March 31, 2020 | Read Time: 4 minutes
In 2010, a group of investors associated with Calvert Impact Capital spun out a nonprofit called ImpactAssets to offer donor-advised funds to clients who want their money invested in ways that are designed to generate social or environmental benefits. A decade later, ImpactAssets manages donor-advised funds for 1,200 clients. It has $1.1 billion in assets under management — more than all but the dozen or so biggest U.S. community foundations.
It’s just one reason those community foundations — about 800 in all — are worried, or should be. They need to step up their game to compete with what feels like countless options available to donors, which include not just other providers of donor-advised funds and private foundations but lightly regulated limited-liability corporations.
“The number of platforms that you can use to execute your philanthropic goals has increased geometrically,” says Gwen Walden, a senior managing director at Arabella Advisors and board member at the East Bay Community Foundation.
DAF sponsors include low-cost, large-scale organizations like the charitable arms of Fidelity, Schwab, and Vanguard; Wall Street firms like Goldman Sachs and J.P. Morgan that cater to the rich; religious charities and elite universities; and providers with a political bent such as Donors- Trust on the right and the Tides Foundation on the left. There are donor-advised funds that channel money to groups that serve women, Latinos, and LGBT people.
All of these competitors can take advantage of existing relationships with investors, or alumni or congregation members, to turn them into donors. By contrast, the community foundations have relied on local elites — bankers, accountants, lawyers, and stockbrokers — to encourage their clients to give locally. But those local elites aren’t what they used to be because their businesses have been consolidated into global firms with weak ties to any particular place.
It’s no wonder that community foundations are losing market share to bigger players.
“The perils loom large for a community foundation dependent on DAFs,” says Kevin Murphy, chief executive of a community foundation in eastern Pennsylvania and author of a report on community funds for the Council on Foundations.
Pressure to Raise More Money
Like operating charities, community foundations must raise new money every year to avoid decline. If their assets fall, so do the fees they collect to support their operations. Despite concerns that DAFs are used to hoard charitable dollars, community foundations awarded $9 billion in grants — a bit more than 10 percent of their assets — in 2018. That’s welcome news for the charities they serve, but it is “a lot of money that you have to raise to be the same size every year,” Murphy says.
The Silicon Valley Community Foundation is a case in point. It brought in $1.86 billion in contributions and made $1.4 billion in grants to charities in 2018, nearly all from donor-advised funds. By law, the donor-advised funds belong to the foundation. In practice, they are controlled by about 1,150 donor families, over whom the staff of the foundation has limited influence.
No more proof of that is needed than the fact that donors moved another $600 million out of the Silicon Valley foundation to community funds in San Francisco, the East Bay, and Marin County, as well as to commercial DAF sponsors, notably Schwab Charitable, which received $451 million in transfers. In keeping with its pledge to keep donors anonymous, the foundation won’t say who pulled money out. Still, more money flowed out of the foundation than came in during 2018.
To be sure, 2018 was an annus horribilis for the community fund: Emmett Carson, its founding chief executive, and Mari Ellen Loijens, its head of fundraising, resigned after the Chronicle reported on its troubled workplace culture and an independent investigation confirmed the problems.
The trouble is, grant money that flowed out also exceeded contributions in 2017. The audited data for 2019 is not yet available, but the foundation estimates that it brought in $1.35 billion in contributions and made $1.26 billion in grants. It did not say how much money was transferred to other DAFs, but those transfers may well have wiped out some or all of that $90 million surplus.
More than most community foundations, Silicon Valley needs to replenish its donor-advised funds every year because they represent more than 90 percent of the foundation’s assets. Fees generated by those funds support the foundation’s operating budget of about $25 million a year. Unless stocks bounce back quickly or donations grow rapidly, the foundation’s assets, fees, and operating budget will shrink in 2020.
Greg Avis has unique insight into the landscape of donor-advised funds. He was the first board chair of the Silicon Valley Community Foundation and became its interim CEO for eight months after Carson’s departure. He is also a board member of Schwab Charitable.
Schwab, Fidelity, and Vanguard all offer superior technology and charge lower fees than most community foundations.
“There is an existential threat to the community foundations from the commercials,” Avis says. “It’s the number-one strategic issue they’re facing.”
