When used to their fullest potential, donor-advised funds are a tool for challenging philanthropy’s systemic inequities.
The ongoing debate over donor-advised funds — are they a $142 billion unwarranted tax dodge that results in wealth hoarding, or a boon to nonprofits and donors alike? — has obscured what for many donors is the most compelling use case for DAFs: as a tool for experimenting with new ways of giving that challenge philanthropy’s orthodoxies and directly address systemic inequities. This is especially the case for clients who are attuned to current critiques of philanthropy and may be hearing negative messages about DAFs. It’s well worth countering those messages, because for clients who see themselves as innovators and want to learn and grow as philanthropists, DAFs offer advantages no other philanthropic funding vehicle can match:
- Their minimal operating restrictions allow for experimentation with creative giving structures that maximize impact.
- Their flexibility gives mission-aligned DAF sponsors the ability to offer ad hoc collaborations with other donors, such as pooling funds to seed potentially transformative projects.
- Their low overhead and simplicity make risk-taking more palatable, opening up opportunities to maximize impact from invested DAF assets as well as granted funds.
A chance to lead with innovative grantmaking strategies
We see many donors — especially in the rising generation of wealth holders — who are excited by the opportunity to co-create equitable, community-driven approaches to giving. They question the relationship between money and power and are looking for ways to mirror the change they want to see in the world.
RSF Social Finance has been working with donors on three models:
- Flow funding, which hands over grantmaking power to nonprofit leaders, social entrepreneurs, and community leaders with lived experience in a particular field. The donor typically chooses the issue area and invites community leaders to distribute funding.
- Shared gifting, which brings 6 to 10 local nonprofit leaders together for a day to review each other’s proposals, ask questions, and decide how to distribute the donor’s grant among themselves, based on their own criteria.
- Community-led funding, which puts community leaders in the donor’s interest area fully in charge. Donors provide ongoing financial support, and community leaders have sustained autonomy over how the funds are distributed.
These are just three approaches that have new donor energy behind them. We see a real upwelling of interest among donors in using their DAFs to develop novel grantmaking processes that can really get at our systemic problems and increase the impact of philanthropy generally.
Innovative investing strategies amplify impact
The most straightforward way to address the charge that assets are just sitting in DAF accounts not benefiting anyone is to work with a DAF sponsor that will invest them for impact. DAF sponsors offer a range of options labeled “impact,” from basic socially screened mutual funds to donor-directed impact investing.
Clients who want to amplify the impact of every dollar can layer on creative approaches like these:
- Recoverable grants, which circulate money back into the DAF so that it can be reused to support other promising social enterprises or initiatives.
- Loan guarantees and participation deals, which leverage DAF assets as risk mitigation for major funders that otherwise would not invest in potentially system-changing projects.
- Catalytic asset management, which provides an alternative to spend-down or perpetuity approaches: Retained assets are invested for maximum impact at potentially high risk, with the understanding that a likely negative return will draw down assets over time.
As one major donor put it to me, “If I put a dollar in my DAF and you do all kinds of catalytic things with it and I get 90 cents back, that’s great.” Their perspective is: Why try to achieve a financial return with money that is intended to be charitable? Let’s focus on the impact return.
Finding the right fit
Gift money has an important role to play in economic life. As the most flexible, catalytic, and risk-tolerant capital, it is ideally suited for empowering communities and funding systemic change — if it is a true gift that does not come with lots of strings attached. For clients who want to fully embrace that potential, DAFs can be both an easy entry point and a long-term strategy: DAFs can complement foundations’ work and test models that could be used for larger grants within the foundation framework.
These clients are often frustrated by standard DAF offerings and feel isolated when they don’t know anyone — including family members and peers — who shares their perspective. They’re looking for “my people,” as I’ve heard donors express it. Wealth advisers who can help them find that community are doing an enormous service to those clients as well as to a more just and regenerative future.
Jasper van Brakel is CEO of RSF Social Finance, which offers DAFs and other giving and investing programs for clients who want to fully activate their money for transformative social, ecological, and cultural change. This article was originally published in WealthManagement.com.
