated for gifts to commercial donor-advised funds.
Is it illegal?
Alas, no. Though I argue that financial advisors should be required to make full disclosure to their clients about their pecuniary interests in commercial donor-advised funds.
Is Fidelity the only big donor-advised fund sponsor?
Nope. In fact, five of the top eleven nonprofits on the Philanthropy 400 are DAF sponsors. This would have been unthinkable only a few years ago.
Is there a way of reforming donor-advised funds so they work for society?
- By requiring funds (along with their capital appreciation) to be donated to charity within 15 years of being contributed to the DAF. I have talked with scores of donors and charities about this idea. Nearly everyone goes along with the notion. The only people resisting – and they are resisting strongly – are donor-advised fund sponsors. Like my pals at Fidelity Charitable.
- By prohibiting private foundations from making grants to donor-advised funds. Many foundations make grants to donor-advised funds, either a) so they can meet their five-percent distribution requirement without actually losing control of the money, or b) in order to launder the donor’s identity for controversial gifts, or c) both.
Passing these two simple reforms would preserve what’s good about donor-advised funds and ameliorate the corrosive effect they’re having on the charitable sector.
Will Congress act to fix donor-advised funds?
It’s an election year – did you notice? It’s anyone’s guess what the new Congress will look like, and how beholden they will be to Wall Street. But something has to give. Maybe if everyone concerned about donor-advised funds in the charitable world called Congressional offices demanding reform, someone in DC would get the message. Despite everything, I continue to have faith in democracy. At least, if we get through the next week.
Why did I title this piece “Wall Street 9, Charity 0”?
Because it’s World Series time. In baseball, if you forfeit, the final score is officially listed as 9-0. Over the years charitable regulators and legislators have swung and missed, to continue the metaphor, on donor-advised fund issues. They’ve forfeited the game to the financial services industry. It’s time to actually deal with donor-advised fund issues instead of giving up.
Also, 9-0 is the tally of a unanimous Supreme Court ruling, including momentous decisions like Brown v. Board of Education and United States v. Richard Nixon. Or, at least that was the vote back in the day when we had nine justices, instead of the eight we have now because the Senate refuses to hold hearings on the President’s nominee. Which takes us back to the subject of the utterly dysfunctional Congress.
So here’s my recommendation to Congress: 1) fill the Supreme Court vacancy, and 2) pass donor-advised fund reform. In that order. (See! I’m not such a one-issue zealot!)
Copyright Alan Cantor 2016. All rights reserved.