NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, May 4, 2015

In the days immediately after Americans learned of the devastating earthquake in Nepal, they began to send millions of dollars in donations to organizations prepared to put disaster-relief boots on the ground in that historic Himalayan kingdom.

Such charity — whether directed to long-established organizations like the Red Cross and CARE or to newer ones such as Doctors Without Borders — reflects the American tradition of personal generosity. But there was also something notably different about the sources of Nepal relief funds compared to similar outpourings a generation previous.

A handful of umbrella organizations holding reserves of charitable funds for thousands of donors were able to direct that money to recommended relief organizations at the online direction of donors, with no checkbooks involved. The grants were directed from thousands of individual donor-advised funds managed by the charitable-foundation arms of some of the nation’s largest financial-services firms. Indeed, just five days after the earthquake, Fidelity, Schwab, and Vanguard charitable could already jointly report nearly 3,000 individual grants of more than $3.5 million.

One might call it charitable rapid response — and it demonstrates the value of an aspect of the fast-growing universe of donor-advised funds that has, surprisingly, been controversial but should not be: the financial reserves held in individual accounts managed by major national financial-services firms.

It is no secret in the philanthropy world that the number of donor-advised fund accounts, especially those housed at what might be called national advised-fund organizations, have dramatically increased in recent years. Since 2007, the number of such accounts has risen by nearly 40,000 nationwide. At the same time, financial reserves — undisbursed funds managed for growth and earmarked for eventual charitable contribution — have also grown significantly, from $11 billion to $25 billion. If that total were housed within a single foundation, it would represent the most assets of any such U.S. entity except the Bill & Melinda Gates Foundation.

But even as private foundations have continued to be a largely unchallenged part of the U.S. philanthropic landscape, the undisbursed funds of donor-advised fund accounts have drawn fire.