This piece is part of the Slate 90, a series that examines the multibillion-dollar nonprofit sector. Read all stories from the Slate 90 here, and view the Slate 90 nonprofit rankings here.
There’s not a lot of churn in the Slate 90. Places like the Smithsonian (No. 1 in the Arts, Culture, and Humanities sector) and the American Bible Society (No. 2 in the Religion sector) have been around for hundreds of years and don’t move a huge amount from year to year. Hypergrowth is rare—except in the case of donor-advised funds.
DAFs are vehicles to provide tax advantages for people who GAF. They’re a kind of democratized foundation, available to anybody with $5,000 to give. In recent years, the sector has boomed. And no DAF has grown faster than Fidelity Charitable, the DAF administered by asset management titan Fidelity Investments.
Fidelity Charitable, which was founded in 1991, had an absolutely astonishing $5.4 billion of revenue in 2015, the vast majority of which came from its $4.6 billion in fresh contributions. That is twice the size of the Red Cross, and more than 14 times as much as the Museum of Modern Art. More impressively, revenues rose 23 percent, or more than $1 billion, from the $4.4 billion in 2014 revenues. Go back to 2011, and the amount was just $1.9 billion; in 2005, Fidelity Charitable’s revenues were below $1 billion. In terms of sheer growth, no other institution comes close. Fidelity Charitable, along with the other big DAFs (Schwab Charitable, the Silicon Valley Community Foundation, Vanguard Charitable), is revolutionizing the philanthropic league tables.
What are DAFs? They’re a place to park your money, often the proceeds from some significant windfall—$2 million from the sale of your stake in a family business, $12 million in vested stock options at your venture-backed startup—while you’re trying to work out which charitable causes it should go to. You get the frisson of a big tax deduction up front, thus reducing your tax burden today. And you get the satisfaction of spreading out charitable giving over many years. Bonus: If the markets rise, your giving potential can grow accordingly.
As a matter of public policy, there’s a case to be made that DAFs shouldn’t exist, partly because they need to place a valuation on illiquid assets before they’re sold, which is not easy to do, and partly because they allow people to simply park charitable funds without giving them away at all. Hell, there’s a pretty strong case to be made that the entire charitable deduction shouldn’t exist. But DAFs in general, and Fidelity Charitable in particular, cause a lot more good than harm. They encourage people to give to charity when their windfall is fresh and before they’ve really had time to get used to it as part of their personal wealth. (Once you’ve donated the money to a DAF, you can move it to a different DAF, but you can’t take it back.) DAFs also make it very easy to take illiquid appreciated assets, like real estate or private companies or CryptoKitties, and turn them into charitable funds without worrying about negative tax consequences. And it makes sense that they would be growing rapidly in an era in which investment returns and capital are outpacing overall economic growth.
To be sure, Fidelity’s interest in Fidelity Charitable is not wholly charitable. While your funds sit in a DAF waiting to be disbursed, they’re invested in the market. And if they’re in Fidelity’s DAF, they’ll be invested in Fidelity’s funds. Fidelity makes its money by investing other people’s money, and it similarly made money by investing the $15.3 billion it had in its DAF in 2015. That’s nothing to sneeze at, even if it is only a tiny, tiny fraction of the $2.5 trillion that Fidelity had under management that year.
But the incentive structure is good. Fidelity makes money by encouraging people to donate money to Fidelity Charitable. And the data suggest that DAFs are not aiming to mimic established foundations, either in longevity or cost structure. DAFs, in fact, generally give that money away pretty quickly: 38 percent of the original dollars donated are gone within a year, and 74 percent is doled out within five years. That’s a hell of a lot better than you see at most foundations, which tend to be set up as perpetuities that give out the bare minimum of 5 percent of their assets each year.
The secret to Fidelity Charitable’s growth is simple: It went to where the money is. It approached financial advisers, many of whose clients’ accounts are already at Fidelity. According to U.S. Trust, some 91 percent of high net worth individuals (those with a net worth of $1 million or more) give money to charity, but only 9 percent of them consulted with a financial adviser about their charitable giving and how best to structure it. So Fidelity founded Fidelity Charitable University, a place where financial advisers can learn about an aspect of wealth management that they often know almost nothing about (and gain continuing education credit in the process). Self-serving? Surely. Good for the total amount of money flowing into charitable causes? Absolutely. In general, the more conversations you have about your personal philanthropy, the more you’re likely to end up giving.
That’s why the growth of DAFs is far from over. Fidelity is the biggest of the lot, and it still only has about 100,000 giving accounts, representing only a tiny fraction of its 26.1 million brokerage accounts. Most Americans still haven’t even heard of DAFs, which means that there’s a long way to go before the DAF joins the 401(k) and the 529 plan as part of most rich families’ financial portfolios.
The DAFs do mean that that there’s a certain amount of double counting in the Slate 90: If a dollar flows into Fidelity Charitable and then into the Red Cross, say, then it’s going to get counted twice. Don’t think of Fidelity Charitable as displacing the other charities on the list, then. Instead, think of it as helping to change the way that Americans give, especially now that President Donald Trump’s tax reform means that there are real tax benefits to what financial advisers refer to as “bunching.”
America’s giving may be becoming a little less passionate, a little more technocratic and bloodless; people are starting to ask more pointed questions about how effectively their monies are spent, and at the same time are willing to give away significantly more money (and quickly) if they are comfortable with where it’s going. DAFs are a central part of this development, which means that for as long as the charitable tax deduction exists, they’re going to continue to grow much faster than the sector as a whole.