Donor-Advised Funds: The Source Fundraisers Can't Afford to Ignore

Over the past few years, the fundraising sector has been debating the merits of donor-advised funds (DAFs). Proponents point out that DAF donors are dedicated to philanthropy and able to easily release their funds to the nonprofit organizations they support, while opponents believe DAFs encourage donors to delay giving and make it more difficult to build relationships.

No matter your take, DAFs are a funding source fundraisers of all sizes and missions cannot afford to ignore. According to both Fidelity Charitable’s 2014 Giving Report and the National Philanthropic Trust’s 2013 Donor-Advised Fund Report, DAFs are on the rise, growing in popularity and dollars dispersed to the charitable sector.

They aren’t going away anytime soon, which means every development office must have a strategy in place to engage with DAF donors.

The stats
DAFs are not new. They have been around for more than two decades and have come a long way since their inception, according to Amy Danforth, president of Fidelity Charitable, the nonprofit arm of Fidelity Investments that houses DAFs.

“Donor-advised funds are a planned-giving vehicle that enable donors of more modest means all the way to the highest-net-worth donors to, as we call it, give, grow and grant,” she says.

They are, essentially, charitable savings accounts. Donors can open accounts, get their tax breaks the moment they add money and then invest that money through the DAF provider — fellow nonprofits such as Fidelity Charitable, National Philanthropic Trust, Schwab Charitable and the Greater Kansas City Community Foundation — to “grow their philanthropic dollars and increase their impact over time,” as Danforth says.

Donors then can grant that money from their DAFs to the nonprofit organizations of their choosing at any time.

With today’s donors expecting more say in where their philanthropic dollars go and demanding more proof of impact, DAFs have become attractive to help set aside charitable dollars while donors become more strategic with where they dedicate their philanthropic money.

“[DAFs] have gotten incredibly popular in the last five to eight years, and the speed they’re growing has overtaken [the speed in which] private foundations [are growing],” says Eileen Heisman, president and CEO of National Philanthropic Trust.

How popular have they gotten? According to National Philanthropic Trust’s 2013 Donor-Advised Fund Report:

• The number of DAF accounts increased by 7 percent in 2012 over 2011;
• DAF assets grew 18.9 percent in 2012 over 2011, exceeding $45 billion in total assets;
• DAF accounts in 2012 totalled more than $13.7 billion;
• More than $8.6 billion was granted in 2012 from DAFs;
• The average DAF account size reached nearly $225,000 in 2012, up 11.2 percent from 2011;
• Payout rates from DAFs exceeded 16 percent from 2007 through 2012.

And according to Fidelity Charitable’s 2014 Giving Report:

• The average number of grants per giving account continued to rise, up from seven in 2012 to eight grants per year in 2013;
• The average grant size rose 6 percent from 2012 to 2013 to more than $4,000;
• The majority of incoming contributions are fully expended as grants within a decade — 91 percent of contributions to DAFs made between 1996 and 2000 were granted to charities by the end of 2010.

The pros
From a fundraising perspective, there are numerous pros to DAFs. For starters, donors who open DAFs are loyal givers.

“We hear it from our donors, and we see it through their actions — we survey our donors every year — 64 percent of them tell us that they give more once they open a donor-advised fund, and we tie that back to the fact that they become more strategic in their giving and their commitment to charitable giving,” Danforth says.

She adds that for donors who have longer-term giving interests, “the ability to invest the dollars over time is a benefit because that money grows tax-free and enables them to fund things on a larger-scale basis than they otherwise might have if they hadn’t dedicated the dollars.”

Coinciding with that, Fidelity has had several DAF donors who are approaching retirement discuss “prefunding” their giving for when they are retired, essentially adding to their DAFs now while they’re still working so they can disperse the same amount of money during their retirement that they do today. They’re setting aside greater sums of money now so they can be as philanthropic as they want to be in retirement, Danforth says.

And, Heisman says, DAFs are often set up as an alternative to private foundations, and that’s beneficial for fundraisers for a couple of reasons. For starters, private foundations are mandated to give 5 percent of their assets to charity, and typically grant about that much, according to Heisman. DAFs give around 17 percent — or more than triple the amount, percentagewise, than private foundations.

Plus, with many DAF providers lowering their minimums to open an account, more donors are able to utilize DAFs today.

Then there is the matter of illiquid assets — namely publicly traded and non-publicly traded securities and stocks. Both Heisman and Danforth note that if someone wanted to give 100 shares of stock to a nonprofit directly, the nonprofit would need to pay commissions and not get the full amount that the shares are worth. However, through a DAF, the DAF provider can liquidate the securities and grant the full monetary amount to the nonprofit.

In addition, it would be difficult for a donor to divide 100 shares of stock between, say, 10 organizations, particularly for smaller organizations ill-equipped to deal with appreciable assets. However, through a DAF, the provider can again liquidate and distribute those assets to the nonprofits much more quickly and easily, according to Heisman.

DAFs relieve a lot of the burdens for donors and fundraisers themselves, which is partly why they continue to grow in popularity. The financial experts of the DAF houses do a lot of the legal and financial legwork, and the accounts provide the freedom and flexibility for donors to grant those funds to the charities of their choosing when they care to do so.

