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By Diane Schrader, Co-Founder & CEO, thirdACT PBC
Everything changed at the 2019 Climate Salon, but I didn’t know it yet. A multifamily office asked me to develop an investment product for donor advised funds (DAFs). They wanted to encourage their clients to invest with their DAFs and thought our products would fit well. I was initially bewildered by this request. After all, aren't DAFs meant to be "giving accounts"? My interest was piqued, and I decided to dig deeper. What I discovered surprised me. DAFs are not just giving accounts - they are investment accounts. In fact, only a small fraction of assets is granted in any given year. DAF assets under management had reached an all-time high of over $120 billion, a figure that has nearly doubled since then. (To put this in perspective, the entire US venture capital industry raised $163 billion in 2022.) The question that came to my mind was, why was this investment capital such a secret?
Let’s start at the beginning. DAFs are a simple vehicle to pool capital for the public good. Donations are recorded on the balance sheet of DAF sponsors, with donors receiving tax benefits. Although donors no longer have control of the money, most DAF sponsors are eager to receive recommendations. There are two directions for this money to go: roughly 20% of assets under management (AUM) are granted each year, while the rest is invested. As the capital is meant for the public good, assets can grow tax-free. DAF sponsors may be non-profits, but this is big business. As of 2021 (the latest data), DAF AUM had reached an astonishing $235.96 billion. While donor contributions have grown, this is primarily due to market gains from the invested funds.
Where is the investment going?
According to 2020 data, a staggering 73% of DAF assets are held in national DAFs such as Fidelity Charitable, Vanguard Charitable, and Schwab Charitable. Much of this capital goes back to the sponsored investment firms, such as Fidelity, Vanguard, and Schwab. However, a movement, if not an uprising, is challenging this norm. If the capital is truly intended for the public good, shouldn't there be more impactful ways to invest than putting it into an ETF?
In 2020, I launched the DAF Salon to shake things up, to use of DAFs for impact investments. Since then, the Salon has become the go-to source for thought-leadership in the industry, hosting 28 Salons that have attracted over 1,200 attendees. Here's what the DAF Salon has taught me:
When people learn that they can invest with their DAF, most go through the three stages of grief. At first, there’s denial: "If one can recommend investments with DAFs, why didn't my wealth advisor tell me? Why didn't my DAF administrator tell me?" This is followed by anger directed at those same parties. Eventually, acceptance sets in, leading to amazement at all the opportunities that DAF investments present. It’s working. In just three years, the entire industry now embraces this change.
Some national DAF sponsors are stepping up by developing teams dedicated to supporting their clients with a diverse array of custom investments, including recoverable grants, loans, funds, and even direct investments into startups. A cottage industry of intermediaries is budding too. At the DAF Salon, we feature at least one of these opportunities each month, while also helping attendees understand the legal, tax, and other related topics that come with investing through a DAF. It's clear that DAFs are no longer just for traditional charitable giving but are quickly becoming a powerful tool for impact investing.
And if you’re wondering, our DAF investment product today serves as a shining example of the power of the DAF investment movement. It's been enthusiastically embraced by a range of family offices and their DAFs, including Vanguard Charitable, Schwab Charitable, ImpactAssets, Realize Impact, and a community foundation. The fact that these influential organizations are backing our investment product is a testament to the growing recognition of the potential for DAFs to maximize their impact on the world.
Do you have a DAF and are you looking for ways to maximize your impact? Would you like to turn your DAF into an intergenerational endowment? Would you like to teach your children how to become impact investors? Look no further than the DAF Salon. Whether you're a seasoned investor or new to the world of DAFs, the DAF Salon has something to offer. To learn more, visit our website at www.daf.salon.
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