The following article is cross-posted from Alliance magazine blog. Based out of the UK, Alliance magazine is the leading global magazine on philanthropy and social investment.
Donor advised funds (DAFs) are a growing segment of philanthropy.
On the other side of the Atlantic, DAFs have been in existence since the 1930s and have combined assets of more than $80bn in assets under management. They have attracted high profile donors including Mark Zuckerberg and Priscilla Chan who gave away $1bn worth of Facebook shares to the Silicon Valley Community Foundation.
However, far from a tool only for the super-rich, DAFs are part of the product toolkit that financial planners use for mass affluent clients that wish to give regularly.
In the UK, DAF growth has been more modest but money contributed to DAFs, grants made and charitable assets made have all grown year on year. According to NPT UK, grants from DAF accounts made to charities reached nearly £280m and total assets in DAFs surpassed £1bn in 2016. (2017 Donor-Advised Fund Report, NPT-UK)
So why are DAFs gaining popularity?
For donors who would otherwise have set up a private foundation or trust, DAF accounts are easy and quick to set up, low cost as you pay an ongoing admin fee along with your investment management fees over significant start up and ongoing legal, accounting, audit and reporting costs, donors can remain anonymous within a DAF structure against public records if they set up a separate foundation.
Some DAFs also offer added benefits for international donors by offering multi-jurisdictional tax relief which is an added benefit over setting up your own foundation and having to navigate the legal complexities of setting up a multi-jurisdictional qualified structures. In summary, there are enormous benefits to setting up a DAF account over setting up your own foundation.
This is certainly the case for those with modest sums of money allocated for philanthropy but even for those with substantial wealth such as Zuckerberg/Chan, DAFs could be a credible alternative because of their cost-effectiveness, simplicity and convenience.
DAFs and social impact investing
As social impact investment is gaining momentum amongst individual investors, DAFs could play a really important role in enabling more donors to allocate their philanthropic capital for social impact.
One of the criticisms of DAFs (particularly in the US) is donors set up DAF accounts to enjoy the benefits of the tax reliefs today but money stays in the DAF invested in mainstream investments and no money reaches the charities that need the funds until the donors decide to do so which could be many years away.
Often there are good reasons as to why donors do this; they may still be working, and have little time to think about giving. Many want to focus on giving to charities once they have more time in their lives, often in retirement.
DAFs could provide donors with options to allocate some of their philanthropic capital into social impact investment opportunities. This would enable donors with funds sitting in DAFs to create impact by providing patient capital to mission led organisations that need investment until donors are ready to nominate charities they would like to give to, thereby recycling funds many times over.
As DAF assets have already crossed the philanthropic boundary, it will never go back to the donor. This means DAF money can afford to be more risk-taking, catalytic in bringing in other types of more commercial investors into social impact deals and provide concessionary capital to deep impact investments that often find it challenging to find investors.
Many social impact investment opportunities have high minimum investment amounts especially those managed in a fund structure. DAFs could play a crucial role by aggregating the funds of many donors into meaningful sums to make these investments.
When returns and capital is repaid after the life of the investment, these funds will go back to the donor’s account, ready for the donor to advise if it should go into other social impact investments or to the donor’s preferred charity.
Evita Zanuso is the Financial Sector & Investor Engagement Director and Karen Ng is an Investment Associate for Big Society Capital.