The recent tumult at the Silicon Valley Community Foundation – a prominent Donor Advised Fund (DAF) sponsor – and subsequent prominent coverage of broader issues with DAFs have brought the debate about the efficacy and potential need for regulation of DAFs to the fore.
To any outsider viewing this discussion, the two opposing sides may appear entrenched. On one side there’s the group that sees DAFs and their growth as a miraculous giving vehicle that promotes new giving and facilitates charitable activity. On the other side there’s the group that sees DAFs as charity deferred: a parking lot for funds that would otherwise go direct to operating charities, giving donors all the tax benefits without any distribution obligations. While dogma may have taken hold in the debate, a little bit of new data from DAF sponsors would go a long way in helping us sift out which perspective more closely reflects reality.
What would giving behavior be like if DAFs weren’t in place? That’s ultimately the difficult question we all want to understand.
Whether DAFs have brought a new wave of giving that would be absent otherwise is largely a settled question at a macro level. Overall giving has fluctuated drastically over the years, but nearly all this fluctuation can be attributed to economic conditions and not the availability of different giving vehicles. Giving as a percent of GDP and giving as a percent of disposable income have each been remarkably stagnant over the years despite the rapid growth of DAFs. So if baseline giving is stable, the key question then is how DAFs have changed the nature of it.
What are DAFs Receiving?
A fundamental point of disagreement is whether DAFs serve as an alternative to private foundations or whether they delay gifts that would otherwise be going straight to operating charities. Access to data from DAF sponsors can’t tell us this for sure, but it can go a long way.
Some commercial DAFs have reported a high percentage of non-cash gifts. Is that a trend reflected across all DAFs? Broad-based data on this – and what specifically those non-cash gifts are – would be instructive. There is a clear tax benefit to donating non-cash property when it has appreciated in value: a donor gets the double bonus of a deduction based on market value and never needing to recognize any capital gain. Importantly, this benefit accrues to gifts to private foundations only when the property is publicly-traded stock, but public charities like DAF sponsors can offer it for a wide array of property.
In other words, gifts coming into DAFs that are non-cash and non-stock are not good candidates for having been diverted from private foundations. For those gifts, the “charity deferred” explanation is more compelling.
What are DAFs doing with Retained Assets?
Many DAF critics express concern that the main winners are money managers. The thought is that donations sit in DAFs without being distributed while financial services firms slowly skim their real gains in value with management fees.
This too should a concern we can address with appropriate data. For funds held in DAFs, what are their typical net investment returns? How do the mean and variance composition of these returns compare with other investment sources? What are the fee structures of the funds held in DAFs? Researchers can readily examine both whether DAF investments experience suboptimal risk/return profiles and whether too much is paid out in investment fees, but to do so, they would need to see the profile of those DAF returns.
What are DAFs Distributing?
The most common defense of DAFs is that their annual payout rates average around 20%, much higher than that of private foundations. As noted above, maybe private foundations aren’t always the right comparison. Even setting that aside, it should be stressed that averages aren’t meaningful. Regulations aren’t typically put in place to curb average behavior; rather, it’s the extremes that often need to be curbed.
After all, a circumstance where all DAFs pay out 20% each year merits a very different regulatory response from one where half of DAFs pay out 40% but the other half pay out nothing. The latter case suggests of a need to put a floor on payouts.
For this reason, it would be helpful to know not the payout rates averaged across all DAFs held by a particular sponsor but rather the frequency of different payouts. While we can already see the average payouts across DAF sponsoring organizations, what is really needed is frequency distribution across individual DAFs within sponsors. That is, I’m less interested in the payouts in aggregate at Fidelity Charitable, more interested in how those payouts vary among the many DAFs held by Fidelity Charitable. With that detailed data we can better tell whether and how payout requirements could affect behavior.
For those concerned about donor privacy, note that DAF sponsors can release this data without providing any specifics about donor identities. We need to know how common practices are, not who specifically does them.
Would accessing this data held by DAF sponsors answer everything? No. But, if the goal is to design public policy around the fundamental effects that unfettered DAFs might be having in the charitable sphere, we need to rely on information beyond our own individual perspectives. DAF sponsors could make data available that would permit an objective empirical assessment of the question.