Gifts of appreciated securities and complex assets. One feature of DAFs that makes them attractive to many donors is their ability to receive and sell appreciated securities and complex assets and distribute them to multiple charities, including community-based organizations that don’t have this capacity.
Investing DAF assets. Most of the assets contributed to DAFs are invested in the conventional ways designed to achieve good risk-adjusted financial returns. The assets grow tax-free, but they belong to the DAF sponsor and can only be used for charitable purposes.
Environmental, Social, and Governance (ESG) funds. Many sponsors offer ESG funds of publicly-traded stocks. Although they are unlikely to affect companies’ behavior, their alignment with some donor’s values may encourage those donors to contribute to DAFs.
Impact Investments. An increasing number of DAF sponsors also offer opportunities for impact investments — typically, private equity investments or loans that yield below-market returns in order to achieve social goals.
“Rate of return” on philanthropic grants. When people talk about the rate of return on philanthropic grants, they are referring to the net social value that a grantee organization can produce with additional funds.
Timing and payout. There is some evidence that DAFs may have a smoothing effect — that is a higher payout — during economic downturns when individuals and foundations are giving less than usual; we should see more evidence about this soon. Also related to grantmaking, it appears that the large majority of DAF grants are unrestricted — a noteworthy difference from grants from private foundations.
DAF sponsors’ vs. donors’ incentives. On the one hand, DAF sponsors have an incentive to have more money under management because of the fees they receive. On the other hand, donors have an incentive to make grants sooner rather than later to minimize the fees and ensure that their donations go to charities. Rather than try to reason from these abstract premises, we think it’s more valuable to look at actual practices — for example, the sponsors’ practices of nudging donors to recommend grants and the sorts of advice that they offer donors. Granted that we spoke to a small selection of DAF sponsors, we did not see perverse incentives at work.
Read the full article about donor-advised funds by Paul Brest and Erinn Andrews at Medium.
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