In response to my post yesterday asking who would follow Network for Good’s lead and try to execute one of the “surprises” from my list in the Chronicle of Philanthropy, David Lynn of Social Venture Partners-San Diego writes:
We’ve been working on a plan for #8. If any other readers would like to discuss, we’d be happy to. We’d love to see it happen.
“# 8: A no-minimum national donor-advised-fund will be launched in partnership with a bank.”
My thought on this idea was that banks have made it very easy to save money, by linking savings account products to their checking accounts. Some banks have even created programs where purchases on your debit card are rounded up to the nearest dollar with the excess being rolled into your savings account. ING Direct has created huge national awareness of their online, high yield savings accounts that can be linked directly to other institutions checking accounts.
At the same time, banks have invested in online banking capabilities so that it is now easy and free to pay your bills out of your checking account. So why can’t a bank offer a donor advised fund that is linked to your checking account and allow for free checks to be sent out of the account to nonprofits? They could even offer benefits if you set up a standing order to transfer a portion of your direct deposit paycheck into your donor advised fund.
From a regulatory standpoint, this idea has some problems. For instance only nonprofits can offer donor advised funds, but Schwab and Fidelity have found ways to offer donor advised funds so I don’t see why banks couldn’t do the same thing. The other issue is the overhead involved in operating donor advised funds with no minimum balance. Schwab and Fidelity now have their minimums down to $5,000, but the last leg down to $0 might be difficult. One of the reasons that I thought partnering with Network for Good made sense, was that doing so outsources the charity vetting process to them. I don’t see why a bank couldn’t mail checks out to any nonprofit within the Network for Good database using their existing bill pay functionality. I don’t mean to downplay the fact that there would be some hurdles to this plan, but it sure seems doable.
To tell you the truth, I’d go one step further. Why can’t for-profit firms offer donor advised funds? I know that’s blasphemy, but assuming all of the same rules regarding the use of the funds was followed, what would the problem be?
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One factor making it difficult for banks and other for-profits to get into the Donor Advised Fund game are the stringent IRS regulations around giving and granting from these funds. Since the enactment of the Pension Protection Act of 2006, organizations sponsoring DAFs have been required to retain certain documentation for all of their grantees. As we all know, Schwab and Fidelity have made themselves players in the game by establishing non-profits operating as commercial donor advised funds; however, these “Charitable Gift Funds” are still required to perform the same due diligence as the community foundation counterparts.
$0 minimum DAFs, however, are entirely within the realm of possibility, and they are almost certainly being considered as options by the commercial and community foundation players. The solution to the overhead issue lies in another concept borrowed from banking: fee-for-service. By replacing the traditional administrative fee with transaction based expenses–per-gift and per-grant–the sponsoring organization can ensure that each fund meets it’s own overhead. By requiring that small funds conduct all transactions online, another common source of overhead can be eliminated. Like retail banks, which offer free accounts with limited services, as well as private banking and PCS services for larger players, community foundations will be able to tailor the level of service to the size of their donor’s philanthropic commitment, and provide a menu of pricing options accordingly.
Thanks Nick. The due diligence is a major issue. But it seems to me that this can be overcome if the IRS would allow DAF sponsors to simply depend on Guidestar or Network for Good or some central database to give them a Safe Harbor for making distributions. I realize this isn’t something easy to put in place, but it is doable.
Your suggestions for minimizing costs is spot on. Banks would likely cover some of the costs themselves as overtime it became a competitive disadvantage for them to not offer DAFs. This is why banks currently offer free online bill pay and eat the postage and administration costs.
Sean,
Why couldn’t this be done through the more than 700 community foundations nationwide? We already know how to do donor advised funds having done them most of forever…and we have a track record with Merrill Lynch for their clients through their Community Charitable Fund…
Why would someone create a donor-advised fund for under $5,000? Why not write checks? You’d save the fee. And comparing the due diligence of commercial gift funds with community foundation is ludicrous. I’d also remind you that the data on Guidestar, helpful as it is, is self-reported.
foundationwriter, think about the reaction people would have if you said “Who would create an IRA for under $5,000? People with that little money should just save for retirement by sticking money under their mattress!”
DAFs are useful tools for people of all income levels.
