New Donor-Advised Fund Pushes to Keep the Cash Moving

A financial-services company with deep roots in progressive politics today announced the creation of a donor-advised-fund service that will push donors to distribute at least 10 percent of their accounts annually to charity, a move that other major players in the fast-growing field have resisted.

In addition to agreeing that they will distribute a tenth of their accounts to charity each year, donors holding accounts in the charitable arm of Amalgamated Bank will have the option of carving out 1 percent of their accounts for a communal fund to be administered by Amalgamated advisers.

Those wrinkles will help differentiate the funds from donor-advised funds created by other financial companies, said Anna Fink, executive director of the Amalgamated Charitable Foundation. Those donor-advised funds, which steer investment-management fees to their parent companies, tend to focus on transactional efficiency rather than improving the world, Fink said.

“Our collective role is to be a financial partner to the social-change field so we don’t have an incentive to just keep the resources sitting in investments,” Fink said. “For us, it’s great to see the money going out to nonprofits. We want to create a community that’s inspired and excited about engaging in social change together.”

If a donor doesn’t meet the 10 percent threshold, Fink said, Amalgamated will work with that donor to come up with a plan to achieve that goal.

“We will reach out regularly with collective giving opportunities to encourage and inspire donors to meet their pledge,” she said, adding that the organization has not finalized policies for “orphan accounts” that have been inactive for long periods of time.

The pledge has the ability to change the mind-set surrounding donor-advised funds, according to Ray Madoff, a law professor at Boston College.

“Too many DAF sponsors subtly encourage donors to think of their DAF Funds as something to preserve for later rather than as something to put to work today,” said Madoff, who is director of the law school’s Forum on Philanthropy and the Public Good.

Roots in Organized Labor

Amalgamated was created in 1923 by the Amalgamated Clothing Workers of America labor union. It now is a B Corporation, meaning it has met a series of environmental and social business operations and investment goals laid out by B Lab, a nonprofit certification group. It has $4 billion in assets and manages the finances of left-leaning political organizations, labor unions, nonprofits, foundations, and individuals.

Last year it spun off the Amalgamated Charitable Foundation with more than $1 million in seed money for grants and operational expenses. It also detailed staff to the foundation to develop the donor-advised-fund offering.

Donor-advised funds allow people to create an account and take an immediate charitable deduction for their gift. The money is controlled by sponsoring organizations that invest it and parcel gifts out to charities on the advice of the original donor.

Over the past decade, commercial donor-advised funds started by investment houses such as Fidelity, Goldman Sachs, and Schwab have grown by leaps and bounds. Fidelity, in fact, now leads the Philanthropy 400 list of charities that raise the most in private support. The growth has come in part because the commercial funds have a deep network of financial advisers to steer donors to them and they can promise donors an easy way to integrate their philanthropy with their broader financial plans.

Fink believes Amalgamated’s banking experience can offer that ease of use, combined with investment funds that may appeal to liberal donors by steering clear of oil and gas companies. It also has a group of advisers that can suggest grantees that might interest progressive donors.

“There’s a real need for a values-aligned donor-advised fund that has the backing and financial acumen of a financial institution,” she said.

Payout Rates Disputed

Critics of donor-advised funds have long pushed for rules that would require minimum payout rates. Responding to those concerns in 2014, then House Ways and Means Chairman Dave Camp unsuccessfully pushed for an excise tax on sponsoring organizations for funds that weren’t directed to charity within five years. Despite efforts to rekindle the issue last year, legislators did not include a payout requirement in the broad tax overhaul that was signed into law in December.

Organizations that sponsor donor-advised funds calculate payout rates in different ways.

Fidelity prefers to highlight the money moving through its accounts on a “first in, first out” basis that looks at contributions to a fund one year and charts how long it takes for those gifts to be distributed to charity over a five-year period. Using this method, Fidelity found that, on average, 38 percent of amount contributed was funneled to charities within a year, and 74 percent was sent out within five years.

In 2012, Paul Arnsberger, a senior statistician at the Internal Revenue Service used a different method and concluded the median payout rate was 7.2 percent at 2,121 donor-advised-fund sponsors. Arnsberger used aggregate asset and grant figures rather than attempting to chart payouts at the individual fund level. Using Arnsberger’s method on a smaller universe of the nation’s largest donor-advised-fund sponsors, the Chronicle pegged the median payout rate at 14 percent in 2013.

Growing Movement

Other nonprofits have tried to benefit from the donor-advised-fund movement by starting their own in-house accounts. Some, like Amalgamated, have an ideological mission. DonorsTrust, a conservative nonprofit that encourages gifts to groups that work to limit the size of government, manages funds that totaled about $187 million at the end of 2016, according to the most recent IRS records available. Proteus and Tides, two organizations that manage pooled funds dedicated to progressive causes, also offer donor-advised funds.

Proteus managed nine accounts with an aggregate value of $4.7 million at the end of 2016. Tides managed nearly 300 accounts valued at about $138 million, according to filings with the IRS.

Jason Franklin, Proteus’s board chair, thinks Amalgamated is positioned to use its client base of unions, nonprofits, and political organizations to become much larger.

But Amalgamated has a long way to go to catch up to Fidelity Charitable, which held $21 billion in net assets as of June 31, 2017, and manages 93,000 accounts. But Franklin thinks Amalgamated’s donor-advised fund business has potential to grow substantially because it is built on the same model as the larger sponsors of donor-advised funds that are affiliated with financial-services giants.

“The fact that they were built on top of a financial-services platform allows them to leverage the scale of the firm to provide more transactional donor-advised-fund activity,” he said about Fidelity, Schwab, and the other commercial donor-advised-fund sponsors. “Amalgamated could be an interesting platform if they’re able to provide a progressive alternative to Fidelity.

“It’s a question of scale,” agreed Jenifer Fernandez Ancona, vice president for strategy at the Women Donors Network. “From a donor’s perspective, if they want to put their money in a financial institution, Amalgamated would provide them the opportunity to do that and also remain rooted in progressive values,” she said.

New Partners

Fink stressed that Amalgamated sees organizations like Proteus and Tides as potential partners in promoting collective giving opportunities. The fund has already opened an undisclosed number of “pilot” accounts. Fink is confident the fund can attract donors of all types. She is in discussions with donor networks in which donors’ investment “appetite” ranges from $25,000 “to the multimillion level.”

Some organizations without financial and banking expertise underestimate the difficulty of managing donor-advised funds, said Ken Nopar, senior philanthropic adviser at the American Endowment Foundation, an independent donor-advised-fund sponsor, who spoke before the Amalgamated announcement.

Assets managed by his organization had doubled to $2 billion over two years. He thinks many more donors will join in.

Said Nopar: “I don’t think we’re near the saturation point.”

Corrections: A previous version of this article failed to make clear that Fidelity Charitable, not its commercial affiliate, had $21 billion in net assets last year. Also, this article has been changed to properly reflect American Endowment Foundation’s doubling in size over two years and to clarify Ken Nopar’s view that the donor-advised-fund market is not near saturation for donors.