Podcast: Understanding Donor-Advised Funds: A Powerful Giving Tool for Today’s Fundraising Landscape

Season 4, Episode 15

Amy Eisenstein hosts Melissa Bank Stepno from Helen Brown Group, a leading prospect research firm. Melissa brings her extensive knowledge to explore donor-advised funds (DAFs) and their transformative role in the nonprofit sector. With DAFs becoming a popular charitable giving vehicle, nonprofit leaders often have questions. Melissa explains what DAFs are, their tax advantages, and how they function as a “giving bank account” managed by nonprofits or financial institutions on behalf of donors.

Discover the differences between DAF sponsors—community foundations, financial institutions, and single-issue funds like religious organizations—and how each contributes uniquely to the landscape of donor-advised funds.

Tune in to hear why understanding donor-advised funds is more important than ever for fundraisers and how DAFs can become a valuable part of your nonprofit’s campaign strategy. 

Listen Now:

Amy Eisenstein:
Everything you ever wanted to know about donor-advised funds. Stick around.

Hi, I’m Amy Eisenstein. And Andrea’s off today, but I am super excited because I have a very special guest with me today, Melissa Bank Stepno. And Melissa is a new colleague and friend of ours here at Capital Campaign Pro, and we met Melissa because she is just taking over the Helen Brown Group, which is an amazing prospect research company.

And of course, if you’re doing a Capital Campaign, you probably need some prospect research. So I’m so excited to welcome Melissa. She joined Helen Brown Group in 2023 and acquired the company recently. Melissa previously has worked at Blackbaud and Boston University and the Boston Ballet, and she serves as an instructor for Rice University at the School of Continuing Studies and the Center for Philanthropy and Nonprofit Leadership.

I probably got that name a little bit wrong. But Melissa is an expert and I’m so excited to be talking to her today about donor-advised funds. So welcome, Melissa.

Melissa Bank Stepno:
Hi, Amy. I’m so happy to be here.

What is a Donor-Advised Fund (DAF)?

Amy Eisenstein:
Well, thank you for joining me because the whole nonprofit sector is abuzz with DAFs or donor-advised funds. So let’s just start with some basics. So what is a donor-advised fund?

Melissa Bank Stepno:
That’s a really great question and it’s interesting, because while the sector is abuzz about them, I think that there’s still some misunderstanding as to what they are and how they operate. So now is a really good opportunity to set the record straight. So at its core, a donor-advised fund is really just a, think of it as a bank account that a donor designates for the purposes of charitable dollars.

Now, donor-advised funds are always managed by a sponsoring organization, not a bank per se, and the sponsors are all actually nonprofits. So if a donor wants to set up a DAF with a sponsor, they would fill out some forms, and then they would start to transfer their assets from their own accounts into their donor-advised funds.

The interesting thing with donor-advised funds is because all of the sponsors are nonprofit organizations, the donor actually gets their tax deduction at the time they move their assets from their personal accounts into that donor-advised funds. And then essentially their funds or their money sit in their donor-advised fund account and they’re exclusively for charitable purposes.

They can’t use the money for anything else. Usually it earns interests. Usually the sponsors offer some type of investment options. And when the donor decides what nonprofits they want to make distributions to, they reach out to the sponsor and say, “Hey, can you please donate to ABC nonprofit,” and then the sponsor takes it from there. So there are some tax deduction reasons why donors use donor-advised funds.

What the Word “Advised” Means in this Context

There’s also some additional just philanthropic planning reasons why donors are using them that I’m sure we’ll talk a little bit more about as we move on. But that word “advised” is really that the donor is advising the sponsor where to give the money to because legally, it’s not really theirs anymore. It’s the sponsor’s. That’s donor-advised funds in a nutshell.

Amy Eisenstein:
That is so interesting. I didn’t know that they were all nonprofits, and I’m just going to ask you if you’re sure about that. Doesn’t Fidelity and some of these big financial institutions manage donor-advised funds? Or is it really community-based organizations?

