They should not be seen as a source of untoward profit, but as value for money.
One might think that those who believe in charitable giving would applaud the growth in a new type of bank account whose funds are reserved for charity alone—and deposits to which increased from $36 billion in 2018 to $85 billion in 2022. During the same period, the charitable donations from these same “bank accounts” increased from $24 billion to $52 billion. But notwithstanding such numbers, the growth of these accounts—a.k.a. donor-advised funds, or DAFs—continue to attract controversy and criticism. In the crosshairs especially are so-called “national DAFs”—the elephants in the DAF world established by major national financial-services firms—Fidelity, Vanguard, and Schwab.
The latest volley against such firms involves the fees they charge to manage the billions in those DAF accounts. As Gerry Roll of the Foundation for Appalachian Kentucky writes in The Chronicle of Philanthropy, “These firms have zero incentive to encourage, much less accelerate, grant making, given the enormous fees they earn and lack of connection to charitable activities in local communities.” He and others would like federal legislation to regulate these national DAFs as distinct creatures from smaller, local funds—to pressure them to increase payouts and thus, indirectly, reduce the asset balances on which they earn fees.
There are any number of flaws in this argument. Nothing, for instance, precludes the millions of small DAF “donor-advisors” from directing their grants to local organizations. I know that that’s exactly what I do when I direct Vanguard funds to my local historical society and park conservancy. I’m not alone. Indeed, in a paper for the Manhattan Institute, I found there to be overlap between the organizations supported by those with national DAF accounts living in metro Chicago and those with accounts with the Chicago Community Trust. Nor is there merit in the idea promoted by philanthropist John Arnold and law professor Ray Madoff—who has historically been concerned about “dead money” sitting in tax-advantaged charitable accounts and not flowing quickly to charities themselves—that “accelerating” such giving via regulation is crucial. In fact, it can be vitally important for charitable funds to be “warehoused” so as to available in times of crisis—think here of the Covid pandemic—having gained in value by not being disbursed at a legislatively mandated rate.
But it’s worth paying special attention to the latest critique of national DAFs—that their business model is based on charging high fees and thus earning profits on the financial reserves they are holding in donor-advised funds.
The first thing to notice here is that those fees are actually not that high. Fidelity Charitable, for instance, charges a .60% administrative fee on its asset balances. Community foundations, which operate DAFs that are locally focused, also charge such fees, which vary greatly—but often exceed 1%. The key point to keep in mind, however, is that such fees should not be seen as a source of untoward profit, but as value for money.
Think here of the counter-factual. Those who prefer to write individual checks to individual charities must maintain bank checking accounts—for which banks impose fees or require minimum balances. Of course, they do not earn interest on such accounts—in contrast to DAFs, whose balances are invested. Then there’s the matter of contributing the value of appreciated stock—no small matter in a period of sharp market growth, as we are currently experiencing. Small local charities are often not equipped to sell such equities or may pay fees for doing so. In contrast, national DAF account-holders can quickly move stock holdings from their investment accounts to their charitable accounts. That’s one of the reasons Vanguard et al. started their charitable arms—to attract investors to their for-profit arms by offering that convenience.
Think, too, of the value of “tangible assets”—such as art or other collectibles. Small charities are not likely equipped to appraise the value of such donations; the national DAFs do so, with the proceeds then available for charitable giving. Scale matters here, too. The major national DAFs have staff and experience in such matters.
Donors may well prefer to have their assets managed by local community foundations—which offer advice on worthy local groups of which donors might otherwise not be aware. But it’s a mistake to view their national competitors—and that’s what they are—as charging unjustifiably high fees, as if they were the proverbial giant financial squids of the charitable giving world. Indeed, it’s worth noting that the CEO of the Chicago Community Trust has earned a higher annual salary ($592,000) than that of Vanguard Charitable’s “chief philanthropic officer” ($289,000). Both community foundations and national donor-advised funds offer convenience and the means for one’s small charitable nest eggs to grow, tax free. They may compete for donors—on the basis of fees or services they offer. Both are good for charitable giving. Those seeking to constrain the growth of one type of DAF over another should avoid demonizing one and instead be cheering for the success of each.