A decade ago, as the number of donor-advised fund (DAF) accounts were beginning to increase substantially, many wealth management firms and banks wondered whether they should offer their own privately branded donor-advised funds. Some created their own by working with outside firms that offered a complete back office solution or even with local community foundations for administrative services, but the vast majority did not.
Though many large banks and wealth management firms, such as Goldman Sachs and UBS, still offer their own DAFs, very few privately branded DAFs are being created today. Increasingly, firms that still offer them now provide clients a choice of using their own or working with an outside DAF sponsor, since clients have different needs and advisors have realized that one solution is not ideal for all clients. There are now only a few back-office organizations that still offer private-label DAFs since the demand has substantially decreased.
Some advisors and firms that continue to only offer one “house branded” DAF may not be aware that some other DAF sponsors will allow them to manage the assets in their clients’ DAF accounts, even at lower levels than their own DAF minimums. This lack of awareness is increasingly rare, however, as advisors realize that many of their clients are discovering other DAFs that they may prefer to use instead of their firms’ own private-label or sole DAF offering. Advisors understand that it is somewhat risky if they continue to only offer one DAF solution that may not appeal to some clients.
In a number of situations, it may still be most appropriate for an advisor whose firm offers just one DAF option to use it with clients. However, some of the reasons why advisors and clients may wish to use alternative DAF sponsors include:
• Privacy and security are so important to clients today, so many do not want others to know which financial firm or institution manages their investments. Yet when a client recommends a grant through their wealth management firm’s private-label DAF, the name of their advisors’ firm is featured at the top of the letterhead on the grant letter that is sent to the charity. Therefore, the charity will know which firm or bank manages the donor’s wealth and can surmise that even if the grant is small, the donor is capable of donating much more and the non-profit could solicit the client for larger or more frequent grants.
• Investment options at the firm’s DAF may be significantly limited, and smaller DAF accounts may have even more restrictions.
• As discussed, some other DAF sponsors allow advisors to manage the assets in their clients’ DAF accounts, even at lower amounts than their firm’s own DAF.
• Many advisors wish to demonstrate their independence to clients by offering outside funds and investments that alternative DAF sponsors will approve, yet their own DAF offering will not.
• Some advisors are not able to charge fees to manage the assets in their own firms’ private-label DAF
• Some DAF offerings that advisors exclusively offer are significantly more expensive than other DAFs
• When another firm provides the back-office service for a private-label DAF and the service is poor, clients may attribute the poor service to their bank or wealth management firm, thus potentially jeopardizing the entire relationship
• Some firms’ private-label and exclusive DAFs are unable to accept donations of complex assets that other DAF sponsors can.
• When advisors only offer one DAF solution, especially if it is private-labeled, clients may search for and select another DAF sponsor, which leaves the advisor unable to manage those important charitable assets
• Some clients do not wish to work with a local or faith-based DAF sponsor that the advisor typically recommends
• Some donors wish to hold certain donated stock or other assets within their DAF account, yet some DAF sponsors do not allow this and will require immediate diversification or liquidation
• Some clients and advisors prefer working with a DAF sponsor that is portable.
Most clients still want their advisors to manage the assets in their DAF accounts, but they often prefer to have choices, both in how the assets will be invested as well as determining which DAF sponsor is most appropriate. More frequently these days, advisors and clients are aware of various DAF sponsors besides their own firm’s, so if advisors are still able to manage their clients’ DAF assets at an outside DAF sponsor, this option may benefit both the advisors and their clients.
As always, it is important for advisors and their clients to fully evaluate all the features, benefits and flexibility of any DAF they elect to utilize. And when advisors discover another DAF may be a better choice or more flexible than the one originally selected, assets in a particular DAF can always be granted to and transferred to the other DAF.
Ken Nopar is the vice president and senior philanthropic advisor for American Endowment Foundation, the country’s sixth largest and leading independent donor-advised fund. AEF works with donors and their financial, legal and tax advisors in all 50 states.