Leah Davenport Fadling: Hello, everyone, and welcome to another episode of Fundraising Today and another episode of Go Beyond Fundraising podcast. My name is Leah Davenport Fadling, and I’m excited to welcome a new guest to our show today. His name is Mitch Stein, and you are coming to us from Chariot. And you serve there as the Head of Strategy.

I’d love to know a little bit more about your role, how long you’ve been at Chariot, what Chariot is, before we get into today’s topic, which is donor-advised funds (DAFs). Mitch, welcome to the show!

Mitch Stein: Thank you so much for having me. Excited to be here and excited to share more with everyone that’s listening or watching. So, Leah, you mentioned that I work for a company called Chariot. I’ve been involved with the company for almost a year. I joined full time this fall in the position of Head of Strategy. It’s a relatively new and fast-growing company, so I have to wear lots of hats. But I focus on long-term strategy, different ways of growing the business and improving the product and engaging with our audience. And I take on a lot of our marketing and content creation, especially educational content creation.

I think anything around donor-advised funds is scary or intimidating, or it spurs a lot of emotional reactions in people, which we’ll dig into today. And so, the big priority is creating more resources and educational opportunities for people around DAFs.

And what Chariot is: it’s a donor-advised fund fundraising solution provider to nonprofits. We have a solution called DAFpay, which is a payment option that sits directly on any nonprofit’s website or donation form or campaign pages. Wherever a donor might donate digitally to your organization, we want them to be able to use their donor-advised fund. Historically, they would have had to log into their bank account and take all these onerous steps to actually send a gift. It took weeks of time. You didn’t even know who it came from usually or if it was submitted or anything.

With Chariot’s tools, you prompt those gifts. You get their name and email right away, and we actually process them, so you get the gift digitally direct into your bank account in this same format with the same data no matter which DAF it came from.

So, a huge step change in the experience around donor-advised funds that we’re really excited to keep expanding and improving. And we’re working with several thousand nonprofits today including American Cancer Society, Susan G. Komen, Michael J. Fox, PETA, etc. It’s just been really amazing to see it out in the wild and working and getting more of those DAF dollars into nonprofit’s hands where they belong.

Leah Davenport Fadling: Yeah. That’s so great to hear. There’s a couple of friends on that list that you mentioned that are also clients over at Allegiance Group, so always excited to see a few names and logos that we recognize there that are leveraging this tool.

Let’s get right into the topic of donor-advised funds. It’s a big one. I think I see questions about donor-advised funds on every webinar that I attend or every podcast that I listen to where they’re talking about nonprofit fundraising and marketing trends for 2024. And there have been a couple of, I would say, maybe not so positive articles out there. There’s a couple that come to mind from inequality.org on donor-advised funds. There’s a lot of suspicion out there about them. So, I’d love to get into some of those suspicions or hang-ups or questions about donor-advised funds because I’m sure a lot of nonprofits and fundraisers that are listening today can see themselves in those questions.

So, Mitch, I know that’s a big load of baggage I just handed to you, but let’s dig right into it.

Mitch Stein: No, that’s what we’re here for. And it’s more interesting to talk about things that are maybe a little controversial, so I’m here for it. And I would say, to be clear, Chariot does not manage a DAF. We are not a DAF provider. We’re actually the first person in this space to build tools for nonprofits to engage with DAFs. So, it puts us in a really interesting position to finally have someone that’s on the nonprofit side in these conversations thinking about how to improve this system. So, I definitely don’t shy away from saying there’s a lot of issues with DAFs.

What I think is important, and we’ll get into them in more detail, but I would just want to call out — because I hear it a lot when the topic comes up — where a nonprofit fundraiser (says), “Oh DAFs are bad. We don’t like DAFs.” And it’s just a way people donate. It’s like saying, “We don’t like checks, so we’re not going to receive your check.” Or “We don’t like credit cards.” It is a way of payment, and I think especially with the tools and infrastructure Chariot’s building, will be more and more that way. And so, we can talk about why that’s a long-term good thing for nonprofits.

But, to get at your question specifically, what’s wrong with DAFs? Why do people gripe about them? I think the answer falls into maybe three buckets. I would say one is a philosophical issue with DAFs. Two is the practical reality of money that’s not being donated to nonprofits, so there’s the issue of money movement. And then the third is, even when you do receive gifts, there’s all these annoying things that happen that really bother nonprofit fundraisers. Those are the three categories.

