The ongoing DAF debate can and should be a segue to deeper conversations about the sector as a whole, and the much bigger concerns it faces, Darren Pries-Klassen argues.
In the charitable sector, the conversation about donor-advised funds – DAFs – has taken up a great deal of the oxygen in the “donation/fundraising” room. Depending on who you speak with, they are either the best thing since sliced bread or the bane of the sector. Few seem to hold a more nuanced approach.
The growth in donated funds in DAFs has been tremendous. According to a recent report from Watermark Philanthropic Counsel, there is approximately $17 billion in assets in DAFs in Canada with annual disbursements to charities of about $1.8 billion. Compare that to a 2023 report released by KCI and the CAGP Foundation that found there was $8.5 billion in DAFs at the end of 2021 in Canada.
Given that donated funds in DAFs have more than doubled in just five years, it is no wonder that people in the charitable sector have strong opinions about them.
The potential and appeal of DAFs
Full disclosure: I like DAFS. I am one of those people that sees their potential far outweighing their harm. No doubt my vantage point has been heavily influenced by my past experience as a CEO of a public foundation that offered DAFs. I have spent more time with donors than with charities. The primary part of my previous work was helping donors think through the “how” and “when” to donate when establishing a DAF. A secondary consideration was how best to distribute funds to charity from a DAF. There is no question my work created a personal bias, but I also appreciate the tension that exists for charities that need funds right now and donors whose giving plans involve distributions from DAFs over an extended period of time.
The donors I worked with were varied in their occupations and how they had accumulated wealth, but what they had in common was a desire to make a positive impact for causes they cared about and a need to strategize about how and when to best make a charitable gift that aligned with family needs, tax considerations, and timing this with retirement and succession planning. People who make charitable donations from assets rather than cash often have many things to consider before a gift is made.
Given this, a donor-advised fund was an appealing option for several reasons. Key among them were:
- Simplicity. DAFs are easy to set up, often with a donation much smaller than would be required to set up a private foundation. There is no need for a board of directors, charitable registration, no annual T3010 to file, and little or no legal costs.
- Timeliness. The donation and subsequent donation receipt can correspond with a tax-triggering event like the sale of a business and/or succession planning, and while minimizing taxes is not the primary reason for donors to give, as the size of the donation increases, donors increasingly appreciate the charitable receipt as a way to offset taxes owing.
- Delayed consideration. People dealing with major life transitions have limited time and energy for all that needs to be done in that moment. Many times, donors were overjoyed that the donation and the grant distribution could be separate events. The former dealt with the donation amount and the asset used to make the donation. The latter was about community impact and aligning values with like-minded charities. Having the option to address the “head” matters now and the “heart” matters later was appealing to many donors.
- Multiple good feelings. Do not underestimate the impact from multiple dopamine hits a donor gets when separating the donation itself from the distribution to charity. With several distributions to charity over a number of years, a donor has a lifetime supply of good feelings, thanks to a DAF.
- Ownership. Yeah, I know. Donors DO NOT own DAFs. Foundations do. Once a gift is made and is added to a DAF, the donor can make distribution recommendations, but they have no control of the fund. The donors might receive an annual report that clarifies fees, earnings, and distributions from the fund, but they do not own it. Full stop! Direction and control is that of the foundation, but good luck trying to convince a donor that “their” DAF is not, well . . . theirs. The ongoing engagement in the fund, even if only for distribution recommendations, is a big hook for a donor, and all the regulations in the world are unlikely to change the “ownership” mindset among donors.
- Evolving interests. Donors can and do change their minds. A cause that was once near and dear to the heart may fall in priority as new causes, charities, and impact opportunities arise. DAFs allow donors flexibility when making distribution recommendations, and donors really like that.
- Trust. My apologies to charities, fundraisers, and others who work for and serve front-line service organizations, because this one will sting. Donors know that organizations can evolve as board directors and leaders change, and with that they know that charitable priorities can evolve and missions can drift. Charities want donors to “trust us,” but donors are a savvy bunch, especially as the donations they make get larger. A DAF allows for distribution evolution in the event that charities also “evolve.”
The need for dollars on the front lines now
While my bias lies with DAFs and their potential, charities doing front-line service work are facing mounting pressure in the form of increased costs, increased demand for the services they provide, limited number of staff willing to work for what is often less than market rates, flatlining and even decreasing donations, and fewer dollars from grants and governments at all levels. This is a problem, and herein lies the tension.
Framing the DAF discussion as a good/bad binary misses the point. Both sides are wrong; or at least, neither side is completely right.
Charities need funds now, so there are those who feel we need restrictions and rules around DAFs to ensure that dollars get to front-line services ASAP rather than languishing in the DAF itself. Others see the increasing appeal of DAFs as reason enough to not rock the boat with rules and restrictions; too many restrictions or mandates placed on DAFs and donors might just reduce or even stop giving altogether. Donors have choice in this, after all. But framing the DAF discussion as a good/bad binary misses the point. Both sides are wrong; or at least, neither side is completely right. There is need for a broader and more nuanced conversation around DAFs if we are truly going to create impact in and for the sector. DAFs are important, but they are just one part of a larger conversation.
Activating the conversation
This past May, I was one of 100 people that attended DAF Disrupted in Toronto, hosted by Future of Good. (Future of Good has a second event planned for November 18 at Simon Fraser University in Vancouver, DAF Activated.)