The cons
There are still concerns with DAFs, however. For one thing, DAF donors can choose to be anonymous, meaning fundraisers may not be able to cultivate and build relationships with those donors.

“There’s tension sometimes between fundraisers and their wish to raise money and the charities that have DAF donors and their wish to protect donors,” Heisman says.

And while she admits that there is no easy solution to that, she has found that many DAF donors do not keep their information private.

Ken Berger, president and CEO of charity evaluator Charity Navigator — a nonprofit itself that utilizes and encourages charities to utilize DAFs — echoes those sentiments on anonymity and transparency:

“Traditionally, a very high-net-worth individual would create a foundation and be required to submit public reports so all the stakeholders can see what’s going on,” he says. “The danger with DAFs is if the same person goes that route instead, the transparency goes away — we don’t have as much information in the public square about what’s going on.”

Berger says best practices need to be put in place to provide as much transparency as possible, particularly in a sector that relies on good faith and trust.

“You have to be careful that we don’t fall into a trap where we go too far down the road to sacrifice transparency for the sake of convenience,” he adds.

The ‘rainy day’ concern?
One of the most common concerns from a fundraising perspective is that DAF donors would sit on their money in these accounts — money that would have otherwise gone directly to charity through other means — meaning less money in the sector.

“From what I’ve seen, those fears have not been realized. In fact, the opposite is true,” Berger says. “More money is being given out. Donors are not parking money there for 30 years.”

“People who have [DAFs] aren’t saving them for a rainy day. They’re giving it out,” Heisman adds.

DAF donors as major/annual-appeal donors
It’s clear that DAF donors are passionate givers who are, in fact, granting the money in their accounts. So how can you identify and engage DAF donors?

“Treat DAF donors like a major-gift donor,” Heisman says.

That means cultivating and really understanding these donors. And the best way to do that is to put DAF information in all your fundraising appeals and visits. Heisman, Berger and Danforth all agree on that.

“Getting a DAF to a nonprofit is largely the same as getting a gift from a checkbook or a private foundation — you need to have a good outreach program, get in front of them and have them find your mission compelling,” Danforth says.

That means anytime you meet with prospective donors, ask if they have donor-advised funds. In every email, direct-mail appeal, telemarketing call and any other fundraising appeal, you should pepper in language about DAFs.

Heisman suggests using terminology such as “recommend,” “advise” and “suggest” gifts to our charity through your donor-advised fund, and include making a gift through a DAF in reply devices right next to the check, credit card and electronic-fund transfer options.

Heisman and Danforth say they are surprised by how many nonprofits neglect to do this, but it’s a vital step. It’s also important to record that information as well, noting in your database which donors have and have given through DAFs.

Then it’s all about cultivation and building relationships, just like any other form of fundraising — essentially, doing what fundraisers do.

“Nobody is going to make the case the way fundraisers are,” Heisman says. “It’s not like we have to push our donors to make grants. They’re enormously transactional. People who use them seem to very passionately embrace them — it’s up to the nonprofits to engage these donors like they do their major-gift donors.”

The implementation
To help educate the sector and donors on DAFs, Fidelity Charitable, Schwab Charitable and the Greater Kansas City Community Foundation invited 10 diverse nonprofit organizations — including Charity Navigator and the Pan-Mass Challenge (PMC), the annual cycling fundraising event that benefits the Dana-Farber Cancer Institute — to discuss a solution for better DAF awareness. From those meetings, the DAF Direct widget was created. The widget can be put on any organization’s donation page to allow donors to give through their DAFs.

The widget, which centers around education of DAFs and acknowledging them as a giving option, has done wonders for organizations such as PMC.

Last year, PMC used the widget for the first time and saw a 50 percent increase in dollars raised through DAFs, bringing in close to $2 million from that funding stream alone, says Michele Sommer, director of finance and administration at PMC.

“I don’t see any downside,” Sommer says. “I see tremendous upside. The challenge is education. There is a small number of people who understand what DAFs are. That really drove how we approached this.”

PMC put information on its website explaining DAFs, and in its rider orientation for event participants, who need to raise at least $4,300 for the event, there is training on fundraising and DAFs. Plus, in the email template PMC provides its participants for fundraising, it includes DAF information.

“There is so much money in these accounts now, all organizations should look at that — and it’s already designated as charitable,” Sommer says. “If I was a development individual, I would hope that every single person in my department was very comfortable with DAFs.

“More and more accounts are being opened. It’s not for you to decide who has a DAF,” she adds. “You never know, so in your ask, always say you can give out of your DAF if you have one.”

Berger agrees, and Charity Navigator recommends that all the charities it reports on include the widget or something similar to engage DAFs. Charity Navigator, being a nonprofit itself, practices what it preaches by including the widget on its donation page.

“Part of the popularity of the widget and DAFs in general is that typically the donors are people who give more substantial gifts,” Berger says. “There’s the old 80/20 rule: 80 percent of contributions come from 20 percent or less of donors. Many who have DAFs are in that 20 percent category. It’s a very valuable audience.

“As a fundraiser, if you aren’t on board, you need to wake up and smell the coffee. It’s a powerful opportunity,” Berger adds. “Because there aren’t the burdens for the donor or for the fundraiser, the future is just going to be more. It’s critical that a fundraiser has this in their wheelhouse as a core opportunity to build a large amount of funds for the organization.”