Through an agreement with the Stanford Social Innovation Review, PND is pleased to be able to offer a series of articles and profiles related to the "business" of improving society.
It's human nature to fear what we don't understand. The objects of such unreasoning fear, according to a Scottish tradition, are "ghoulies and ghosties and long-leggedy beasties and things that go bump in the night." Today, on the philanthropic landscape, nothing goes bump in the night quite so resoundingly as donor-advised funds (DAFs). The astonishing growth of DAFs — charitable giving vehicles over which donors retain a measure of control — is almost beyond comprehension. And for many people, incomprehension has given rise to fear and even hate.
Ray Madoff, a professor at Boston College Law School, fears that advised-fund donors will sit on their philanthropic assets indefinitely. To counter that threat, she advocates legislation that would give DAFs the life span of a houseplant. By law, other kinds of charitable trusts can exist for fifty years, and some can exist in perpetuity. But Madoff believes that donor-advised funds should face a requirement to spend down their assets within seven years. She doesn't explain why these ghoulies should die at such a young age, nor does she give any examples of DAF malfeasance.
Alan Cantor, a consultant to nonprofits, goes further. Donor-advised funds, he argues, are "philanthropic warehouses" that rich people set up for the nefarious purpose of applying a charitable tax deduction to money that may never find its way to frontline charities. Research by the National Philanthropic Trust shows that donor-advised funds, in the aggregate, give away three times as much as a percentage of their assets as private foundations do. But that fact doesn't faze Cantor. Because some DAFs may be giving away absolutely nothing, he contends, all of these ghosties must be subject to strict regulation.
Others in the philanthropic community have rallied to defend donor-advised funds. They note, for instance, that DAFs provide nonprofits with a user-friendly source of fundraising opportunities. But if we really want to move beyond fearing this creature, we need to start by understanding how it became so large. How, after languishing in the back corners of the community foundation world for decades, did the donor-advised fund became the hottest thing in philanthropy? The answer lies in the largely untold story of one DAF in particular — the Fidelity Charitable Gift Fund.
It's a true long-leggedy beastie. In the mid 1990s, when I was president of the California Community Foundation, I did my best to kill it off. I made speeches about the Fidelity Charitable Gift Fund at conferences. I argued that the Internal Revenue Service should withdraw its tax exemption because it did not operate for "exclusively charitable purposes," as dictated by the Internal Revenue Code. An attorney for my foundation wrote a few articles in obscure law journals on the same theme. We caused a ruckus. Thank goodness we didn't succeed.
I fought so hard against Fidelity Charitable because I appreciated the value of DAFs. They are an efficient, twenty-first-century alternative to the private foundations that dominated philanthropy in the twentieth century. They are easy to set up and inexpensive to manage. The institutions that house DAFs can easily bundle them together for investment purposes. As an experienced fundraiser, moreover, I understood that all fundraising is really a matter of relationship building — and I knew that a great way for a community foundation to build relations with potential donors is to offer donor-advised funds. In short, I had a plan for asset development, and I feared that Fidelity was stealing away the assets that I hoped to develop.
What I didn't understand then, and what many detractors of DAFs fail to understand now, is that entities like Fidelity Charitable have the financial incentive and the marketing might to reach a vast constituency of would-be donors. The growth of such funds represents the greatest marketing phenomenon in the recent history of charitable giving: For the first time ever, philanthropy has a sales force. And philanthropy as a whole has benefited from it.
A New Player
Donor-advised funds emerged as an alternative to private foundations in the 1970s. Gathering small funds of this kind under one institutional roof for investment and management purposes made sense. Even so, DAFs back then were the stepchildren of philanthropy. Nobody really liked them. At community foundations, boards of directors chastised staff members for going after DAFs when they should have been raising unrestricted funds. Staff members, for their part, preferred to increase foundation assets through wills and bequests.
I took the helm at the California Community Foundation in 1980. In those days, community foundations were little known and largely unheralded. They had no alumni, no grateful patients, no cadre of volunteers, and no corporate ties — in short, no ready base of support. The task of raising funds for a community foundation seemed daunting. So, to the head-shaking disapproval of my peers, I devised a fundraising strategy that featured donor-advised funds. I tried to market DAFs to groups that I labeled "agents of wealth" — tax attorneys, accountants, financial advisors. Donor-advised funds, I figured, were the future of philanthropy. And I wasn't alone.
