Do Donor-Advised Funds Serve Charities—or Custodians?

As financial advisors, we’ve often recommended that clients set up donor-advised funds. We know the drill: Contribute to the fund and get an immediate tax deduction. But it often takes time for the fund to actually give the money to charity.

Recent articles have questioned whether donor-advised funds are truly beneficial to charities because they often maintain significant balances in the accounts. (See here and here for examples.) The implication in these articles is that high-balance donor-advised funds, often run by large asset management firms, are benefiting custodians more than the nonprofits they’re intended to serve. This is based on two assumptions:

1. Donor-advised funds should not hold on to assets—all money should be granted out within a short period.
2. Custodians profit too much from donor-advised funds.

The Issues With Donor-Advisor Funds

Let’s take a closer look at each of these issues:

1. Accumulation of Assets

Critics of donor-advised funds say that it is problematic that the funds retain accumulated assets instead of immediately distributing the assets to charities.

I disagree.

Donor-advised funds typically have large balances because donors choose a strategic time taxwise to contribute. The funds with ongoing balances represent a critical pipeline of support for our communities, especially during challenging times.

For example, think back to the post-2008 financial crisis. Jeremy Pearl, president and CEO of the Jewish Community Foundation of San Diego, says that distribution rates from donor-advised funds spiked during this time precisely because the assets were available. Donor-advised funds provided a stable reservoir of capital ready to be deployed when incomes and investments were down and needs were high. Says Pearl, “One could argue that [donor-advised funds] effectively bridge a vital gap between immediate, current giving and long-term endowments, ensuring a robust funding stream for nonprofits when they need it most.”

2. Custodians’ Profit

There’s no doubt that national custodians profit from running donor-advised funds, but their scale brings efficiencies; they are able to offer investors relatively cost-effective solutions to charitable giving. Firms like Schwab and Fidelity typically charge around 0.6% per year, with Vanguard following a similar structure, often with reduced fees for larger accounts. Additionally, they make money through selling proprietary investments with internal fees and charging account maintenance fees.

Indeed, from the custodians’ perspective, donor-advised funds are essentially another efficient distribution channel for their asset management services. They scale exceptionally well and leverage existing infrastructure to acquire and service donor-advised-fund accounts at a low cost. Their business model thrives on volume and transactional efficiency, with a focus on national reach and standardized offerings.

In terms of custodial providers, Vanguard’s offering is less onerous than others. Although its annual fee is 0.6% for amounts between $500,000 and $10 million, the fee drops ratably down to 0.1%. Additionally, the proprietary investments are Vanguard funds, with internal costs averaging only 0.06%.

Are Community Foundations Different?

If investors want a more locally focused option, community foundations represent the antithesis of the national custodian business model. While community foundations’ fees are ostensibly higher, the difference can be justified by essential value-added services. For example, the Jewish Community Foundation of San Diego charges annual fees of 1.25%. Like other community foundations, it’s not built on a model of infinite scalability in the same way large custodians are. Rather, it offers services more tailored to the donors and communities it serves.

Community foundations provide:

• Deep community knowledge: Community foundations have their fingers on the pulse of local needs, identifying the most impactful initiatives and organizations that are making a real difference in their communities. This community knowledge cannot be matched by a national custodian.
• Deep donor relationships: Community foundations foster highly personalized relationships with donors. “We work closely with our donors to understand their philanthropic passions, connect them with causes that resonate, and help them craft a giving strategy that aligns with their values and legacy goals,” Pearl says.
• Community involvement: Community foundations offer opportunities for donors to learn about local issues, engage with other philanthropists, and even participate in collaborative giving initiatives.
• Flexibility: Community foundations can offer more flexibility than national custodians. Says Pearl, “While we strive for efficiency and have adjusted our fee schedules for larger funds to be more competitive, the nature of providing truly high-value, bespoke services means we cannot always match the scale-driven pricing of national [donor-advised fund] platforms for smaller accounts. However, our lower account and grant minimums make philanthropy accessible, with fees starting as low as $25/month for our smallest funds. It’s about providing meaningful service and impact, not just a transactional vehicle.”

The Advisor’s Role: Guiding Clients to Lasting Impact

As financial advisors, we’re often consulted about setting up and using donor-advised funds. When guiding clients in their philanthropic endeavors, how do we choose between a donor-advised fund sponsored by a national custodian and one housed within a local community foundation?

Custodian donor-advised funds offer convenience and a straightforward approach to charitable giving. This is appropriate for clients who don’t need personal support or community expertise, especially for those who prioritize simplicity and lower fees.

For clients who seek to engage deeply with local issues, collaborate with like-minded individuals, or ensure their philanthropy leaves a tangible, lasting legacy within a specific community, a local community foundation donor-advised fund is often the superior choice. It offers not just a tax-advantaged giving vehicle, but a true partnership in impactful philanthropy.

Our challenge as advisors is not to base our view of these essential charitable tools solely on price. We must understand their distinct value propositions and guide our clients toward the solution that best aligns with their unique charitable vision and desire for enduring community impact.