DAFs: The Freedom to Wait for Strategic Impact

(Previously published on Medium)

Urgency is often treated as philanthropy’s highest virtue. This is because, in the moment, action can feel even more virtuous than impact. When the world is on fire, the call for immediate action is compelling. But in moments of profound crisis, donor-advised funds (DAFs) have shown their potential to deploy capital with effectiveness and precision. Advocates for venture philanthropy often question whether it would be more advantageous for these funds to actively generate returns thereby increasing the available philanthropic capital.

Lest the advocacy for DAFs as blended finance and venture instruments be mistaken for mission drift, let us return to first principles. These funds exist, above all, to enable giving that is deliberate and tax-efficient.

This bears repeating in light of increasing critique that donor-advised fund payouts lack formal deadlines. That the possible returns on these philanthropic assets remain bound to their DAFs is, in actuality, a boon to more traditional charitable causes.

The evidence bears this out. Patient capital by way of donor-advised funds has been a powerful force in moments of crisis. In 2010, when an earthquake devastated Port-au-Prince, Haiti, donor-advised funds moved quickly.¹ Major philanthropic sponsors including Fidelity Charitable, Vanguard Charitable, and National Philanthropic Trust deployed targeted grants at the advisement of their donors. A decade later, when a global pandemic disrupted economies and healthcare systems, these same funds released billions to hospitals, communities, and frontline workers.² Critics call these philanthropic vehicles inert, but the reality is that patience enables preparedness. When necessary, donor-advised funds deploy philanthropic capital at a scale and speed that is a complement to more traditional forms of emergency aid.

A critical question arises: can’t private foundations do the same? What, then, is the case for donor-advised funds? The distinction is not in intent, but in design. Private foundations, while capable, often operate within the confines of long-term strategies and tightly-defined institutional priorities. This makes large pivots less likely. Donor-advised funds, by contrast, are designed for flexibility. Most are housed within public charities that process grants on a daily basis, unburdened by the need for board approvals or rigid giving cycles. This structural advantage means that, when crises occur, a DAF sponsor’s operational infrastructure is already at full tilt, which enables quicker grant execution. There are no programmatic commitments or formal mission statements to navigate around. They can deploy their giving in real-time.

Of course, donor-advised fund flexibility is not without its challenges. Issues around transparency and accountability are valid concerns, and calls for guardrails merit consideration. But the core advantage of DAFs lies in their flexibility and capacity for strategic patience. Rigid timelines would risk undermining this fundamental attribute, reducing the effectiveness of donor-advised funds in addressing complex and evolving issues.

Before categorizing donor-advised funds as mere tax shelters or stagnant pools of capital, consider this: philanthropy’s true value lies in its ability to balance multiple factors. While urgency is crucial in moments of crisis, sustained impact requires discipline, strategic planning, and foresight. The goal is not just to spend philanthropic capital, but to deploy it effectively. This includes making sure it can grow, adapt, and remain available when needed most.

Donor-advised funds are not without their limitations. But in a philanthropic culture often preoccupied with the immediate need to act, they represent an important counterpoint and consequential alternative; at times, the most effective impact begins with restraint.

Further:
¹ Shidler, Lisa. “Amid flood of donor-fund assets for Haiti, a plea to stay the course.” InvestmentNews, January 24, 2010.
² National Philanthropic Trust, “Donor-Advised Fund Giving Has Surged During COVID-19 — and Continues to Grow,” February 2, 2021.