We want to start with the philosophical one. What DAFs are — also we should do that for anyone who’s listening who’s like, “Wait, I’ve heard it, but I don’t actually know exactly what it is.” Totally fine. There’s been a real surge in popularity in the last few years, and that’s why people are talking about them more. Because now, there’s over 3 million people that use donor-advised fund accounts for their philanthropy. That number has more than doubled in the last five years, so it’s exponential growth. There were $52 billion granted to nonprofits out of donor-advised funds last year, so it’s also making up an increasingly large portion of philanthropy. That number has grown over 20% on average per year over the last five years. These are not numbers we’re used to in philanthropy. We’re hearing all about decline in participation, decline in giving — this is an explosive growth area, so that’s why we’re talking about it.

What it is for a donor is it’s basically a 401k for retirement or HSA for health expenses or 529 for education. All those are just savings structures with tax advantages for a specific purpose. DAFs, the specific purpose is donating to charity. So, when someone puts money or assets into a donor-advised fund, they get the tax write-off for that year for taxes for the full amount. And then over time can make donations out of that vehicle to nonprofits that they choose. Those donations have to go to 501(c)3 organizations, and they cannot be in exchange for value. So, I can’t use them to buy my tickets or an auction item or anything where I’m getting something in return. And that comes up a lot for nonprofits, it’s important to note.

And I think where people get hung up is that, unlike foundations, which have a minimum distribution requirement — 5% of those assets every year at a foundation have to be distributed to retain their tax status. In a DAF, there is no timing requirement. And so, in theory, these funds could sit there forever. And there may be individual DAF accounts where that does happen. Where those funds are languishing in perpetuity, and they got a tax write-off originally, but it never actually got into the hands of an operating nonprofit. Which, in theory, that’s why that tax write-off exists. And so, that’s the rightful complaint that people have, is where that does happen. And I think the question that comes in is, how often is that happening, and what are we actually seeing (in terms of) the usage in reality to DAFs?

If there are a handful of bad actors — which has certainly been acknowledged that there are instances of people using DAFs inappropriately. People also use nonprofit organizations inappropriately and foundations. There are rules that can be broken in any one of these settings. So yes, there are instances where DAFs are used inappropriately, and that can certainly spread some distrust or dislike for them. But I would just say it’s important to understand the scale of this industry, and how many of those instances relative to the overall scale of DAFs is important to keep in mind. So, that’s the philosophical level, which we can dig into a little bit more.

The practical reality that people are upset about is that there’s $230 billion that’s been donated to charity according to the IRS that’s sitting in DAFs. And it’s frustrating to think every nonprofit is working so hard to fundraise and especially in an environment where fewer and fewer individuals are giving. And it’s like, “But wait, this money’s moving over into donor-advised funds and not into organizations.” It’s a frustrating thing!

That’s part of our mission at Chariot. How do we move that money out of DAFs faster? I think that’s another very valid reason for people to be upset or have strong emotions, and I think there’s two — we view there as being two primary ways to tackle that problem. One is evaluating regulation and legislation that should be in place to improve how people interact with DAFs. That’s not my area of expertise, it’s not something I have a lot of impact over. Us on the product and technical side also see a big opportunity in making DAFs more usable, you can help move money through them faster.

So, what I always compare (it) to is, it’s really a gift card. It’s a charitable gift card you’ve given yourself. You’ve set money aside; you only have one use case for it — you can only donate to charity. It’s similar to a Starbucks gift card. You can only use it at Starbucks; you can’t go take it to another store. But what if you got to that Starbucks and you couldn’t use your gift card? They said, “No, actually you have to go on your desktop computer, log in, and you have to select the coffee you want to order, and then come back.” How often are you going to be able to use that? And so, that’s the current instance with the DAFs. A DAF owner comes to your website. And even if they wanted to use it, think about all the different steps they have to take. And I’m sure you’ve talked many times on this podcast about donor psychology and friction and how hard it is to get people to convert to give. We’re putting so many steps in the way, which has to be adding to that problem of money sitting there.

