What’s Behind the Curtain? We Still Don’t Know.

[Note: This article was co-published in The Chronicle of Philanthropy on March 12, 2018.]

The most dramatic phenomenon in American charity in the last decade is the rise of donor-advised funds. Six of the ten most successful fundraising organizations in The Chronicle of Philanthropy’s newest “Philanthropy 400” were donor-advised fund sponsors, including organizations affiliated with financial services giants Fidelity, Goldman Sachs, Schwab, and Vanguard. This explosive dominance of DAFs on the charitable landscape demands scholarly research and analysis.

It was therefore with great anticipation that many of us awaited the arrival of the new report from Giving USA™, “The Data on Donor-Advised Funds: New Insights You Need to Know.” But to say that the report is a disappointment is an understatement.

I had assumed that Giving USA would use its notable analytical capacity to research critical issues raised by donor-advised funds.  After all, donor-advised funds are the black box of philanthropy: there is no transparency, as the public does not have access to individual fund records. Unlike foundations, where each grant is recorded on their Form 990-PF, grants from DAFs can be anonymous, not attributed to any particular donor and fund, and perhaps not disclosed at all. And, most troubling, there’s no requirement that money donated to DAFs ever needs to be distributed to charity, raising questions about inactive funds.

But Giving USA avoids these critical issues. Their report digs deeply into some of the least interesting aspects of the DAF phenomenon, skips lightly over any controversies or conflicts, and goes nowhere near any of the major questions involving DAFs’ impact on American charities.

There is some new information in the report, but frankly, none of it is surprising or of significant interest. And the fact that the report was sponsored by the Fidelity Charitable Trustees’ Initiative, and that Giving USA shared the stage with Fidelity Charitable’s president in a national webcast the day after the report’s release, raises uncomfortable questions about the judgment of Giving USA and its research partners at the Lilly School of Philanthropy at Indiana University.

I fully appreciate that the report includes some new information, and I don’t question the quality or depth of the research, as far as it goes. The problem is what Giving USA chose to study. The report chronicles the growth in giving to donor-advised funds, and upwardly revises the numbers that have been reported through the years by the National Philanthropic Trust. The Giving USA report also analyzes the distribution of grant recommendations from donor-advised funds, reporting that DAF grants track more closely to the charitable preferences of high-net-worth donors than to the public at large.

These are not exactly earth-shattering revelations. We already knew that donations to donor-advised funds were booming, whatever the exact numbers turn out to be. And finding out that grants from DAFs controlled by wealthy people are similar to direct gifts from those same wealthy people is more logical than newsworthy. It’s somewhat interesting to know that DAF grants skew toward certain charitable causes. But it’s hardly what we need to know, as the title of the report asserts.

Meanwhile, the report mentions criticism of DAFs only in passing, not in any depth. The authors devote much more space to explaining the advantages DAFs present to donors.

Here are some suggestions about what Giving USA should be researching about donor-advised funds:

  • Has the rise in giving to DAFs resulted in a net loss of contributions to what I will call “real charities” – those that provide services and advocacy – as many of us writing about DAFs suggest? That is, an enormous amount of money is going into donor-advised funds, and much of that, we assert, might otherwise have gone directly to charity. Further, we think the money going out from DAFs in grants to charity is not as much as the amount going into DAFs. Or are donor-advised funds in fact causing more money to go to these charities overall, as the DAF industry implies?
  • How many of the hundreds of thousands of individual DAFs are completely or essentially inactive? And how much money rests in those funds?
  • How often do private foundations make grants to DAFs to meet their 5-percent spending requirement? And what happens to those funds after the grants are made?
  • How many DAFs become orphaned after the donor dies, and what is the fate of that money? Does the principal of those funds get distributed to charity? Does the money remain invested at the donor-advised fund sponsor? Do the DAF sponsor trustees use the assets for their own grantmaking?
  • What does Giving USA suggest as a fair, standardized method for measuring annual DAF payout rates? (The industry has changed its methodology over the years to maximize its reported distribution rate. See my analysis from last July in the Chronicle of Philanthropy.)
  • How much do donor-advised funds generate in revenue for DAF sponsors, financial advisors, and the mutual fund industry?
  • Would instituting a requirement that all donations to DAFs be fully distributed within a certain number of years create an actual burden on sponsoring organizations and donors? And what would be the impact of this kind of spend-down requirement for charities?

These are questions nonprofits care about – not the issues Giving USA researched.

The Giving USA report came out only two weeks after a Chronicle of Philanthropy story announcing that Fidelity Charitable brought in an astounding $8.5 billion in calendar year 2017. That’s more than double what Fidelity Charitable, already the top fundraising nonprofit in America, raised in the most recent compilation of the Philanthropy 400. I would assume that the other commercial DAF sponsors will report similarly astronomical donation totals in the weeks and months to come.

What are the implications of that jaw-dropping growth on American charities? That’s what nonprofit leaders – and policy-makers – need to understand. As much as I enjoy finding colorful words to describe the DAF phenomenon – “tsunami!” “kudzu!” – I am heartsick over the implications of Wall Street’s takeover of the charitable world through donor-advised funds, and I am not alone in hoping for the institution of common-sense reform measures.

