August 11, 2013

Defending a Critique of Popular Funds

To The Editor:

Douglas Kridler’s critique (“Donor-Advised Funds Don’t Deserve to Be Singled Out for Criticism,” Letters to the Editor, July 14) of my May 23 Opinion piece (“Donor-Advised Funds Are Booming, but Nonprofits See Little Benefit”) misses several critical points.

Mr. Kridler asks why I focus on donor-advised funds when there are endowments and private foundations that also hold charitable funds for future use. Actually, I’m not a big fan of endowments or private foundations, either. They, too, warehouse money that often could be put to better use. But that’s an argument for another day and another opinion piece.

I chose to write about donor-advised funds because, unlike private foundations, which have been around in the United States for over a century, and endowments, which have been around for hundreds of years, donor-advised funds (particularly the commercial gift funds) are relatively new vehicles. Moreover, they are growing in extraordinary ways and for the most part are unregulated. This rapidly growing philanthropic sector deserves some special scrutiny.

Mr. Kridler takes issue as well with my objection to financial-services firms receiving a fee for donations to commercial donor-advised funds. He points out that investment firms charge fees for managing charitable endowments, so why do I take issue with their fees from donor-advised funds?

While financial-services firms have traditionally, and understandably, received fees for managing charitable endowments, in that role they are actually performing a service for the nonprofit: managing the funds.

On the other hand, when a financial adviser draws a fee for directing his client’s money into an in-house donor-advised fund he is simply receiving a commission, much as he would when a client invests in a mutual fund.

The financial adviser is not performing any action other than facilitating the transfer to the “charity”—that is, the donor-advised fund.

That, in my mind, is a vastly different role from managing endowments. One of the cornerstones of nonprofit development is that commission-based compensation is unethical. Yet that’s how Wall Street is building its donor-advised-fund empire, and the arrangement is unseemly at best.

Mr. Kridler mocks my “one anecdote” about the donor who creates a donor-advised fund and then essentially never authorizes a contribution.

I agree with him that this sort of abuse is not common, but I will assert that it is also not as rare as many would think.

Certainly, there’s little in the structure of most donor-advised funds to discourage this kind of behavior. A few months ago, I called a major commercial-gift fund and asked: “If I were to set up a donor-advised fund account with you, would I be required to make charitable distributions?” The woman at the other end replied, “Well, if you don’t make any grants over a five-year period, we’ll have to call you and remind you to make one.” There was a bit of a pause. Then she noted, “But our minimum distribution is only $50, so that shouldn’t be a big deal.”

Well, to my mind, it is a big deal. If Mr. Kridler feels that this kind of abuse is so rare, he shouldn’t mind the imposition of a required annual distribution for all donor-advised funds. That wouldn’t bother the majority of donors who give generously from their funds, and it would force those sitting on their accounts to get the money out where it can do some good.

Alan M. Cantor

Concord, N.H. 

Mr. Cantor is a consultant to nonprofits.