The event was billed as a “practitioners gathering” and brought together donors, foundation leaders, charity leaders from organizations of all sizes, tech experts, advisors and wealth professionals, and more. It was a wonderfully diverse group of people with broad experience and opinions. Perfect for the conversation. Kudos to Future of Good for hosting this event and bringing such a diverse group – the “charitable ecosystem,” as one participant called it – together.
The day started with donors, advisors, and foundation representatives sharing their respective experiences with DAFs. There was an interesting exchange about who “owns” the donor relationship. Is it the DAF foundation, the charity that receives a grant from a DAF, the investment advisor who encouraged the DAF, or someone else? After some discussion, the idea that donor relationships are not “owned” but “managed” prevailed. Everyone involved with DAFs and donors has a vested interest in relating well with all parties involved.
We spent a rather rushed hour discussing the shortcomings of current software and new technology developments that will create a host of efficiencies as well as how best to create “scalable impact” in a sector that is “antiquated.”
Fatigue set in as the day wore on, but the comments of the final hour captured the zeitgeist participants felt. Charities and non-profits are a key piece of the fabric that hold communities and the country together, but they are stressed to the breaking point. In addition to increased costs, rising need for services, and limited revenue streams and donations, charities, like other institutions, also face growing mistrust among Canadians.
DAFs will continue to grow in popularity and size, and that is good, but with that comes a growing need to ensure we ‘get it right.’
Conversations about DAFs are important. Their recent growth is reason enough to look at them carefully and ensure that we create best practices that benefit every corner of the sector, but changing rules and regulations around DAFs and their disbursement quotas does not solve the problems facing the sector. Of greater concern are the loss of volunteers and the number of hours they contributed following the COVID-19 pandemic. The reduction in volunteers and their contributions means services are downloaded onto already stressed and overworked staff, or they are no longer offered at all. Inflation, tariffs, and the seismic shifts we are feeling in our economy will continue to have an impact on the sector as people hold on to funds for their own needs rather than donating them for the benefit of causes and communities. And how do you build an engaged citizenry and healthy communities when people spend less time out and about engaging with humans and more time at home behind a computer screen?
Focusing the discussion
As a sector, we have much bigger concerns than DAFs and I welcome those conversations, but that doesn’t mean DAFs and DAF foundations get a pass. DAFs will continue to grow in popularity and size, and that is good, but with that comes a growing need to ensure we “get it right.” Let me suggest that there are three key areas that need the focus of our ongoing discussions:
Investment
Many have said that funds in DAFs not disbursed to charity are languishing. If that is true, what does it say about the capital in endowment funds, many of which are established as “permanent” where the capital can never be touched? Suggesting that funds in DAFs (and endowments) are wasted or languishing is shortsighted. It assumes that only funds in the hands of front-line charities that offer services create impact.
Charities need money today, but they also need reliable funding in years to come, hence the need for donated funds in DAFs, and for those funds to be invested well. But why can’t invested funds also create impact? Impact investments are gaining traction. Foundations that invest in community housing, renewable energy, sustainable agriculture, and a host of other projects that benefit people and communities are creating impact. While those funds may not yet be in the hands of a charity, they are not languishing.
Education
Foundations are getting better at this, but they need to do more. With the accelerated growth of DAFs, the foundations that manage them have a growing responsibility to educate donors and would-be donors about how charitable impact is best created. Education should include introductions to charities within the community, especially those that are small, grassroots, minority-led and -focused, and which lack the marketing and communications bench strength of larger charities. Meet-and-greet events, tours, testimonials, and more need to be part of the quid pro quo of any donor who establishes a DAF.
If foundations are going to be “charitable infrastructure,” as some have said, then in addition to gift planning and donation management, they need to be proactive in educating donors and the wider public about the importance of charitable giving and give exposure to those organizations doing the heavy lifting in their respective communities. “Donor-advised” does not mean that foundations get a pass in their responsibility to help donors think more creatively when it comes to charitable giving.
Collaboration
Too often the conversation suggests that foundations and charities are in competition; that they work at cross purposes from one another. We need to do away with the “us” and “them” mindset and embrace the reality that we are in this together. Foundations exist to serve charities by receiving, managing, and disbursing charitable dollars so that front-line charities can do the work for which they were created. Charitable gift planning can be a long and complex process. Foundations are well suited for this role, which allows charities to focus on their mission and delivering services.
Moreover, professional advisors are key players in the collaboration process. Increasingly, lawyers, accountants, wealth advisors, and others are seeing the benefit of charitable giving and encouraging clients to give consideration to making donations.
While limited in what can be shared because of privacy and confidentiality, all professionals involved with donors and donations need to do all they can to create a collaborative environment. Pick up the phone and talk to one another when there is a breakdown in the disbursement process. Get to know the people committed to charity and donations. Grab a coffee or even a short virtual chat with people in the sector. It takes time to build relationships, but relationships are the fuel that drives our sector.
And let’s not forget that donors are also part of this collaborative process. Sometimes we forget that people have a choice as to whether they will share resources with our sector. Our focus should be on helping donors understand the benefits of the sector and introducing them to charities and causes, and creating more meaningful impact, rather than on disbursement quotas and tighter regulations.
There is a great deal that feels overwhelming at the moment, but there is also so much that offers hope. The DAF conversation, for example, has the potential to bring everyone to the table in a way that we rarely have seen before. That’s exciting. Diversity of experience and opinions, shared openly and safely, will do far more to benefit charity and the sector than will regulations. Here is to the creativity that lies ahead!