My late mother was fond of a Yiddish proverb: “When the house is on fire, don’t worry about the curtains!”

Giving USA has taken a very different tack. Its report describes the donor-advised fund curtains in the finest of detail, analyzing the lace, linen, and stitching, while the rest of us can’t help but notice that the larger nonprofit house is ablaze.

Meanwhile, the people most affected – charitable leaders – though deeply concerned, are reluctant to speak up.

That’s for good reason. As Paul Streckfus, Editor of the EO Tax Journal, wrote in one of his recent newsletters, “Part of the problem is that real charities are afraid to raise their voices. If they object to DAFs siphoning off billions of dollars into investment accounts, the DAFs can take them off their approved distribution lists. If they object to foundations hoarding or misspending funds, they can be cut off. If they object to tax provisions favoring the well-to-do, such as reduced estate taxes, they can be cut off. The result is that real charities are afraid to speak up even as their funding dries up.”

The perception that Giving USA was avoiding difficult topics in its donor-advised fund report isn’t helped by its association with the report’s underwriter: The Fidelity Charitable Trustees’ Initiative. I’ve been assured by the report’s researchers that Fidelity’s sponsorship played no role in their work, but surely Giving USA could and should have been more thoughtful in its choice of sponsors  for this project. The leaders of Giving USA then amplified the problematic association when, in its March 1 webcast presenting the report’s findings, they tacked on a presentation by Pam Norley, President of Fidelity Charitable, who walked through several slides about Fidelity’s own internal surveys and donor studies.

I have been in touch with the researchers from the Indiana University Lilly School of Philanthropy who wrote the Giving USA donor-advised fund report. They confirm that they did not review the methodology or raw data of the Fidelity internal study that was co-presented in the Giving USA webcast. Giving USA also referred to the internal Fidelity study within the body of its own report, quoting the finding that two-thirds of Fidelity donors say they give more to charity because of donor-advised funds. (That strikes me as about as scientifically valid as an assertion that two-thirds of churchgoers say that formal religion makes them better people.)

But here we are. The Giving USA report weighs in at 56 pages, replete with beautiful full-page photos, but containing very little meaningful information on the most dramatic, disruptive, and problematic development in the nonprofit world. One of the few groups with the chops to take on the issues presented by donor-advised funds chose to dodge the critical questions. And the charitable world, ever weaker and more threatened, says nothing.

Copyright Alan Cantor 2018. All rights reserved.

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Affairs of the Heart

Some people misunderstand the motivation for charitable giving. They consider that charitable donations typically result from extended intellectual analysis. In fact, most donors don’t think their way into giving to charity. From my observation, charitable giving is primarily driven by emotions.

I thought of this the other day as I was being interviewed by a group of graduate students studying nonprofit effectiveness. The students, who impressed me by their intelligence and earnestness, presumed that donors based their charitable giving on key measures of nonprofit efficiency and outcomes.

I disagreed. First, I disabused them of the notion that Charity Navigator and other evaluation agencies did a good job of measuring the quality of nonprofits. (For more on that, see my “Navigating the Evaluators” and “Missing the Obvious in Nonprofit Ratings.”). But I also stated that, when it comes to donating to charity, most donors follow their hearts, rather than their minds. read more…

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I Hope I’m Wrong

An earthquake just hit the nation: the new Republican tax bill. It will take months and years to sort through the ramifications and debris. There are huge implications for the economy, for the wealth divide, and for the healthcare system.

But I’m going to focus on the probable impact on the nonprofit world – and it’s really bad.

Here’s what I think will happen. read more…

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Live Oak

[Note: A version of this article appeared in Philanthropy Daily on December 21, 2017.]

I’m fascinated by what makes someone an effective nonprofit leader.

Yes, leaders should be inspiring and visionary, setting and articulating a vision for the organization. And, of course, it’s important for leaders to manage finances well, to be compelling fundraisers, and to be good at delegating responsibilities. But, more than anything, being an effective leader comes down to character, work ethic, and personality.

One way to think of it: an effective nonprofit leader is a person with thick skin, dirty fingernails, and a good heart.

Let me tell you about a woman I’ll call Anna, who has been running a historical museum, and running it extremely well, for many years. She’s an exemplary nonprofit leader. Anna is calm and cool. She resists the temptation to respond to provocations. I was speaking with one of her board members, a historian of the early American Navy, and he said, “Anna’s made of live oak!” His reference was to the remarkably dense framing timber, live oak, that was used to construct Old Ironsides and the other 18th-century frigates of the first U.S. Navy. Live oak gave those ships an unequalled resilience. Anna, he told me, was made of the same stuff. “Cannonballs just bounce off her.” read more…

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Charity, Incorporated

It seems that every time I set out to write about topics other than donor-advised funds, fresh news explodes on the scene that requires my attention, and yours. This week it’s the astounding – but not at all surprising – announcement by the Chronicle of Philanthropy that six of the ten top fundraising organizations in the nonprofit world in 2016 were donor-advised fund sponsors.