And the third bucket, which we can dig into more, is because of those reasons – the hassle. DAF gifts show up, you get a check in the mail, it doesn’t have a name, maybe you have an address. You get some random fund name, where it’s “The Jones Family Fund.” That’s not helpful. I have 150 donors with the last name of “Jones.” They’re super delayed, they can get lost in the mail. There are all these processing issues that’s both a waste of time for fundraisers and folks working at nonprofits, and it often makes them look bad with donors. Because it doesn’t matter if it’s the DAFs’ fault that a check didn’t come, or it never got processed or whatever. When you have no insight on it and the donor doesn’t know that, it’s so frustrating. “My local food back, I tried to send this DAF, and they can’t handle it.” We do so many donor interviews where that comes up. And so, it’s another big area of improvement that, with Chariot’s tools, we’re focused on. How can we make that process super simple and seamless?

Leah Davenport Fadling: Wow, so many things that I want to get into more deeply. But one of the things that you mentioned is this question around, at what frequency are funds leaving these donor-advised funds and being given to charity? And how, right now, there’s not a lot of regulation around at what frequency or what percentage that should happen.

Is there an advantage to the institutions that are managing these donor-advised funds to keeping the money in these accounts?

Mitch Stein: Yeah, I think it’s really important to think about incentives because any financial institution that makes money based on assets under management, their management fee — yeah. Think about how you look at your savings account. Even just the technical UI — it’s not “Oh, here’s ways you can spend this money.” It’s “Here’s ways you can invest it and grow it.” Which is good! That’s what a savings account is for, and that gives you financial security. So, that’s where I think some incentives are aligned.

But when it comes to a vehicle to give money away, I think if you look at any donor-advised fund portal… There are a few newer and smaller ones where they’ve caught onto this, and their fee structure is different, and it’s more about helping you make an impact, and their business is aligned to when gifts move out or maybe more of a subscription fee for using the tool. But by and large, especially the big players, they make money when that money is in the account and then when you use their investing products to invest it. So, that is a big challenge and barrier where, any time a donor is exclusively interacting with their DAF platform, you have to think about the incentives there.

And one of the cool things about building tools around DAFs for nonprofits — and I’ll just give you one example. When you go through the DAF page checkout, we show the donor their account balance in their DAF. Now, we’ve seen that over 30% of donors that go through that tool, after being reminded of the amount of money sitting in their DAF, increase their gift. Which makes sense in all of our experiences, again, with gift cards. When you have a gift card, you go to the cashier, what’s the first question you ask? “How much is on that?” You want to know. You’re going to spend close to the gift card balance. You’re going to get the extra scone at Starbucks, right? Or maybe just me.

And there’s been studies on this too, where someone would be at a grocery store and ask people coming in, “How much money is in your checking account?” And just that simple question of prompting someone to think about it, those people would spend 50% more on that trip to the grocery store because they had in mind how much money they have. And there’s so much comparison and relevance to the DAF experience for a donor that I think is super interesting. And all that to be said, because we didn’t get into specific numbers, also the important reality to keep in mind is that the payout ratio for donor-advised funds in aggregate — this is the whole DAF industry across 1,100 DAFs — has been over 20% per year every year since it started being tracked in 2007.

So, there may be individual accounts and funds that aren’t meeting that threshold — this is an aggregate number — but the aggregate number for foundations, where the requirement is 5% per year, is pretty darn close to 5%. It’s important to keep that in mind and why I say it’s important to research and think about what regulations are appropriate and would achieve the outcome we want. Because if there is a minimum that’s instituted, could it actually move the payout ratio down? I don’t know, it needs to be studied. But it’s an opinion that a lot of people hold or put out there. And in a debate about these issues, could it be worse than it is today instead of better? And how do we be mindful of those potential unintended consequences?

Leah Davenport Fadling: That’s a really interesting question because when I think about, for example, foundations and that their payout ratio is 5%, that seems shockingly low to me. And I would think that would be something that a more educated donor would want to do some research around. But I do know that, at least in my experience and what I’ve heard from a lot of people, there’s just not a lot of education out there, when someone wants to become a more sophisticated type of donor and give in a way that isn’t just directly writing a check to someone or giving some money directly from their bank account or their credit card.

