Each year, thousands of clients open donor-advised funds (DAFs) on their own. Some open them at the very end of the year, even though their advisors recommended opening them much earlier with the advisors’ preferred DAF sponsor.
Because there are over 350,000 DAFs, more clients are aware of DAFs than ever before and find DAF sponsors by various methods. Some large DAF sponsors advertise directly to clients, thus bypassing their advisors. Occasionally clients’ friends or relatives recommend a particular DAF sponsor, and some nonprofit organizations now even encourage their donors to establish DAFs with them. Consequently, some clients don’t contact their advisors to see if they can help them open a DAF, even though it’s in their best interests to work through their advisors and discuss charitable planning with them.
These clients who open DAF accounts on their own, especially those who rush to do so at the end of the year, don’t realize that some DAF sponsors may charge higher fees, may not allow accounts to be passed down to their children or other successor advisors, may have significant limitations about how much can be granted or to which charities they can make grants, may have limited and substandard investment options, and don’t allow their financial advisors to manage these assets.
Fortunately, however, even though these DAF may have been set up elsewhere, advisors and their clients still have a viable solution. Most DAFs are portable, so advisors and their clients can simply and quickly establish a new DAF at another sponsor that allows the advisors to manage the assets, and then they can recommend a closing grant from the old DAF sponsor to the new one.
The minimum account size for an advisor to manage their clients’ DAF assets varies significantly from one DAF sponsor to another, and some don’t allow advisor management at all. Fidelity Charitable and Schwab Charitable allow management at $250,000, while the largest independent DAF sponsor, American Endowment Foundation, lets advisors manage DAFs at all sizes starting at $10,000.
There are situations in which it makes sense for clients to have a separate DAF in which the advisor isn’t involved. If advisors determine that these other accounts are very small and will never grow, and that their clients will quickly grant out what they contribute to them, it probably makes sense that these accounts stay with the other DAF sponsors.
However, if charitable giving and planning is important to the clients and the DAF will continue for a number of years, grow over time or is part of their estate plan, then it’s very important that the clients’ financial advisor is involved and invests the assets in the DAF account.
Management of Investments
Because the amounts in these DAFs grow tax-free and may increase to a significant amount, donors benefit by entrusting the management of these assets to the professionals who they rely on to manage their other investments. This will enable clients to increase these charitable assets so they’ll be able to donate more over time to their favorite charities and have the impact that they desire.
Ken Nopar is the senior philanthropic advisor for the American Endowment Foundation donor-advised fund.