Five of those organizations – Fidelity Charitable (#1 on the list for the second year in a row), Schwab (#6), National Christian Foundation (#8), Silicon Valley Community Foundation (#9), and Vanguard Charitable (#10) were among the eleven top fundraisers the year before. The newcomer at the top of the charts, bursting onto the scene at number three, with a jaw-dropping one-year increase in donations of 450%, was the Goldman Sachs Philanthropy Fund, which brought in over $3.1 billion.

That Goldman Sachs, the corporate embodiment of Wall Street avarice and power, should appear on the list of top charitable fundraisers is not surprising to those of us following this story: there’s money to be made in donor-advised funds, and if the folks at Goldman Sachs know one thing, it’s how to turn a profit. It’s only surprising that it took them this long. read more…

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A Tale of Two Letters, and Two Sectors

[Note: A version of this post was published in the opinion pages of The Chronicle of Philanthropy on November 2, 2017.]

Here’s an idea: Let’s agree to stop referring to “the nonprofit sector.”

That’s because, in reality, there are two nonprofit sectors.

The first is comprised of the hundreds of thousands of charitable organizations that provide actual services. The second is made up of funders: foundations, donor-advised fund sponsors, and corporate and individual donors.

The priorities of these two nonprofit sectors are different. The first nonprofit sector – I’ll call them “the charities” for short – is focused on meeting mission: feeding, housing, educating, and counseling people; saving the earth and animals; curing diseases and healing the sick; producing community theater and running art classes; rescuing, feeding, and supporting families displaced from natural disaster; and generally doing what they can to keep this frayed and fragmented society of ours from falling to pieces.

The second nonprofit sector – “the funders” – genuinely cares about all of that. But the funders are also concerned with their own institutions’ and donors’ well-being, tax advantages, budgets, and privileges. And the interests of the funders are often in conflict with those of the charities. read more…

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Do More

[This article was co-published on October 4, 2017, by the Maine Association of Nonprofits]

When I was a 27-year-old, freshly promoted, and utterly under-qualified executive director (back in 1985 we didn’t think to call ourselves “CEO” or “President”), I met with a man named Richard who had raised tens of millions of dollars in his nonprofit career. My goal in setting up the meeting was to pick Richard’s brain about nonprofit management in general, and fundraising in particular.

Richard must have been 45 at the time, which seemed venerable to me then. After a few minutes of getting to know one another, Richard, who was as friendly and welcoming as he was knowledgeable, asked me how often the board of my organization met. “Monthly!” I responded, thinking it was a pretty obvious and logical answer.

Richard scowled – well, no, he didn’t scowl, he was too polite for that, but he grimaced just enough to make his disagreement known. “I think that’s a problem,” he said. “Meet less. Do more!”

I think of Richard – and how right he was – nearly every week. read more…

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Peak bagging

Peak bagging

As someone who likes to be taken seriously, I probably shouldn’t begin this post by publishing such a goofy picture of myself. But here I go, happily sharing this photo, as a way of illustrating a point about goal-setting.

This picture was taken on July 2nd atop Mt. Isolation, an obscure and (true to its name) difficult-to-reach New Hampshire mountain that has an elevation of either 4,002, 4,003, or 4,004 feet, depending on the guidebook. Regardless of its exact altitude, the fact that the summit is 4,000-and-something feet high makes Mt. Isolation one of forty-eight 4,000-foot peaks in the state. And the reason you see me so exultant, relieved, and, well, just a bit inebriated, is that climbing Mt. Isolation meant that I had now climbed all forty-eight mountains, and that moment was the culmination of a personal eight-year quest. I was at long last a member of the 4,000-Footer Club. read more…

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The Phrase “Great Board Meeting” is Not a Contradiction In Terms!

I used to say that a bad nonprofit board meeting was like root canal surgery, but I don’t say that any more. Why? Because last year, for the first time, I underwent a root canal procedure, and it really wasn’t so bad.

The surgeon played great music and told funny jokes, and the anesthesia was, well, kind of pleasant. And it was all over in an hour. In terms of interest, entertainment, and, shall we say, mood enhancers, root canal surgery is actually better than a bad nonprofit board meeting. (At the very least, it’s shorter.)

That said, it really is possible to have great board meetings – and, for organizations to be successful, it’s critical. So how do you make good board meetings happen? read more…

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Incomplete Pass

It’s reasonable to think that when you make a donation to a particular charitable organization, the funds will be used in a way that supports that organization’s mission. But as a recent Boston Globe article by Bob Hohler explains, that’s not how it always works, particularly when there are celebrities involved. In this case, the charitable bait-and-switch involved New England Patriots quarterback Tom Brady – a stellar athlete, for sure, but a philanthropic klutz. And, sadly, Brady’s approach to charitable giving is typical of the kind of pseudo-philanthropy that infects celebrities from the NFL to the White House. read more…

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