Donor-advised funds, or DAFs, were originally created to be catalysts for charitable giving. The idea was that donors would put money into DAFs, and then would grant it out again relatively quickly to working charities. But DAFs have instead largely become a revenue-driven industry with intense competition for donations.
This is particularly true for large national DAFs affiliated with for-profit commercial investment banks. And a new study has discovered that the national DAFs that use their sites to promote the tax benefits and the decision-making power they offer to their donors — rather than what they’re doing for charities — are winning this competition hands down.
How sponsor website language reveals sponsor priorities
I recently had the pleasure of conducting a unique analysis of donor-advised fund sponsor websites in collaboration with Brian Mittendorf, a nonprofit accounting expert and professor of accounting at The Ohio State University.
In our analysis, we looked at the language that sponsors use on their public sites to see whether it bore any relationship to their financial and charitable behavior.
Spoiler alert: for national sponsors in particular, language definitely matters. National sponsors that spend more time talking about donor benefits on their websites have more assets, take in a much higher proportion of noncash contributions, and pay out grants at much lower rates than sponsors that spend more time talking about charitable giving.
In the case of payout, the difference is especially huge. As a group, national donor-advised funds tend to report aggregate payout rates somewhere in the 15 to 25 percent range.
But our analysis predicts that a hypothetical national sponsor with a strong emphasis on charitable grantmaking on their website would pay out at 53 percent, while a hypothetical national sponsor with a strong emphasis on donor benefits would pay out at just 2 percent. And those lower payout rates have ripple effects when it comes to the buildup of assets: Our model predicts that the highly charity-focused sponsor would have assets of just $34 million, whereas the highly donor-focused sponsor would have assets of $2.7 billion.
Determining the tenor of DAF sponsor website language
For our analysis, we gathered electronic tax returns for a set of 601 donor-advised fund sponsors. We then searched the sponsors’ public websites for a set of specific terms.
When we found a term that was related to the tax benefits of DAFs, the investment or granting choices available to donors, or the donors’ ability to control decisions, we counted that as a donor-emphasis term.
When we found a term that was related to urgency, mission impact, grantmaking, or charitable needs, we counted that as a charitable mission-emphasis term.
We counted up these two types of terms to create a score we called the Emphasis Measure, or EM. High EM scores meant that the sponsor’s website was more focused on donor benefits, and low EM scores meant that the sponsor’s website was more focused on charitable missions.
In most current reporting on DAFs, sponsors are broken out into three main categories: national, community foundation, and single-issue. We found that our Emphasis Measure could predict differences not only across these three sponsor types but also within them.
National sponsors, as a group, had higher EM scores than either community foundations or single-issue sponsors — in other words, national sponsors spent more time promoting donor benefits.
And while EM was less predictive of behavior within community foundation sponsors, it was highly predictive within national sponsors, and, to a lesser extent, within single-issue sponsors as well.
What our findings mean
As interesting as these findings were in themselves, this wasn’t just an academic exercise to me. I’ve watched donor-advised funds carve out an increasingly larger chunk of the charitable marketplace for themselves over the past decade. They now take in more than a fifth of all individual giving in the U.S., pulling that money away from working charities.
Seven of the top ten recipients of charitable donations in the country, including the four largest, are now DAF sponsors. And national sponsors, in particular, account for the lion’s share of DAF assets and incoming contributions.
Until now, though, I haven’t been able to look systematically at the language that sponsors choose to use in their public online presence — how they market themselves, and how they appeal to both current and prospective donors.
Our analysis indicates that national sponsors who emphasize the benefits they offer to donors in their public communications have a distinct financial advantage over those that emphasize their charitable purpose instead.
Highly donor-focused national sponsors pay out less and are better equipped to take in non-cash donations, so their assets build up significantly faster. These sponsors gain revenue with increasing speed, leaving their charity-focused peers — and working charities — far behind.
It may be that website language makes such a large difference for national sponsors simply because they face more raw competition for donors. There are usually only one or two community foundations in a given city or region, so they can essentially function as monopolies, the only funders focused on specific local or regional priorities.
National sponsors, on the other hand, typically have no unifying mission — geographical or otherwise — and may have to work harder to convince donors to choose them over their peers.
In the end, our analysis suggested to me that lumping sponsors together simply because they are the same kind of incorporated entity paints them all with too broad a brush.
Especially in the case of national sponsors, high-payout mission-focused sponsors may be providing statistical cover for low-payout donor-focused sponsors, allowing the latter to escape scrutiny and avoid needed common-sense regulation.
This means that we may want to evaluate DAFs by a different set of criteria than we have used in the past. And that has implications for regulators, donors, and working charities — not to mention anyone who cares about or depends upon the health of the charitable sector.
Implications of DAF evaluation for regulators
U.S. taxpayers subsidize the deductibility of contributions to donor-advised funds. We do this because the money going into DAFs is supposed to come back out again relatively quickly to support charities working directly for the public benefit.
As our analysis shows, some DAF sponsors are better at fulfilling their end of this bargain than others. But because current industry reporting on DAF payout aggregates all sponsors together by organizational type, it can make some sponsors look more generous as a group than many are individually.
If regulators were able to evaluate sponsors by a score such as the one we developed, it could identify sponsors that are at greater risk of falling behind on their public obligations. In this way, such a score could help make the case for better regulation — including, at the very least, a payout requirement.
Implications for donors
Knowing whether a DAF sponsor is more focused on its charitable mission or on donor cultivation would be useful for donors as well. If you want to open a DAF and genuinely want to put your donations where they will do the most public good, you’d be best served by choosing a sponsor that emphasizes grantmaking more than the tax benefits it confers to you.
And if you currently hold a DAF account, review your sponsor’s marketing material to see if it emphasizes donor benefits more than its work for the public good.
Ask your fund representative what policies they have in place to ensure that the money they hold gets out the door to the charities that need it. If you believe that your sponsor is overly focused on its attractiveness to donors, consider switching your fund to a sponsor that is actively charity-focused. (Or consider paying it all out.)
Implications for the charitable sector… and all of us, really
Donor-advised funds were originally meant to be instruments for social good. But many sponsors are now adapting to — and in many cases perpetuating — the financialization of philanthropy by deliberately emphasizing the tax benefits and philanthropic control they provide to their donors, de-emphasizing grantmaking as a result. And this is reflected in their account books.
The analysis we present in our paper quantifies this phenomenon. It measures the degree to which sponsors have financialized what was originally intended to be a nonprofit instrument, and it measures just how intense the competition has become among the very largest DAF sponsors in this country.
In principle, as charities, all DAF sponsors should be laser-focused on the benefit they provide to the public. But as the industry grows more competitive, they move farther away from this fundamental mission. Their drive for donor revenue drives our increasing concerns about the buildup of charitable wealth in DAFs.
My hope is that our analysis can help to raise awareness of this trend — and perhaps be a step towards bringing sponsors back to more grant-focused action.