– Agree that DAFs are useful tools, practically and tax-wise. Even if you give $25 to four charities, you can file for one tax deduction to your DAF instead of four individual receipts.
– Community foundations are not at all set up to process multiple small donations. They also have a very hard time marketing opportunities to their donors, let alone signing on to opportunities they haven’t vetted. They are primarily financial vehicles – although many seem to be trying to change and take a larger roll in the community. Additionally, they seem to be getting focused on larger impact grants, which leaves the out the smaller niche operations. (Not saying this is bad, that’s a separate discussion.)
– Yes, some banks have created DAF’s, but again becomes an administrative and legal question. The correct legal and financial structure is to essentially become a community foundation (that’s what lets you create DAF’s). Much better to do in partnership with a bank that is in the business of moving money around than to form a new one – which will need a bank anyway.
Our current theoretical solution is to take an outcome-based project approach, which solves many of the administrative, legal, and financial hurdles, and even allows non-501c3 gifts out of the DAF.
Electronic banking and processing solves the $0 minimum issue. We also believe we can finance the entire operation on the float (which is essentially the model of the standard community foundation), which means we believe we can move 100% of the donated money to charities, or as close as we can get. That’s better than many other players. The only potential whack is credit-card processing, and that can be negotiated very low if not absorbed.
Legally, with a project based approach, forcing all money to move anonymously solves many of the IRS-DAF rules. The required vetting is that a project is “charitable” within the IRS regulations, which we believe can be accomplished with the community style/web 2.0 setup. It is difficult to rate a “mission” as charitable; it is much easier to rate a specific project as charitable (and successful).
Thus, our current conclusion is that if we create a platform allowing for donors to connect with charitable projects, and institute the proper financial structures to efficiently and responsibly move that money – for free – then we could provide a great service. We become a tool for the donors, whether individuals, foundations, or community foundations.
Additionally, as to the value-add for a new philanthropic/giving site beyond solving this DAF problem:
– A different angle on connecting donors and charitable works, with an adjustment to the rating system and the “other people like you did this” recommendations. Most other situations seem to focus on rating the charities, which is a significant challenge and has little or no value when it’s a short-term project, like fixing up a local park. But if I could find a set of donors with similar passions that has given to 50 projects with an 95% overall project success rating, then I might feel pretty confident to have my money go wherever those donors are going. The lemming risk is present, but hopefully not significant. Ways to solve the seemingly-prevalent problem of “I’ve got money to give away, I just don’t know where to give it.”
– When multiple donors are involved, and tools are provided to facilitate contact, some of the donors may care beyond just the money transfer. Normal actions may take the form of staying involved on a discussion board or forming other ad-hoc groups, or trying to help out in whatever way possible during the project. However, some donors may even choose to go further to uncover the details of the project, whether that’s site visits when local or remote research. As I’m sure you’ve seen, there’s a lot of people spending a lot of time on the web, perhaps we can give them something good to do! While we don’t expect a huge ratio of extended involvement, we hope there would be a sufficient level of interest. If 300 donors give to one project, maybe 10 of them care more than superficially. And on the other side, if one donor gives to 40 projects, maybe they find one or two that really grab them. Helping the money go further by leveraging the connections made is really where we find the exciting possiblities.
Yes, we have been through much of this with lawyers, private foundations, and our local community foundation. We’d love to get it built, just haven’t been able to take that next step yet – an important one being that partnership with a bank and/or existing DAF setup. It’s an idea we’ve been very excited about, and we’d really like to see it happen, hopefully with our involvement but even without.
Thanks.
–David
Has this idea pprogressed any further?
No, but thanks for asking. Maybe I’ll revisit this concept.
This is an interesting concept— we are currently faced with a situation where we have donors to a fund for that is dedicated to Gene Therapy and Canavan disease– The challenge is the institution for whom the funds are intended has decided it cannot accpt the gifts via Paypal as they are not coming from a 501 C3 and there fore are not charitable gifts– The fund wull untimately have to become its owm chairty but havning a ni mnimum DAF might be agreat interim solution as there are many small donors
That would make sense. Right now Schwab Charitable offers $5,000 min DAFs. That might be an option in your case.