Melissa Bank Stepno:
So yes and yes. Strange answer, I know. By volume, the largest number of sponsors are by far community foundations. There’s about 1,200 sponsors in the country right now in the United States, and more than 700 of those are actually community foundations. However, when you hear Fidelity and Schwab and Vanguard and the big banks, brokerage houses are sponsors, they have actually set up separate legal entities that are nonprofits.

They’re registered 501(c)(3)s, I don’t know, their donor-advised funds through their nonprofit arm, not through the big mega corporate financial entity. Of that 1,200 or so sponsors in the country, maybe about 70 or 80 of them are these what we call commercial or national sponsors, typically banks, brokerage houses, but legally it’s separate entities, separate guidance. And yeah, they’re actually nonprofit organizations.

Amy Eisenstein:
Oh, interesting.

Melissa Bank Stepno:
Yeah, it’s interesting too, Amy, because when you think about the motivation of why I’ll call it an entity to use a generic word, why an entity would decide to become a sponsoring organization, the motivation for a community foundation to do so is probably very, very different than a national bank or brokerage house. The community foundations, they’re set up to empower philanthropy and make their communities a better place.

And it really comes from that philanthropic spirit of helping people in their community move philanthropic dollars around. I think on the national side and the commercial side, sure, there’s some philanthropic intent there, but when you think of a Fidelity, one of the real benefits to them is that they’re keeping more assets within their family of organizations.

Let me use a different word than organization not to confuse with nonprofits. Fidelity is using within their family of businesses. And that increases the investment dollars that they have under management and helps build stronger relationships with their clients. But I think the main motivating factor is not always actually philanthropy.

Amy Eisenstein:
Interesting. Thank you for making that distinction. I appreciate that.

So now we know what a donor-advised fund is and where to look for sponsoring organization. I would say start with your community foundation because I think there’s a community foundation in every community across this country, but also it’s so interesting, I learned something today about financial institution sponsoring donor-advised funds.

The Growing Landscape of Donor-Advised Funds

So let’s talk a little bit more about how the landscape has changed because we’ve seen them just explode over the last, I don’t know, five years or so, honestly. So talk a little bit about the landscape of donor-advised funds.

Melissa Bank Stepno:
Yeah, I just want to just pause for one second because there’s actually a third type of sponsor that we didn’t talk about yet. So just want to throw it in there for clarity and then I’ll come back to your question. So we’ve got community foundations. We’ve got banks, brokerage houses. We also have what’s sometimes referred to as single issue sponsors. This is actually where donor-advised funds started.

They’re deeply rooted in religious affiliated organizations like the Jewish Communal Fund or Catholic Charities. Some universities actually now serve as sponsors. So like the University of Michigan and Harvard University, they are sponsors themselves. So there’s this third type of angle that you can look for. If you are on this call and you’re thinking about where you might want to have a DAF sponsored as a donor, consider those as well.

The Recent Explosion of DAFs

Okay, so what happened over the past few years? The first donor-advised fund was created in 1924, so they’re actually exactly 100 years old if you’re listening to this soon after we recorded it. And they pretty much just chugged along until about 2017, which some of you may remember was a really big year for tax changes in the United States. And it’s right around that 2017 timeframe that the volume of donor-advised funds really started to tick up across the United States.

There’s over 2 million of them today, and one of the reasons why is a lot more sponsors started coming into the market around that timeframe. And we could probably make a parallel here to that was tax changes that happen in November. A donor gets their tax deduction at the time they make a gift to their donor-advised funds, not when the money goes out to a receiving organization.

So that’s where the taxes come into play. So over 2 million advised funds today. According to Giving USA, it’s pumping about $50 billion into the philanthropic landscape. So that’s about a quarter of the money that’s flowing through the United States. They’re just mega big at this point, and I think that’s why we’re all talking more about it, but it’s also still a fairly new giving vehicle to our industry.

For those of you who have been in the industry for let’s call it 20 years or so when folks started to make online gifts and we were all like:

“Whoa, what is this? What do you mean give online? You got to write a check. You have to send it in through the mail.”

