Just in time for the yearend charitable giving season, The Chronicle of Philanthropy recently reported that Fidelity Charitable surpassed United Way as the top nonprofit to raise the most money from private sources.

Fidelity Charitable is a donor-advised fund (DAF). DAFs are a relatively recent charitable phenomenon whereby donors contribute assets (cash, marketable securities, real estate, etc.) to a public charity that maintains and manages these assets in an account and in turn makes disbursements to charitable organizations at the donor’s direction. Technically the DAF has final ownership and control of assets in the account, but, in practice, donor intent is honored. And, most importantly (and most attractively for donors), DAFs are not subject to the strict IRS oversight to which private foundations are subject.

Assets in a DAF can grow over time, and indeed this is one of the selling points one finds in Fidelity Charitable’s marketing materials. But this also means that DAFs reap more fees over time, and in the cases where a DAF is the spinoff of a financial services company (such as Fidelity or Vanguard), financial services companies themselves stand to reap more fees over time. It is in the interest of the financial services industry to have donors give to and through DAFs rather than directly to charities. The financial services industry only stands to benefit from the maintenance of assets in DAFs instead of the application of such assets in charitable programs that actually help our neighbors and better our neighborhoods. The longer that assets sit in a DAF, the more fees and trade commissions rack up.  Additionally, DAFs—including Fidelity Charitable—charge an administrative fee of 0.6% on each account. Fidelity Charitable states that it has over 100,000 donors.

In 2014, Fidelity Charitable took in $4.6 billion in contributions and paid out $2.8 billion in grants. The organization ended the year with $15 billion in assets. At .06% that’s $90 million in fees—for what is essentially passive income (the opening and maintenance of accounts). [i] DAFs are a no-brainer for financial services companies like Fidelity.

The donation of appreciated assets in order to both avoid capital gains tax and to take advantage of the charitable tax deduction for the fair market value of the assets is nothing new. Many charitable organizations accept gifts of appreciated assets. But DAFs are often more attractive than private foundations because they cost significantly less to the donor, there are no annual disbursement requirements, and disbursements are not directly tied to the donor (e.g. John Q. Donor who has an account at Fidelity Charitable can donate to the group “The Life You Can Save,” without his friends, enemies, or the media knowing that he gives to an organization founded by a man who supports infanticide. Were Mr. Donor to open his own private foundation, his foundation’s grants to Peter Singer’s pet projects would be public knowledge and tied directly to Mr. Donor). In short: DAFs benefit the 1% with respect to both tax planning (or dare we say tax avoidance) and secrecy.

Fidelity Charitable—like many DAFs—is primarily marketed to donors and prospective donors on the basis of tax planning benefits, not the virtue of charity.

The result—in soundbite terms—is that Fidelity Charitable rapidly tops the charts in terms of dollars raised, beating out venerable human service organizations like the United Way, the Salvation Army, and the American Red Cross.

The result—in tangible, human terms—is that millions go to bed hungry while millions of millions sit in a Boston bank account managed by well-fed, well-clothed, well-housed financiers. 

For recent articles on donor advised funds and the future of philanthropy, see how new data released by the Chronicle of Philanthropy sheds some light on how these funds are being used. You can also read Martin Morse Wooster's piece on the pits and falls of donor-advised funds.

[i] That’s before the donor’s advisor at Fidelity Charitable suggests that the donor invest his donation in a Fidelity index exchange-traded fund (ETF) with an (admittedly low) expense ratio of .05%-.1%. Managed securities like ETFs and mutual funds—likely vehicles for investing assets in a DAF—reap more in fees for individual companies and the financial services industry as a whole over time.