These Funds Are a Missed Opportunity for Some Advisors

Donor-advised funds can provide a lot of value to an advisor’s practice and allow them to bill on assets they otherwise couldn’t, according to Schwab Charitable’s Fred Kaynor.


Illustration by RIA Intel

For the first time since its founding in 1999, Schwab Charitable, an independent 501(c)(3) nonprofit affiliated with Charles Schwab, donors made more than one million individual grants to about 120,000 charities. And despite economic uncertainty and tumultuous markets, the total dollar amount of grants through Schwab Charitable in fiscal 2023 grew by 8 percent, or nearly $350 million, over the previous year.

Since its founding, Schwab Charitable and its donors have granted more than $29 billion to 235,000 charities. The organization works with nearly 3,500 advisors, who advised 77 percent of Schwab Charitable’s donor account assets in fiscal year 2023.

Fred Kaynor, managing director of marketing and business development, sat down with RIA Intel to discuss the role of donor-advised funds and explain why financial advisors should add charitable giving to their wealth management plans. Responses have been edited for clarity and length.

What are donor-advised funds, and how do they work?

It’s a threefold proposition: contribute, invest, and grant. Donors contribute to the account, and then those assets, if they’re not cash, are liquidated and deposited into the account. They then invest those assets, hopefully for growth, during the period in which they’re in the account, and then, when they’re ready, they grant those assets, or recommend grants for those assets, to their favorite nonprofit 501(C)(3) charity. Our donors generally contribute a variety of assets: cash or liquid assets, along with non-cash assets such as publicly traded securities, restricted stock, art and collectibles, real estate, private business interests, and so forth.

So instead of having to sell the assets first and then donate the proceeds to charity, they donate or contribute the assets to their Schwab charitable account and we liquidate those assets on their behalf. This way, they avoid the capital gains they would otherwise have incurred if they sold the assets themselves, which often means that there’s significantly more available to go to the charity they’re supporting. When they’re ready to grant to charity, either they or their advisor will process a grant recommendation in which they simply input the name of the nonprofit organization, which has to be a 501(C)(3) nonprofit in good standing with the IRS. Once they identify the organization and indicate how and where they would like the gift to be designated — for example, on behalf of, or in honor of, someone — we generate the letter with that information, along with the check, and off it goes. It’s a really efficient, tax-smart, low-cost solution that advisors can use on behalf of their clients to help them maximize the impact they want to make.

Who manages these accounts?

It depends upon the kind of account they have, whether it’s a core account, meaning a more self-directed one, or a professionally managed account, which is managed by an independent adviser on the donor’s behalf. They can invest in several different ways. They can choose from a pre-selected list of about 15 investment pools, ranging from large cap to index to socially responsible, or, if their account is managed by an advisor, he or she can incorporate additional investment options.

How do market fluctuations and economic uncertainty affect donor-advised funds?

One of the great qualities of a donor-advised fund account is that people can contribute to the account when they have the resources and assets to do so. So, for example, you might have a philanthropically inclined donor who takes a company public, or retires, or has a large inheritance, but who doesn’t know what charities they want to donate to or how they want to donate. With donor-advised funds, they don’t have to worry about that. They would make that one contribution to their donor-advised fund account, qualify for the tax deduction, potentially avoid a capital gains tax and then be free to plan out their giving over time.

Now, let’s say we have a year like we just did, where we saw lots of economic volatility and market fluctuation. People weren’t necessarily in the position to contribute as much as they had in years past, but if they were using a donor-advised fund, they already had those assets set aside for charitable giving. So what’s really remarkable and what speaks to the strength of this mechanism is that even though research has shown that total giving in the United States declined in 2022 — which is only the fourth time in four decades that donations did not increase year over year — people gave more from their donor advised fund account at Schwab Charitable than ever before in the history of our organization.

Would Schwab ever deny a donor request to transfer funds to a charity?

Very rarely. We have about two million 501(C)(3) nonprofits in our database. It’s basically the IRS database of nonprofits, so as long as they’re in good standing with the IRS and the funds aren’t going to a direct donor benefit — such as paying for their child’s college tuition or something like that — then generally no. There are also situations in which we can’t honor a request — for example, if they tried to donate to a 501(C)(4), which is a political advocacy group. There are also some rare cases in which a charity that would qualify to receive a contribution, such as a local house of worship, isn’t in our database. But part of the service we offer to donors and their advisors is that we will contact the charity and request that they complete the requisite paperwork to get in our database. Once they do that, we honor the grant recommendation and approve and fulfill the grant.

Who does this make sense for? Is it only for someone who has suddenly received a large inheritance and wants a way to donate over the long term?

This is a way for people to fulfill both their short- and long-term philanthropic goals. Some people give regularly to charities, but other people want to fulfill a long-term philanthropic goal and extend their legacy beyond their lifetime. The donor-advised fund provides that sort of efficient mechanism and a one-stop-shop way to do so. For example, they could establish a John and Elizabeth Smith Scholarship Fund for UPenn med students, or something like that, a move that might require more assets than they have on an immediate, near-term basis. They can use the fund to grow those assets for the scholarship fund.

There’s also a third category that provides opportunities to fund things that might arise on a more ad hoc basis. We partner with an organization called CDP, the Center for Disaster Philanthropy, an organization that provides us with a list of pre-approved nonprofit organizations that support disaster relief and recovery as it occurs. In fact, over the last couple of years, with all of these enormous humanitarian and natural disaster crises, including Ukraine, hurricanes, tornadoes, and floods, we saw a huge spike in giving from our donors to CDP organizations.

Do you require a minimum account balance or a minimum grant?

The minimum grant amount is $50, and there are no minimum account balances. But the goal would be for them to use the account as their primary giving vehicle. So we hope that there aren’t a lot of zero balance accounts, and that a lot of people contribute to and grant from their accounts on an ongoing basis.

The purpose of our solution is to democratize philanthropy — we want this to be accessible to everyone who is philanthropic and wants to give with the maximum impact. We firmly believe that this is a solution that’s suitable for everyone with a charitable intent. We do see that a lot of people who use these accounts tend to be more high net worth or ultra-high net worth. But it runs the gamut in terms of the demographic breakdown, from people of very modest means to people who are highly resourced.

How do advisors play into this whole ecosystem of donations?

We have this benchmarking survey that we send out to a large community of Schwab custodial advisor relationships, and for the third or fourth consecutive year, an enormous number of those advisors have rated charitable planning as one of the top value-add services that they provide to their clients. And frankly, there are two reasons for that.

First, philanthropy and charitable planning is becoming more and more important to advisors with high-net-worth and ultra-high-net-worth clients. They recognize that as charitable giving grows in importance to these particular clients, they as advisors need to embrace it as a practice, because it’s a way for them to deepen and broaden those relationships.

Second, 90 percent of affluent households already give to charity. These households want to realize the same efficiency with their giving as they do with their savings and other investments. A huge wealth transfer is coming, and with that transfer, we believe that these charitable discussions are one of the best and most effective ways for advisors to deepen their client relationships with the current generation.

Additionally, through Schwab Charitable, advisors can bill charitable assets that they’re actively managing on behalf of the donor in a way that they wouldn’t be able to if the client was giving directly to charity. If an account requires a balance of $250,000 or more, an advisor can assess a fee of up to 1 percent for managing that account on behalf of the donor.

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