They’re what’s happening with donor-advised funds right now. I don’t think that they’re going to become as big as online gifts, but it’s a force that is really entering into our donors’ mindset and something that as fundraisers we all need to learn how to adapt to so we meet our donors where they are.

Other Reasons to Use DAFs Apart from Tax Benefits

Amy Eisenstein:
Yeah, that’s so interesting. And I think that a lot of people who have resources to give and who are paying attention to their tax rates are turning to vehicles like a donor-advised fund to make their giving even more tax effective. I don’t know if that’s the right way of saying it. But I’m curious, other than tax advantages, are there other reasons that donors would want to use a donor-advised fund and how are you seeing donors using their donor-advised funds?

Melissa Bank Stepno:
So there are a lot of reasons other than just tax advantages. I think it’s the easiest one for us to gravitate towards first, but let’s talk about some of the others. One is that if you compare a donor-advised fund to a private foundation or a family foundation, donor-advised funds have a much, much lower barrier to entry. You can set up a donor-advised fund with far fewer assets or dollars than you would need to set up a private foundation.

And all of the reporting and compliance issues that you have with foundations like filing 990s and whatnot go away because the sponsor organization is doing all of that for you. So for households, families, entities that maybe 10 or 20 years ago might’ve thought, we’d really like to start our own foundation, but it’s too much of a burden or maybe we don’t really feel like we have quite enough to do it yet, donor-advised funds are really a great alternative for that. So that’s something to really consider. Anonymity is another one.

So I think anonymity around donor-advised funds is actually blown a little bit out of proportion. It’s kind of a soap box of mine, which I won’t get on unless you want to. However, however, some donors do use it because it makes giving anonymously really easy. If I set up a DAF and I call it the Rainbows and Kittens Fund and I give to environmental causes and animal causes, you’re going to have no idea of who I am as a person unless I want you to. So it does provide that little bit of extra shield.

And then the last thing that I would say is particularly for donors who choose to set up their funds through community foundations, some of the benefits or programs that the community foundations offer to their DAF holders come along with philanthropic education and recommendations on where you might want to actually give your money to. So if you’re philanthropically minded but you’re not really sure where to start or how to get going, those services could be really beneficial to you.

Amy Eisenstein:
Interesting. All right, that’s great.

Why Some in the Nonprofit Community Dislike DAFs

Now, this is something we didn’t really discuss before, so hopefully this isn’t much of a curveball, but many people in the nonprofit sector grumble and groan about DAFs. So why are DAFs problematic from the nonprofit side, from the nonprofit perspective? Why do development directors and CEOs hate DAFs?

Melissa Bank Stepno:
Because it provides or, let’s not use the word provides. It introduces a layer of distance between the nonprofit and the donor. At the end of the day, a DAF is just another giving vehicle. I could give through a check. I can give through my credit card. I could transfer stocks to you. I could give crypto. I can give through my donor-advised funds. It really is just another giving vehicle.

But almost pretty similarly to when somebody makes a stock gift and that gift comes in from the brokerage house and you might not be sure what person is behind the gift that came from the brokerage house, some of that happens with donor-advised funds as well. And I think that’s what’s causing some of the consternation.

Fundraising professionals, we want to steward our donors, we want to build relationships with them, we want to make things sticky, and it’s hard to do that when there’s this added layer or wall between us and them. It doesn’t really happen when somebody is giving through a credit card or a check.

Amy Eisenstein:
I mean, that is a real concern. I share it with my colleagues, so I’m definitely on the fence. Do donor-advised funds encourage generosity and more giving? Maybe, maybe not, but this wall or this shield is problematic, but we have…

Melissa Bank Stepno:
Can I rebut that for a moment?

Amy Eisenstein:
Yes, please.

Melissa Bank Stepno:
Not really rebut it, but maybe inform it a little bit. So I would say two things. One is my opinion is we need to meet our donors where they are. We all know that the number of donors in this country is decreasing. We all know that we are stagnant in terms of how philanthropy looks as compared to the GDP. If there’s a swath of donors that are choosing to give through this giving channel, then it behooves us to meet our donors where they are and lean into how to get the largest amount of gifts from those who want to support our causes.

