Editor’s note: The ongoing debate regarding donor advised funds focuses largely on whether they need to be more tightly regulated and transparent, and whether they merit the tax advantages they provide. However, we can ask an entirely different set of questions that have much more to do with the ways in which DAFs actually operate: What are the best practices for DAF sponsors who aim both to provide valuable services for their donor clients and to serve their communities in alignment with their values? This post by Liberty Hill Foundation describes their approach.
Donor advised funds (DAFs) are well known for their convenience and incentives to donors. They are anonymous, have no annual payout requirements and place no taxes on capital growth.
And with relatively low startup costs, a public foundation can have a new DAF up and running for a donor in a matter of days.
However, recent debates have raised questions about the fairness and impact of DAFs, and the responsibility of public foundations to ensure that money is flowing consistently from DAFs into communities, rather than idling in accounts.
With a 60% annual payout rate – 70% of which goes to L.A.-based organizations – Liberty Hill Foundation’s DAF holders are particularly engaged in local grantmaking.
Here are 6 practices employed by Liberty Hill that other community foundations can use to maximize the impact of donor advised fund programs:
1. Provide donor education
According to a 2016 study from California Community Foundation and UCLA’s Luskin School of Public Affairs, 80% of Angelenos wanted to do more for their communities, but 40% said they didn’t know how to make a difference.
Community foundations have the power to marshal their knowledge, experience and resources to direct money toward desired outcomes – an extremely valuable attribute for DAF holders who want to boost their impact.
If your foundation has the resources, conduct research into causes that your donors might want to support and relay your findings back to them in an accessible format.
Share dockets of the most impactful organizations or host informational workshops for your DAF holders.
Liberty Hill has hosted sessions on topics ranging from housing justice and youth incarceration, to identifying effective nonprofits and impact investing.
During 40 years of grantmaking sharply focused on Los Angeles, Liberty Hill has accumulated a wealth of institutional knowledge that our DAF holders can rely on to inform their giving. That is one reason 70% of the grants from Liberty Hill’s DAFs go to organizations benefiting local communities.
2. Break isolation
By allowing donors to take a more hands-on approach to grantmaking, DAFs can provide a sense of autonomy.
However, fostering a feeling of community among your DAF holders can also have strong positive effects on their philanthropic behavior.
One way to build connection is through giving circles, in which small groups of donors unite around common causes and pool their resources for greater impact.
At Liberty Hill, 25% of DAF holders participate in giving circles, which specialize in everything from environmental justice to empowering women to lifting up Black communities.
By attending site visits with their giving circles and comparing their notes on grantmaking options, DAF holders interact with one another, share their knowledge and increase their understanding of the funding landscape.
Also, consider bringing your DAF holders together through events or presentations. At Liberty Hill, we hold a Strategic Philanthropy Workshop series, where experienced donors serve as guest speakers, sharing information on topics such as election year giving.
Many of Liberty Hill’s DAF holders are also part of the foundation’s Advisory Council, which brings higher-level donors together for talks and panel discussions with elected officials and policymakers.
These types of gatherings can give longtime DAF holders platforms to have their voices heard and provide ways for newer DAF holders to boost their philanthropic knowledge.
When donors can see how their peers are giving and feel like they are part of the same conversation – or better yet, the same movement – it can foster a culture of highly enthusiastic and ambitious grantmaking.
3. Facilitate meaningful connections
For many DAF holders, the level of connection they feel to the work of grantee organizations will affect how much they are compelled to give and how they approach philanthropy in general.
Encourage your DAF holders to become personally invested in your cause by providing opportunities for them to meet and see grantees in action.
At Liberty Hill, we offer van tours, which allow donors to visit the locations where struggles for social justice are playing out and hear directly from organizers and impacted community members.
Community foundations can also help DAF holders feel connected to the work by exposing them to organizations that match their interests.
Shortly after the 2016 election, Liberty Hill DAF holder Renee Dake Wilson wondered if there was a cohort of young women activists who needed resources to get to Washington, D.C., for the historic Women’s March in January 2017.
Liberty Hill helped connect Dake Wilson with the Dream Resource Center, where a group of young DACA eligible women was hoping for just that chance.
Dake Wilson sent the young Dreamers to D.C. where they proudly marched for the rights of DACA youth and undocumented women and girls.
These powerful interactions with grantees can be the moments that make it all worthwhile for philanthropists and keep them coming back.
4. Aggregate the power of DAFs
Having a sense of alignment among donors opens up possibilities for combining the power of DAFs.
For example, California Community Foundation’s DAF holders joined forces to support a community housing fund that reached $10 million – far beyond the scope of what one DAF could have done on its own.
Liberty Hill’s Queer Youth Fund similarly demonstrates the value of donor collaboration. Founded in 2002 by three DAF holders, the fund has since involved many more donors and granted nearly $5 million specifically to small, youth-led organizations focused on LGBTQ issues.
Furthermore, building a strong brand with a defined mission will help attract DAF holders who are open to collaborating with one another.
If your foundation appeals to donors who are relatively united in their goals, ask them to use their funds to back your foundation’s key grantmaking efforts and seek 100% participation.
When one DAF holder agreed to match grants up to $100,000 to support Liberty Hill’s Agenda for a Just Future policy initiative, other DAF holders were prompted to take action.
5. Invest for impact
Grantmaking is a DAF’s primary focus, but don’t overlook investing strategies. By keeping unspent dollars in socially responsible portfolios, community foundations can make DAF assets work for good even while they are waiting to be disbursed.
Social impact investing is increasingly popular as account holders gain access to more options, such as environmental screens, and see returns consistent with the broader stock market.
Noting that more than 60% of Liberty Hill’s DAF holders are women, the foundation added a gender lens strategy to the list of options for those who choose to keep their funds invested.
This growth strategy invests in large-cap companies that demonstrate strong performance records and include women in significant roles, including chairwoman, CEO and chief financial officer, and have women make up at least 20% of the board or 25% of senior management.
6. Make it simple, make it personal
Lastly, it is important to make using a DAF fund as easy as possible. Provide a secure online portal and a direct personal contact for DAF holders’ grantmaking.
Know their interests and suggest specific places for them to direct their giving. Make sure they understand the value of participating in your DAF program as opposed to navigating the field on their own.
Removing barriers that might inhibit donors from using their DAFs, and providing plenty of guidance and support, help Liberty Hill’s DAFs attain a high payout rate of 60% annually, which they replenish with new deposits for further grantmaking.
Since DAFs provide an excellent entry point into philanthropy, ensuring your DAF holders feel fulfilled can have big returns in the future.