Enter Edward (Ned) Johnson, who had taken his father's firm, Fidelity Investments, and built it into one of the largest mutual fund companies in the world. Sometime in the 1980s, Johnson met with folks at the Boston Foundation. What happened at the meeting is now the stuff of lore. The story, whispered over many a cocktail at many a community foundation conference, goes like this: Johnson said that he was prepared to create what would then have been the largest-ever donor-advised fund — its assets would have totaled $200 million — at the Boston Foundation. He would do so, however, only if the foundation agreed to let Fidelity invest those funds.
Representatives of the foundation, mindful of the IRS rule that a donor cannot direct the investment of a gift and also receive a tax deduction for it, said no. Johnson returned to his office and vented his frustration to his legal counsel. "The Boston Foundation doesn't have a patent on community foundations, boss," the lawyer said. "Why don't we petition the IRS to let us create our own charitable vehicle? We can use your $200 million gift as seed money."
Did it actually unfold that way? Well, this much is true: In 1991, Johnson received IRS approval to create the Fidelity Charitable Gift Fund, a nonprofit public charity devoted to the marketing and servicing of donor-advised funds. (The fund now carries the brand name Fidelity Charitable, but its official name is still the Fidelity Charitable Gift Fund.)
Fidelity Investments advisors, who had viewed community foundations as competitors, loved the Fidelity Charitable Gift Fund. Now they could offer clients a philanthropic vehicle that cost nothing to establish and that didn't need IRS approval. They also had the same financial incentive to serve advised-fund donors as they had to serve other clients. What's more, because investment fees are quantity-driven, Fidelity Charitable could charge fees that were lower — often much lower — than those of any community foundation
Overnight, Fidelity Charitable had a sales force that was a hundred times as large as the fundraising forces at all U.S. community foundations combined. And Johnson didn't stop there. In the mid-1990s, Fidelity launched a huge advertising campaign that featured full-page ads in Newsweek, The New Yorker, Smithsonian, Time, and other magazines. The ads very effectively explained the advantages of donor-advised funds. The Fidelity campaign was so effective, in fact, that I developed a campaign of my own that rode on its coattails: I simply extolled the added benefits that come with local management of a DAF.
The Fidelity Charitable ad blitz, together with direct marketing by Fidelity financial advisors, was remarkably successful, and that success validated the old fundraising axiom, "Cows don't throw milk at the farmer." As it turned out, there were lots of people who were open to creating philanthropic funds — but no one had ever asked them to do so. Now Fidelity was asking them. And that's how, over time, the Fidelity Charitable Gift Fund became the second-largest fundraising organization in the world (following the United Way of America).
A Growing Field
Fidelity's success was not lost on other investment firms. Soon Charles Schwab, Vanguard, and other companies set up their own nonprofit charitable funds. All of these philanthropic vehicles thrived, and the number of people with an incentive to sing the praises of donor-advised funds grew and grew.
And community foundations, which had once called themselves (with a touch of pride) "the best-kept secret in philanthropy," found that they were secret no longer. Those that embraced DAFs as part of their asset development plan — the Silicon Valley Community Foundation, for example — expanded rapidly. The California Community Foundation, which had $18 million in assets when I came on board, today has assets worth $1.4 billion. The $1 billion community foundation is no longer unusual.
People at community foundations also have learned that by using donor-advised funds to build relationships, they can attract broad-based funding for the arts, education, health care, and the like. Sometimes, in fact, they can even attract the elusive unrestricted dollar. Many years ago, during my time at the California Community Foundation, a wealthy woman set up a small donor-advised fund under our "roof." Then she started attending our quarterly donor luncheons. Apparently, she liked what she heard and saw at those luncheons — because, some time later, she decided to leave the foundation a $260 million unrestricted gift upon her death.
The Fidelity Charitable Gift Fund didn't steal the assets that I wanted to cultivate. On the contrary, it marketed a philanthropic vehicle that has encouraged a new set of donors to enter the field. That bump in the night that I feared? It was opportunity knocking.
Jack Shakely is president emeritus of the California Community Foundation in Los Angeles.