So that’s one, that’s my opinion. But on the other side, this is the informed piece, donor-advised funds often get a lot out of flak for being a place where people park their money to make it seem like they’re being philanthropic and the money just sits there and it actually doesn’t get to the nonprofits for any mission driven reason.

And while I do think that that’s true in the minority of cases of donor-advised funds, there’s been a lot of research and studies going on over the past few years that show that giving out of donor-advised funds has a higher velocity than giving out of foundations. So that’s number one. When you think about minimum distributions out of a foundation, the IRS requires 5% distributions.

Many foundations don’t go anywhere above 5%. They just give that minimum every year. Industry average, when you look at DAFs, you’re looking at something more in the 20s, so like 22%, 24%. Now yes, you could say, “Well, 24% is not 100%.” I agree with you totally, but 24% is still a lot more than 5%. So there’s that component to it.

And we’re also seeing some recent studies that are showing kind of similarly monthly giving where when you look at giving patterns for individuals who give monthly or sustainer gifts to organizations, their lifetime value is higher, their retention is higher. We all know retention is easier than acquisition. Donor-advised funds are pretty similar.

Something like 70% of gifts coming out of donor-advised funds are coming from repeat donors, and that retention and that lifetime value is higher than just normal annual fund donors also. So I think there’s some good things happening even with the challenges that we’re seeing at the same time.

Amy Eisenstein:
I love that and that is so comforting to know, I have to admit. So thank you for sharing those important statistics.

Ways for Nonprofits to Learn About Their Donor’s DAFs

So let’s say a nonprofit is going into a campaign, which many of our listeners are, and they have a whole swath of donors they’re doing some research on, and they want to know if their donors or other donors in the community have donor-advised funds. How on earth would they go about starting to figure that out and what should they be looking for? What tools should they use? And yes, you are invited to plug your own tools here, Melissa.

Melissa Bank Stepno:
Well, thank you for giving me permission, Amy, because I was going to say, here’s where the plug happens because it’s true. It’s where the plug happens. So let me say this first. Here’s something that we know for a fact. If you have a donor giving through a donor-advised fund, you know that they are philanthropically inclined. You don’t choose to put money into a restricted account for the sole purposes of charitable dollars if you don’t have a philanthropic interest in your head and in your heart. So know that.

Amy Eisenstein:
I love that.

Melissa Bank Stepno:
Any giving through a donor-advised fund, philanthropically minded. I think there’s a separate question as to whether or not they are also good major giving prospects. They may be or they may not be. They may be or they may not be. A lot of that has to do with the circumstances around that donor-advised fund. So I’ll point listeners in two places and they are very related. So just by way of background, Amy mentioned earlier that I am with the Helen Brown Group.

We are primarily a prospect research consulting firm. Generically speaking, we provide outsourced prospect research or nonprofits. A few years ago, our team, our consultants, prospect researchers, were struggling to research donor-advised funds. So out of ingenuity and spirit, they started collecting data for their own internal use. And about two years ago, we actually turned it into a product that’s available to the nonprofit community for purchase.

How to Do Research on Donor-Advised Funds

So it is a searchable online database that is the only thing available right now that allows fundraisers and researchers to do research on donor-advised funds. It’s the most robust data source that there is right now. It’s a lookup tool. So you can go in there and you can look up whether you have a gift coming in from John and Jane Smith, maybe not, that’s a little generic, but you get my point, fund to see what information we have on that fund, where else the fund has contributed.

Maybe they gave you a $100 gift, and you can see that they’ve made $1,000, $5,000, $10,000 gifts to other nonprofits. Then you’re starting to get into major giving capacity. You could also use it for prospecting. So you can go in there and you could say, okay, you’re an animal welfare organization. You’re a food and security organization.

You’re a pick a cause organization and pick a community, wherever you are, I live in New Hampshire, so we’ll say New Hampshire, to find donor-advised funds that have supported similar missions, similar locations to you. It could also serve as a prospecting tool. So what is it called? It’s not under Helen Brown Group, but it’s part of us, but it is called DAFinitive. So think of DAF, D-A-F.

