The Power of Giving: Why Donor-Advised Funds Should Be Part of Your Financial Portfolio and How You Can Do More
“Giving connects two people, the giver and the receiver, and this connection gives birth to a new sense of belonging.” - Deepak Chopra
While Deepak Chopra might not have been thinking about philanthropy when he wrote this oft-quoted statement, he could have been. While also a tax-mitigation strategy, giving is a mindset that gives us purpose and can fuel high performance at work and life. Many top CEOs give relentlessly beyond themselves, even while in the C-suite. In fact, 2017 was a banner year for charitable giving, with some $14.7 billion being donated by the top 50 philanthropists in the U.S. (many of them household names like Zuckerberg, Gates, and Bloomberg).
Donor-advised funds (or DAFs) — personal investment accounts that are created and managed to support charitable causes — make giving seamless and tax efficient, even for those who might not sit at the head of a Fortune 500 company or have a famous last name. They are also the fastest growing sources of capital in the U.S., with more than $85 billion housed in these types of funds, a 28 percent increase since 2012. While a lot of people are looking for a new sense of belonging to something bigger than themselves and their financial returns, DAFs are offering even more innovative ways of doing so.
The last several years have seen a tremendous growth in all donor-advised fund metrics, particularly in contributions, while the five-year compound annual growth rate from 2012 to 2015 was above 20 percent. In addition to a surge in capital, the number of donor-advised funds available to investors jumped, as well, enjoying a steady 6 percent or better growth rate reported each year from 2012. (However, donors and sponsors alike still struggle with the visibility and availability of these funds; more on that later.)
The Giving (Money) Tree
Why the rising popularity of DAFs? For one, these types of investments are easy to create: An individual simply contributes cash, securities, or other non-publicly traded assets into funds established by philanthropists at public nonprofit organizations as well as through a variety of charitable arms of commercial investment firms such as Fidelity, Schwab, and Vanguard. These entities operate as DAF sponsors to help advise and administer funds for their clients.
Secondly, the public charity or investment firm that is responsible for sponsoring these accounts conducts the due diligence required to ensure that funds are directed towards viable and IRS-qualified initiatives and meet the highest Environmental, Social, and Governance standards. The due-diligence process is both quantitative and qualitative, taking into account both risk-reward data of traditional investments, as well as measurements of the impact these enterprises are making in their chosen cause and community.
And, perhaps most enticingly, the investor receives a tax deduction immediately upon their contribution, much like they would with any charitable donation. Many investors look to DAFs for tax-planning purposes, such as reducing their tax burden, deferring capital gains, and converting illiquid assets. With DAFs as opposed to other types of funds, donations have the potential to grow (based on an individual’s investment practices), creating more tax-free income to help support and further the selected charitable causes.
Lastly, donor-advised funds offer budding impact investors benefits that private foundations can’t match. When contributing to private foundations, an investor needs a larger dollar amount to get involved (typically $5,000-$10,000 for a DAF; $250,000+ for private foundations), while meeting minimum distribution requirements (5 percent of net assets annually), and paying higher maintenance fees.
Donor-Advised Funds and Impact Investing
The exciting power of DAFs lies in the ease and benefits of contributing to these types of funds while enacting change in the world. So, what if DAFs led the impact investment movement? This heightens the potential of that capital because those dollars can be reinvested in charitable efforts over time. It also means that people across the socioeconomic spectrum can become impact investors by powering smaller donations with maximum possibilities.
By expanding the impact of their investments beyond merely profit seeking, investors could fund social enterprises that may carry a risk level that is too high for traditional capital. They could leverage their funds to unlock an even greater flow of traditional capital and help these early-stage ventures become more sustainable and create more change in their communities. In other words, they could change the world.
By working with financial advisors who are aware of and aligned with philanthropic causes and financial goals, investors can determine the appropriate impact investments to make. This step is also crucial to make sure that funds are being allocated properly and are being deployed without delay to begin making an impact and increasing the investment’s viability and sustainability in the market. One such example is Beyond Capital — as a charitable contribution from a DAF, a donor immediately becomes an impact investor, reaching 2.4 million lives through nine companies.
Despite their growth, donor-advised funds currently face several challenges in the marketplace, both for donors as well as for sponsors. Often, investment opportunities within DAFs are limited and hard to identify, while access to early-stage ventures is still granted through personal connections and networks. For sponsors, meeting fiduciary responsibilities and reporting requirements can be a time-consuming and expensive process.
I wrote this article because no financial advisor had ever spoken to me about setting up a DAF, still knowing that I have bootstrapped Beyond Capital for nine years and been passionate about having a positive effect on individuals living in India and East Africa. My family and I are driven by the power of our own giving and inspired by the networks of those around us and ingrained in their own unique social impact. A DAF will give you the chance to access this feeling easily and at any level, making impact investing accessible. We are structured as a charitable fund, meaning investors can allocate dollars through their DAF sponsor to contribute to these for-profit ventures.
Beyond Capital’s comprehensive impact frameworks use both quantitative data and qualitative on-the-ground evidence to evaluate the impact each of our enterprises has on its consumer base and the community at large. Conducting this analysis before, during, and after the investment guides our thinking about the expected and actual impact of an investment and how each investment aligns with Beyond Capital’s key objective of helping to improve the lives of those living at the bottom of the economic pyramid.
Simply put, Beyond Capital’s partnership with donor-advised funds offers investors a path to putting their dollars behind worthwhile causes and real change in the world.
Resources:
The Chronicle of Philanthropy, The 2018 Philanthropy 50
National Philanthropic Trust, 2017 Donor-Advised Fund Report