What could a world look like where donor-advised funds worked for donors and communities?
By Gabriella ‘Gabi’ Espinoza, Sr. Product Manager, Magic Cabinet
In philanthropy, there’s mounting evidence suggesting that donor-advised funds or DAFs may not be the most effective way for donors to move dollars to communities.
On one hand, DAFs naturally employ several trust-based principles. DAF grants release nonprofits from onerous applications and reporting cycles as well as the burdensome paperwork that comes with them. The grants often provide unrestricted funding to nonprofits, giving them flexibility to get creative with solutions to community needs. A separate, more personal benefit to the donor is that DAFs require very little lift to set up, and the donor can deploy funds to an organization of their choosing at any time.
On the other hand, once funds are transferred into a DAF, there’s no time limit for redistribution, and immediate tax deductions mean donors have very little incentive to move funds out of DAFs to communities. DAFs have been known to facilitate further hoarding of wealth, and often serve as another channel for tax breaks among the wealthy. Couple that with the systems built around DAFs, which primarily serve to sustain and expand donor wealth, and it’s clear that we need to reframe how we talk about DAFs
The Conversation We Should Be Having About DAFs
Letting funds accumulate in DAFs essentially costs donors nothing, and on the surface seems less risky than deploying funds without a plan. But as DAF assets continue to grow—reaching $326 billion in 2024—the risks that nonprofits and communities absorb also continue to increase.
The critiques of DAFs are valid and well-documented. But what many of them fail to capture is the personal dissatisfaction for the donor who has true philanthropic aspirations when opening their donor-advised fund.
For a would-be philanthropist, DAFs are excellent vehicles for earmarking and growing funds for philanthropic giving…and little else. Once a DAF is open and funded, donors are faced with an immense cognitive load before they can even consider moving money. Questions that often arise include:
- What causes and communities should I support?
- What organizations work in those communities?
- How do I vet those organizations?
- How do I give strategically?
These are difficult questions for any philanthropist, and unless a donor is working with a trusted philanthropic advisor, they may struggle to find the answer. In recent years, donor communities, including #HalfMyDAF and DAF Commons, have emerged to support donors as they grapple with these questions, which stem from the sheer gap in philanthropic knowledge and resources available within the DAF ecosystem.
What we’re witnessing in real time is DAF inertia, or the underutilization of DAFs when it comes to the actual deployment of philanthropic dollars. According to the DAF Research Collaborative, DAF assets grew 27% from 2023 to 2024, and the payout rate continues to hover around 20%, or $64 billion. However, this calculation only looks at outbound funds, meaning that the rate includes $7 billion in DAF-to-DAF transfers. So while the rate seems impressive and higher than the payout rate reported by independent foundations (the median remained at 5% for the last five years), it may not tell the whole story. So what keeps donors from fully utilizing their DAFs? Let’s examine a few common misconceptions about DAFs:
Myth 1: DAFs are best used as a ‘rainy day fund’
One cause of DAF inertia is the marketing for DAFs, which encourages donors to stock their DAF as a philanthropic ‘rainy day fund’ for whenever the next crisis arrives. While crises necessitate rapid and flexible funding, that’s not the most strategic use of a DAF. Rather than one-off giving that helps communities in the short term, donors should consider long-term, sustained investment to create real systems change. The dollar today is going to be well-spent, as is the dollar tomorrow. The “perhaps” dollar in seven months is going to have limited impact on the system realities that communities face in the present moment.
For donors, that reality is rarely communicated through DAF marketing, and DAF infrastructure isn’t designed to connect donors with community-based organizations.
What donors think is happening: Traditional DAF marketing has positioned them as the giving vehicle for rapid response funding. So donors fund their DAF as a philanthropic ‘rainy day fund’ to deploy whenever a crisis arrives.
What’s actually happening: Commercial DAF sponsors aren’t designed to connect donors with community-based organizations, so donors are rarely aware of the realities that communities face in the present moment. Without this insight, donors prioritize one-time rapid response giving that supports communities short-term rather than considering multi-year giving that sustains organizations long-term and creates real systems change.
Myth 2: Donors have ultimate control over their DAFs
Perhaps the greatest irony of the whole DAF system (and what should make DAFs the most trust-based vehicle available to donors) is that, by contributing money to a DAF, a donor has technically ceded decision-making power to the DAF sponsor. However, after the initial contribution, the donor’s role transitions to an advisor who makes grant recommendations for the DAF sponsor to fulfill. Historically, this hasn’t caused much conflict as sponsors generally respect the wishes of the donor. However, with the recent blockage of DAF grant recommendations to the Southern Poverty Law Center by the three major commercial sponsors Fidelity Charitable, DAFGiving360 – formerly Schwab Charitable, and Vanguard Charitable, this cessation of charitable decision-making power is more visible now than in the past.
What donors think is happening: Donors open a DAF as a way to accelerate their philanthropic aspirations, whether that’s supporting a specific cause or community they care about or investing in innovative, impactful solutions.
What’s actually happening: After the initial DAF contribution, donors cede power to the commercial sponsor, which now legally controls their funds. Donors then become advisors who recommend grants, and the final decision on which organizations receive funding ultimately lies with the sponsor.
Myth 3: DAFs transform philanthropy
Since their inception, DAFs have become the most used giving vehicle by donors and have transformed how they think about and engage in charitable giving. On the surface, DAFs seem like an innovative way to fund causes donors care about–but they often exacerbate some of the same problems inherent in traditional philanthropy. There’s little to no transparency into donors or their DAFs, so nonprofits face a guessing game when trying to procure DAF donations. Also, when donors hold onto their DAF dollars for the ‘rainy day,’ this perpetuates the feast-or-famine cycle for small, community-based organizations that see temporary, short-term influxes of capital during galvanizing moments like protests, natural disasters, or acts of violence that don’t translate into long-term support.
What donors think is happening: Donors think they’re using an innovative giving vehicle that helps nonprofits, without the burden.
What’s actually happening: DAFs perpetuate the challenges inherent in traditional philanthropy, albeit in a new space. They introduce additional complexity to the relationship between nonprofits and donors, making it more difficult for organizations to get to know donors and properly steward the relationship.
How donors can use their DAFs to support communities
So what’s the solution? Should donors forgo DAFs completely?
Not quite. We recently spoke with 50 individuals representing perspectives across the spectrum of donor advising and philanthropy, including financial advisors, philanthropic advisors, policy experts, and movement-driven intermediaries. Across these conversations, one key solution emerged: donors should prioritize giving directly to community intermediaries.
These intermediaries, as the experts in movement spaces, already make grant decisions in close partnership with the communities they serve. Their portfolio of nonprofits is curated to invest in whole movements, rather than merely funding disparate organizations, something of a power-building index fund.
For donors who may be unsure about identifying the “right” nonprofits to fund, intermediaries have already cultivated deep relationships with partner organizations that are finding creative and innovative solutions to pressing needs in their communities. As one foundation executive director we spoke with stated, “Not every investment has to be perfect. How can you give while also learning?”
These community-advised intermediaries are also eager to work with donors who want to feel a sense of connection to the movements happening in communities. A development director at an intermediary funder posed this question to donors: “How can I help you make a bigger philanthropic impact? Let me partner with you to move these resources.”
For donors who want to put their philanthropic dollars to work in service to community-led movements, this kind of partnership is an incredible way forward from the inertia they may be facing in DAFs. All it takes is a little trust.