Amy Eisenstein:
D-A-F.

Melissa Bank Stepno:
Intive, I-N-T-I-V-E. Did I just spell that right? I’ve never spelled it verbally, D-A-F-I-N-I-T-I-V-E.

Amy Eisenstein:
I think you were missing an I.

Melissa Bank Stepno:
I am. I’m totally missing an I.

Amy Eisenstein:
DAFinitive. DAFinitive. DAFinitive.

Melissa Bank Stepno:
Exactly.

Amy Eisenstein:
So does it have its own website? What website do they go to to find it?

Melissa Bank Stepno:
Www.DAFinitive.com. And again, it’s DAFinitive with an A instead of an E.

Amy Eisenstein:
Yeah, okay, great.

Melissa Bank Stepno:
So that’s a paid resource. But I also want to just let folks know, on that website, not behind the paywall, completely open to the community, we also host what we call a minimums document. And this could be super helpful for folks trying to think about major gift prospecting with the donor-advised funding group. Sponsors can basically dictate what a minimum amount is to open up a donor-advised fund at their organization. Some sponsors have no minimums.

So Fidelity, you could open up a donor-advised fund with $100. They don’t care, not indicative of anything capacity-related. Other sponsors say you must open your fund with $100,000, or some are even as high as a million dollars. So what does that say to me as a fundraiser? Even if I get a very low dollar gift from a DAF that is sitting at a sponsor organization that requires a million dollars in liquid assets or money or assets that can be converted to liquidity to open up that fund, that is immediately a capacity indicator for me.

Go back about five minutes in the recording. I already said that every donor-advised fund holder has got philanthropic interests. So that’s two of the three golden tickets for me in terms of prospecting for campaigns. I want to see capacity, I want to see philanthropic interest, and I want to see a connection to my organization or my mission. Two of the three right off the bat.

Amy Eisenstein:
Amazing.

Melissa Bank Stepno:
On the DAFinitive website, if you scroll all the way to the bottom, there’s something called the Donor-Advised Fund Resource Center. It’s chock-full of links in there with articles and research studies and whatnot. It’s all free. It’s not stuff that we publish. It’s just stuff that we’re collecting for the community. But this minimums document is something that we are maintaining for fundraisers so that you can start to get a sense of what the minimums are at different sponsors. And I think we’ve got like six or 700 analysts right now.

Amy Eisenstein:
Wow, that is such a cool resource. I know that everybody listening is going right to the DAFinitive website to get that.

Melissa Bank Stepno:
Bring it on, guys. Bring it on.

Amy Eisenstein:
All right, so that’s so great. You know what? I have learned so much about DAFs that I’m in the field, I thought I knew some things, now I know even more things. So I’m thrilled with this conversation.

Top Donor-Advised Fund Tips and Takeaways

So let’s get to some really good tips and takeaways. What are some key things maybe that either you can reiterate things that we already talked about or some new tips and takeaways for our listeners today, Melissa? What do they must know about DAFs and fundraising?

Melissa Bank Stepno:
So let me give you guys three or four things, and some of them we’ll go back to things that we’ve already talked about, but I’ll make it more tangible and tactical for you.

Think About Your Marketing and Communication Streams

So the first is think about your marketing and communication streams and how you are talking to your donors and your constituents. Is it on your website? Is it on your old-fashioned reply devices? Ask the question, do you have a donor-advised fund?

Are you giving through your donor-advised fund? If you’re a frontline gift officer, make it part of your conversation. The more we talk about it and the more our donors know that our organizations are accepting gifts through this, again, it’s just another giving vehicle, I think the more you will see turning through that vehicle itself. So that’s number one.

Amy Eisenstein:
Okay, Melissa, I’m just going to stop you right there because I just have to reiterate that. So interesting, years ago when we were doing direct response cards and whatnot and websites and donor pages, we have new information about have you considered putting us in a bequest?

And now the new language is, also do you have a donor-advised fund? I just wanted to make sure everybody heard that. And as everybody’s listening, that’s part of a response mechanism. It’s information you’re collecting from donors on your website, on your response cards, those types of things. I love it.

