Strange Traffic: $4 Billion Shuffles Between DAF Sponsors Each Year?

BY JON PRATT

For community-oriented individuals with DAFs (donor-advised funds), it can make sense to move, say, your DAF from one sponsor to another. For example, you may have a $30,000 DAF at a community foundation but you are moving to another city and want to move it to the community foundation there.

But what about transfers between DAF sponsors of more than $10 million each? In 2023, only counting these large transfers, a total of $4 Billion moved among DAF industry leaders Wall Street firms Fidelity, Morgan Stanlen, Schwab, and other firms. These transfers:

• Were reported as charitable grants (“payout”)
• Did not go to any operating nonprofit
• Produced no charitable benefit – simply moved to a different financial institution
• Provided no tax advantage to the individual DAF account holder, and
• Have no apparent explanation.

Here are just four eye-widening examples of multi-institutional transfers revealed by IRS Forms 990 in 2023:

• National Philanthropic Trust (NPT) transferred $63 million to Fidelity Investments Charitable, and Fidelity transferred $194 million to NPT
• Schwab Charitable Fund (recently rebranded as DAF Giving 360) sent $120 million to Investments Charitable Gift Fund, and Fidelity sent $183 million to Schwab
• Fidelity sent $57 million to American Endowment Foundation (AEF), and AEF sent $48 million to Fidelity
• Morgan Stanley Global Impact Funding Trust sent $149 million to Fidelity, and Morgan Stanley sent $13 million to Fidelity

Charting the money flow between 42 of the largest DAF sponsors creates a massive money circle — Visualization by the Vermont Complex Systems Institute using data from the Institute for Policy Studies.

Clearly, DAF sponsorship is big business, especially for commercial investment houses that have created these tax-exempt charitable entities eligible to hold DAFs on behalf of their clients.

An obvious question is to what purpose is so much money around? The most frequently heard rationale is that people move accounts based on their wealth/financial advisor:

• They move to a different wealth advisor and move their DAF assets as well to the new advisor’s firm
• Their wealth advisor changes firms, so they move their DAF (which technically they no longer own, but merely advise) from one DAF sponsor to another to keep their relationship with their wealth advisor
• They move their DAF to have one provider manage both their personal investments and their donor-advised funds in one place
• Wealth advisors appreciate being credited (and compensated) for the combined private and charitable assets under management

Maybe there is something more to this strange traffic than shifting customer loyalties, but if so, what is it?

Regardless, the main problem here is the wasted resource  of “trapped value,” a valuable public trust sitting dormant. The billions of dollars held in these accounts, for which many received a tax deduction long ago, can be seen simultaneously as proof of these donors’ generosity and charitable ineffectiveness. Essentially, wealthy people treat these tax-exempt funds under their nominal “advising” as another piece of their portfolio, private property to be preserved, enhanced, and handed down to heirs.

Underlying these arrangements are a couple of lawyerly fictions that 1) DAF sponsors exercise complete control over these accounts, and “advisors” none, and 2) moving tens of millions of dollars from one account with a DAF sponsor to an account with a different DAF sponsor is a “grant” furthering a charitable purpose, not a transfer of assets.

So, what is actually going on here? The answer to this question needs to come from the state attorneys general, who should investigate, since they have the responsibility to protect charitable assets, and are to be notified of substantial transfers of assets from public charities. Are these payments actual charitable grants that further a charitable purpose, or special accommodations of private investment client accounts for other reasons? AGs should require DAF sponsors to explain the legitimate purpose of these transfers, and report it to the public.

In the meantime, why not put that $4 billion inactive DAF capital to work helping people this year?