I feel like that’s a whole separate issue, but it does make me ask the question with donor-advised funds or some of these other different giving vehicles. Is that something that perhaps nonprofits could take upon themselves to help with? Because I don’t know how many financial managers have it in their to-do list to look at things from the nonprofit’s point of view. It’s their point of view to get the best possible return for the customer that they’re managing their money.

Mitch Stein: Yeah, and it’s a great point, and it’s why I’m so focused on generating more education and more educational opportunities for nonprofits around donor-advised funds. Because I think another thing that contributes to funds staying in DAFs for too long is there isn’t enough conversation between fundraisers and their donors about DAFs. Especially if you hold that opinion, “DAFs are bad.” And you can think DAFs are terrible, and we can debate that. But the reality is that people are using them, and they’re popular and growing because they’re meeting a need of donors.

And so, understanding and being able to have a conversation about them could unlock a connection to a donor that has or will in the future set up a donor-advised fund, and you don’t want to miss out on the distributions that they’re going to make from that. And you want to be top of mind. And yes, it’s good to be familiar with DAFs, the pros and cons, and why people use them, in case a donor wants to talk to you about it, which is a great relationship-building moment. But also, you can be helpful to them.

Most donors don’t even realize that their DAF requires them to name a beneficiary. It’s not an automatic part of onboarding because when they sign up for a DAF, if their account goes dark or they do pass away and they haven’t named a beneficiary, the assets go to Fidelity or Vanguard or Schwab. And they can name an or multiple organizations that can be the beneficiary of their DAF just as they would in a will. But it’s not something they’re prompted to do, and a lot of people don’t even know about it. So that’s a way you can be helpful to a donor. Be like, “Oh, did you set up a DAF? By the way, did you know that you actually proactively need to go in and name a beneficiary?” Now you’re going to be top of mind when they’re making that selection, and you’ve done something really helpful for your donor. So, it’s one tiny example where being knowledgeable about these things can actually strengthen those relationships and keep you top of mind when they are using their DAF.

Leah Davenport Fadling: That’s huge. I think anybody who deals especially with planned gifts at their nonprofit should have that on their list of things to include in that conversation.

Mitch Stein: Yeah, absolutely. As more and more people are opting for DAFs instead of private foundations, which has historically been a bigger part of those conversations around planned giving and major donor engagement, I think it’s important to be mindful of why they’re making that switch in a lot of cases.

And I think last year might have been the first time that more money moved into donor-advised funds than private foundations. So, if you watch the charts, they’re doing this big inversion of where these funds are going because it’s just easier to manage. Yes, you don’t have that minimum payout requirement. Maybe someone more cynical would say that’s why it offers that flexibility.

But from a donor’s perspective, you don’t have to have a board. You don’t have to do audits. You don’t have to do all these administrative and costly things that are going to reduce the amount of money you have to ultimately donate by having your own foundation. If you’re not planning on it being a big operating family foundation but you’re just using it to make grants out or donations out, a DAF is making a lot more sense to people.

Leah Davenport Fadling: I think foundations have historically been associated with people with significant wealth and a lot of generational wealth. And so, donor-advised funds are this interesting area where it allows a donor to potentially save up to make a really big impact to a nonprofit or nonprofits of their choice over their lifetime, but they can do it without all of the overhead and the issues involved with a family foundation. So, I completely understand why it’s one of the fastest-growing areas of charitable giving.

But of course, we still have to crack that nut of, how do we actually move those funds from the donor-advised funds to the nonprofits? Which I think gets into kind of a great segue, which is another question that I see a lot of fundraisers asking: “We get a gift from a donor-advised fund, we don’t know who it came from, we don’t know how to build a relationship with that donor so that if there are more funds sitting in that donor-advised fund, we can get in line to receive another gift from them.”

So, first let’s get into some reasons about why that is, but why do those donations come through and they’re unclear or poorly attributed? And what are some things that your company and maybe other companies are doing to help solve that gap?

Mitch Stein: Yeah, it’s a common problem. I think about the challenges around DAFs in three buckets. One is a fundraising question: how do we get more money? Two is a stewardship question, which is what you’ve been asking about. And three is an operational question: how do we reduce the burden and risk in a manual process?