Melissa Bank Stepno:
And I’m going to just reiterate what you reiterated, which is this doesn’t mean take off the, are we in your list?

Amy Eisenstein:
Yes, thank you.

Melissa Bank Stepno:
I know it gets crowded on there, but I do think the more you talk about it, the more awareness you’re building for your constituents and the more knowledge you’re gaining for your organization and your database.

Amy Eisenstein:
Love it. Love it.

Melissa Bank Stepno:
Very tactical. Here’s another tactical one. We’re going to stay on marketing and communications for a minute, and then we’ll move on.

Put Your EIN Number on Your Website!

If your EIN number is not on your website, please put it on your website like today, like yesterday. This is not even something that’s specific for DAFs. It could be helpful to someone who wants to give a stock gift to you.

But the reason why your EIN number is so important is in many instances, in order to request that a gift be made from a DAF to a nonprofit, the donor or the advisor reaches out to their sponsor and says:

“Hey, could you please transfer $1,000 to my local food bank, my local animal shelter, my local hospital?”

How does the sponsor know what that really means? An EIN number is the only way of 100% guaranteeing that the recipient is the correct recipient without a lot of back and forth between the sponsor and the donor. So I would highly, highly encourage you to do that if it’s not already there.

Facilitate DAF Requests Directly From Your Website

And then the last thing I would say on this, and this is not me being self-serving because I have no affiliation with any of the companies that offer these, but there are a number of maybe three or four that I could just throw out by name, and I’m not endorsing any specifically, but just for awareness building, technology companies that basically have widgets that you can install on your website.

That rather than forcing the donor to leave your website and go to their sponsor’s website to fill out a form and have to find your EIN number, what these widgets basically do is facilitate the DAF request directly from your website. And it also provides you a way of capturing key information like what is their actual name, the individual’s name and address, and then basically ports the request to the sponsor on the donor’s behalf. So I’m going to just mention a couple.

And with anything software related, test it out, test drive it, talk to the vendors, all those things. But I know Chariot offers one. I know FreeWill offers one. And I know The Giving Block offers one, and there might be some others out there. So if you represent another company that offers one, let me know and I’ll start adding you to my list.

Amy Eisenstein:
Great. And I’m sure there’s more and more every day and it’s impossible to keep up, but that’s great. So do your research. These are important things to know.

Melissa Bank Stepno:
And then if I could just add one more, I would say listening to this podcast is definitely the one thing you could do, but continue to educate yourself because this is an evolving area of the philanthropic landscape. It is coming on with force. We already talked about that a little bit, but I do think things are going to change and shift as with any new thing that we encounter.

Resources for Donor-Advised Funds

So if I can point you all to a couple of other resources. I already shared with you, we’ve got a resource center on our website, but there’s a little bit of coverage about DAFs and Giving USA not a ton. FreeWill and Chariot, who I just mentioned, have widgets. They also have pretty robust webinars and white papers and studies and whatnot.

And for those who are really interested, the DAF Research Collaborative, so DAF, as in Donor Advised Fund Research Collaborative, they’re a little bit more academic in nature. They do some really awesome research, as does the National Philanthropic Trust. So just some names of other resources that you could keep up and abreast of trends are really helpful as well.

Final Thoughts

Amy Eisenstein:
Excellent. Melissa, this has been an amazing conversation, and I feel like now we need to have you back every year for updates, which is great.

Melissa Bank Stepno:
I’d love that.

Amy Eisenstein:
Yeah, so let’s make a date. A year from now, we’re going to get an update on where DAFs have been and where they’re going. But this is so helpful. So now for all you listeners, anytime somebody says DAF, you’ll say:

“Oh yeah, I know what a donor-advised fund is. I don’t have to be freaked out about it anymore.”

It’s a giving vehicle. And I love thinking about it that way, a bank account, a giving vehicle, such a good, simple way to break it down. So thank you so much for joining us, and we’ll see you next time, listeners, on our next podcast.See you soon.