Marble Falls The old rule about being careful when throwing stones if you live in a glass house might apply here, but whatever….
I was a founding incorporator of the Tides Foundation, created and run by Drummond Pike for decades, and served on the board of that outfit and a number of the boards of the Tides family of organizations for more than thirty years. Drummond pioneered the development of donor advised funds, known now more widely as DAFs by the cognoscenti, by making Tides something on the order of a special purpose community foundation for donors committed to social change and benefiting people across a wide menu of issues and interests, rather than simply one local community and its arts, parks, and opera societies. Offering DAFs was part of the fuel for that fire in building a now enormous and impactful philanthropic and service organization by the San Francisco Bay.
Tides isn’t the only operation that became huge in this field. Many area-based community foundations grew phenomenally, like the notorious and controversial one in Silicon Valley. As wealth has grown the industry that supports its creation and protection has grown as rapidly, and seeing the numbers rising, DAFs became a target for big financial players like Fidelity, Schwab, and Vanguard to profit commercially as well at take the whole enterprise up a notch. Part of the Tides mission statement for many years included a commitment to provide “excellent service,” which was also the business model that financed the organization and its staff from fees for handling transactions, as well as for any docket advice for donors who wanted it. Nonetheless, Tides today is likely strained to compete on speed and efficiency with huge commercial players.
Furthermore, DAFs are no longer niche, and certainly can’t now be misidentified as vehicles for social change. As the Wall Street Journal reported DAF contributions “topped $85 billion in 2022, more than double the 2018 figure, and DAF assets nearly doubled during that time, according to the National Philanthropic Trust.” The new world of DAFs no longer has the pleasant scent of flowers and sea breezes as you entered Tides’ headquarters in the Presidio, but now has the pungent odor mainly of a pure and simple tax dodge. Remember, “Donors get income-tax deductions when they put money into a DAF. They give up legal control of the assets but can still recommend which charities get their money and when, and the funds [like Tides] almost always comply. Meanwhile, the assets can be invested inside the DAF. As long as they stay there, those assets can generate fees for donors’ wealth advisors.” There’s nothing arm’s length about any of this, making the issue of control a very thin screen. There are also no pay-out requirements at even the meager level of real foundations, so the money can, and often does, simply sit there and grow, still shielded from taxation.
The Biden administration hasn’t tried to kill DAFs, but has focused on whether the way these funds pay financial advisors handling the investments may be shortchanging charities that are ostensibly designed to be the ultimate beneficiaries of eventual giving from the DAFs. To the degree financial advisors, unlike something like Tides, are often paid based on a percentage of the total funds they are managing, they have an obvious incentive to retain the resources in the DAFs, rather than seeing those funds distributed by the donors to nonprofits. The administration has proposed a rule that “many of those fees to the donors’ advisers would be deemed excess benefits, subject to a 20% tax plus another 5%, on fund managers.”
The rule has not gone into effect, but since we’re talking about anyone, including the servant institutions of the rich and their minions paying some taxes, many are screaming like stuck pigs. Disturbingly, many community foundations are joining them, when it really should be none of their business, since their tax status rests on being a public good, rather than a private resource for the rich. Some are arguing their pot would be less likely to be filled to brimming if financial advisors lost some of the incentive of steering their rich clients to DAFs held by the community foundations. From my perspective, this simply underlines the fact that DAFs for most donors and the industry that has sprung up to serve them has all become nothing but a tax dodge with the community foundations abetting and confessing to the fact.
Chuck Collins, a longtime comrade, guest on Wade’s World, and author we’ve excerpted and reviewed in Social Policy and director of the Charity Reform Initiative at the Institute for Policy Studies, was quoted saying, “I’m not sure if they’re the best rules, but to me, it’s emblematic of, ‘Wow, there must be a lot of money at stake here.” That’s mild to my way of thinking. This whole DAF mess demands reform and realignment. This rule hardly seems a bug bite for the advisors, and we should all hope that it is just the beginning of real financial regulation by the government, because this whole DAF think may have been the right thing at one time, but has now evolved for all the wrong reasons.