The ongoing debate over donor-advised funds – is it an unjustified $ 142 billion tax evasion resulting in asset hoarding or a boon to nonprofits and donors? – has masked what many donors find the most compelling use case for DAFs: as a tool for experimenting with new ways to challenge the orthodoxy of philanthropy and directly address systemic inequalities.
This is especially true for customers who are prepared for current criticisms of philanthropy and may hear negative messages about DAFs. It pays to counteract these messages, because for customers who see themselves as innovators and want to learn and grow as philanthropists, DAFs offer advantages that no other philanthropic financing instrument can offer:
- Their minimal operating restrictions allow experimentation with creative donation structures that maximize impact.
- Their flexibility allows mission-oriented DAF sponsors to offer ad hoc collaborations with other donors, e.g. B. pooling funds to launch potentially transformative projects. and
- Their low overhead and simplicity make risk-taking more attractive and open up opportunities to maximize the impact of the DAF assets invested and the funds granted.
A chance to lead with innovative grant award strategies
We see many donors – especially in the emerging generation of asset owners – who are excited about the opportunity to help shape fair, community-based donation approaches. They question the relationship between money and power and look for ways to reflect the change they want to see in the world. RSF Social Finance has worked with donors on three models:
- Flow fundingwhich gives authority to grant grants to nonprofit executives, social entrepreneurs, and community leaders with years of experience in a specific area. The donor usually selects the subject area and invites community leaders to distribute the funds.
- Shared giftwho gathers 6 to 10 local nonprofit leaders for a day to review each other’s suggestions, ask questions, and decide how to distribute the donor grant among themselves based on their own criteria; and
- Community-led fundingThis means that the community leaders are fully responsible in the donor’s area of interest. Donors provide ongoing financial support and community leaders have maintained autonomy in the distribution of funds.
These are just three approaches behind which there is new donor energy. We are seeing a real increase in donor interest in using their DAFs to develop novel grant delivery methods that can truly solve our systemic problems and increase the impact of philanthropy in general.
Innovative investment strategies increase the effect
The easiest way to remove the burden of having assets only in DAF accounts and not benefiting anyone is to work with a DAF sponsor who will invest them for the effect. DAF sponsors offer a range of options called “Impact”, from simple socially verified mutual funds to donor-led impact investments. Customers looking to amplify the impact of every dollar can focus on creative approaches like these:
- Recoverable Grantswho circulate money back into the DAF so that it can be reused to support other promising social enterprises or initiatives;
- Loan guarantees and equity transactionswho use DAF assets as risk mitigation for large funders who would otherwise not invest in potentially system-changing projects; or
- Catalytic asset managementThis offers an alternative to the spend or perpetual approaches: retained assets are invested for maximum impact at potentially high risk, assuming that a likely negative return will weigh on the assets over time.
One big donor told me, “If I put a dollar in my DAF and you do all sorts of catalytic things with it and I get 90 cents back, that’s great.” Your perspective is, why try to make a financial return on funds that are going to be used for charitable purposes? Let’s focus on the impact return.
Find the right fit
Gift money plays an important role in economic life. As the most flexible, catalytic, and risk tolerant capital, it is ideal for strengthening communities and funding systemic change – when it’s a real gift that doesn’t have many strings attached. For customers who want to take advantage of this potential, DAFs can be both an easy entry point and a long-term strategy: DAFs can complement the work of the foundations and test models that could be used for larger grants under the foundation.
These customers are often frustrated with standard DAF deals and feel isolated when they don’t know anyone – including family members and colleagues – who shares their point of view. They are looking for “my people” as I have heard from donors. Wealth counselors who can help you find out that the community is serving these clients tremendously and creating a fairer and more regenerative future.
Jasper van Brakel is CEO of RSF Social Finance, which offers DAFs and other donation and investment programs for customers who want to fully activate their money for transformative social, environmental and cultural change.