And the stewardship one is really frustrating because these tend to be really large gifts. DAF donor average donations are almost $5,000, compared to the average credit card donation online is about $200. That being said, there’s a wide dispersion. Not every DAF donor is a billionaire, but they are intentional. They have a decent amount of money to set aside, so these are going to be generally mid-level and larger donors.

So, you want to be able to thank them right away. You want to follow the stewardship handbook. You want to send them a personal note, maybe write them a thank-you letter. If it’s their first time donating, you want to try to get them on the phone. You want to invite them in to give them a tour, and introduce them to the executive director. Whatever you would do to really cultivate more of a relationship, this is a primary instance where you want to do that — and also, the instance where you’re least likely to have the information to do that.

So, the way the DAF gifts are made through the platforms where DAF donors hold their account, sometimes they are given anonymously, and that’s often another complaint that nonprofits will have. It can truly be anonymous. And that is, unfortunately, their right. And it’s frustrating. It is a relatively small number; I think it’s close to 5% of gifts are actually made anonymously out of DAFs. But even if it’s not anonymous, they give the name of the fund. Whenever I set up a DAF account, I could have the fund named “The Climate Fund.” It doesn’t have to be associated with my name. I have the choice of if I want to do that or not. And so that can be impossible to identify, depending on what the fund is named.

And then almost always, the contact information you get will be a mailing address. And so, it’s almost never — I think there’s one platform I know of that shares email addresses automatically unless it’s proactively given by the donor. There are just big information gaps that you’re trying to fill in and research and follow up. Those are problematic to research.

And also, another big problem aside from the data gap is the timing delay. Gifts are made, but if it’s happening on the DAF provider’s platform, you as the fundraiser have no idea when that took place. So, a donor might tell you, “Oh yeah, I’m going to make that gift this week,” because you sent them a request, and they responded and said, “Yes, I’ll do it.” You don’t know how much they ultimately submitted. You don’t know if it was actually submitted because, surprise, people forget or put things off and don’t actually follow through. So now, what do you do? It’s been two weeks. Do you follow up with them? Do you just continue waiting? Gifts that are arriving in the mail can take two to six weeks to show up. Things get lost in the mail or delayed. Or the donor never actually submitted it. But you have no idea, so you have all this back and forth, which is never an interaction you want to have, especially with this category of donor.

Things that you can do to improve that: I would say, if you have a relationship with a donor, asking them in the notes of their DAF gift to specify who they are or provide their email saves you a ton of time. Especially if you notice someone that gives every year with their DAF, and you’re reaching out to encourage them to do it again, just a small reminder: “Be sure to put your name in the notes field.” I heard of one very creative fundraiser that said they told a board member the DAF gift amount was $24,999. It was a really specific number so they could match it to her instead of $25k. So, there are workarounds that can be, in that instance, a little sad, almost, having to do that. So that’s the manual way to improve it.

When people donate through DAFpay, part of the checkout process is name and email as an automated way. They can ultimately still decide to give anonymously, but we are, as a product for nonprofits, trying to solve that problem for them. So, in that instance, you get a name and email immediately. You know exactly how much they gave. And you both have transparency through our system to see the status of the grant and where it is. So, there’s no going back and forth, was it submitted, who submitted it, all that nonsense.

Leah Davenport Fadling: I love all the points you brought about this overall theme of reducing friction for the donor because I think that this is something, especially with online giving, that a lot of fundraisers and marketers as well as different software vendors and online giving platforms have been working really hard over the last 10 to 15 years to solve. There’s a lot of really interesting things happening with online giving, and so it’s fun to see that there are other companies out there that are trying to solve some of the more complex giving problems with online user-friendly tools to make it easier both for the donor and for the nonprofit.

Mitch, thank you so much for joining us today. I can’t wait to share this conversation with our audience. And thank you so much for a few minutes of your time today to talk about a controversial topic in the nonprofit space and have some amazing talking points.

Mitch Stein: Yeah, no, thank you for having me. And as I said, I never shy away from some controversy. There are some important points to be aware of and discuss on all aspects of this issue. Look, philanthropy is complicated, it’s a complex ecosystem. So, we all have to do our jobs every day and understand there’s a lot of things that are wrong with the way this industry works. And the little ways that we can make those changes and improve them are important. So, I appreciate you inviting me in for the conversation.