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How Fidelity Investments built America’s biggest charity

The tax return of America’s biggest charity runs more than 5,000 pages. It details $10 billion in donations to tens of thousands of -nonprofits, including youth centers, theater companies and soup kitchens. At least 1,300 Baptist churches are listed, as are Planned Parenthood, the Environmental Defense Fund and Teach for America. Page 738 of Schedule I shows $100,000 flowing to Puppies & Golf Inc.

The return reveals something else, too: hundreds of millions of dollars of transfers to entities linked to financial services firms such as Morgan Stanley, Schwab and Vanguard.

A Carnegie, a Ford or a Gates didn’t establish this philanthropic colossus. Its creator was Fidelity Investments, one of the world’s largest money managers. Three decades ago, the company persuaded the U.S. government to let it build a charity that would offer — sponsor, in industry parlance — a then obscure kind of account called a donor-advised fund, or DAF. People who give to one get an upfront tax deduction for the irrevocable donation. The money can then sit there until donors tell the sponsor to distribute it to their charities of choice. Fidelity marketed this perk to Americans eager to cut their tax bills but unsure where to give. It eventually dropped minimum account balances for individuals to zero, making them accessible to the masses and leading to a sea change in philanthropy.

Rivals including Charles Schwab and Vanguard followed suit, making DAFs one of the fastest-growing areas of philanthropy. Organizations that sponsor the funds now rank, by the value of grants made, among the largest charities in the U.S., with Fidelity leading the pack. Individuals, corporations and others rely on DAFs because they’re flexible and convenient. In 2021, the accounts held about $234 billion, more than double four years earlier, according to the National Philanthropic Trust, which compiles reports on the DAF industry and offers accounts of its own.

This boom is stoking concern that donors are stockpiling money instead of handing it out to working charities. Some private foundations have even turned to DAFs to delay and conceal where they’re giving, reported in October. There’s no time limit for emptying the accounts. But members of Congress have proposed requiring donors to distribute the money within 15 years if they want all the upfront tax breaks. The industry opposes the change.

Fidelity Charitable, the nonprofit that the money manager created to sponsor its accounts, has made the case for DAFs by showcasing good works. Its annual Giving Report emphasizes the flood of grants its donors make every year and the accounts’ widespread use, especially by those with smaller sums to distribute. The median account holds $24,086, the company says in its latest report.

But a Bloomberg review of Fidelity Charitable’s tax returns, which provides the most detailed look yet of its donors’ giving, shows that the portrait the company paints in its -marketing is incomplete. Between July 2016 and June 2021, the organization sent at least $1.4 billion to other major DAF sponsors and received $1.5 billion from those same entities. In other words, donors were shuffling money around. The transfers let sponsors take credit for donations moved to another middleman rather than a working charity.

These sorts of payments are on the rise, according to a 2021 study by researchers at Indiana University’s Lilly Family School of Philanthropy for Giving USA. In October, California regulators released an audit that suggests such transfers account for $1 out of every $10 that DAFs distribute.

“If money is going from DAF to DAF, it’s not really a payout,” says Brian Mittendorf, an accounting professor at Ohio State University who studies nonprofits. “It’s just a transfer from one pocket to another.”

In its 2022 Giving Report, Fidelity touts the number of its accounts supporting popular charities, including Doctors Without Borders USA (more than 11,000) and the American National Red Cross (more than 8,500). But a list of the biggest–dollar recipients in the tax filings looks quite different. Wealthy institutions such as the Church of Jesus Christ of Latter-day Saints, whose adherents are often referred to as Mormons, and elite universities including Harvard and Stanford got far more, even though fewer DAF accounts sent them money.

Other charities topping the list can reflect the priorities of a single billionaire, such as MacKenzie Scott or Jack Dorsey, suggesting that DAFs are as much a tool for the ultrawealthy as they are for the masses. The Giving USA research found that DAF donors, like high net worth individuals, tend to concentrate on education, culture, art and the humanities.

Fidelity Charitable says that there are several reasons for transfers among DAFs, such as when a donor changes financial advisors, and that, even excluding the inter-DAF flows, its accounts give generously. Highlighting where a few donors send lots of money “ignores the generosity of hundreds of thousands of our donors,” the company said in a written response to questions.

The nonprofit sector raises more in the fourth quarter than at any other time of year, with about one-fifth of donations made in December alone. As Americans plan their year-end giving, Fidelity’s sales machinery cranks up to help them capture a share of the $50 billion in federal tax breaks handed out annually for contributing to charity. That process is -reinforcing a model some critics say distorts philanthropy and should be subject to greater regulation. “Our conception of what it means to give is -changing,” says Roger Colinvaux, a law professor at Catholic University of America and a former counsel to the Joint Committee on Taxation of the U.S. Congress. “It’s about the donor and not the charity.”

Donor-advised funds date to the 1930s, when foundations such as the New York Community Trust pioneered them. But they didn’t really take off until Edward “Ned” Johnson III, the son of Fidelity’s founder, dreamed up a way to offer them to clients. The idea was to create a public charity that sponsors the accounts and relies on the investment firm to manage the money donors contributed. Those donors, not the money manager, decide which charities get the gifts.

Fidelity, based in Boston, applied to the IRS’s Brooklyn, New York, office to establish a new tax–exempt entity, according to a 1998 Wall Street Journal article. Washington officials realized what had happened only after the request had been approved in 1991, says Paul Streckfus, editor of the EO Tax Journal, who covered early debates over DAFs. The application “should have received a lot of scrutiny,” he adds. “Someone stamped it approved, and Fidelity was off to the races.”

A marketing blitz in the 1990s extolled the benefits to donors, and money started pouring in. Fidelity maintained its lead over the growing ranks of sponsors by leaning on its network of in-house financial advisors to sell the accounts. The company was also ahead of its rivals in accepting assets, such as stakes in hedge funds or crypto, that can be harder to liquidate, allowing people with more complex wealth to free it up for charity.

Money now routinely sloshes back and forth among the major DAF sponsors, tax returns show. Since 2017, donors to the Goldman Sachs Philanthropy Fund have directed more than $800 million to Fidelity Charitable. Meanwhile, Schwab and the National Philanthropic Trust — which partners with banks such as JPMorgan Chase and Wells Fargo to offer DAFs to their clients — have been among the 10 biggest recipients of Fidelity’s grants in recent years. Payments from those two outfits and only six others totaled $1.4 billion between July 2016 and June 2021, or more than 4% of all giving from Fidelity Charitable.

Sponsors, which compete on price and service, say the transfers are no different from someone moving a checking account from one financial institution to another. Some donors may be inclined to switch if they get a better deal. Others have multiple DAFs and may be shifting assets among them. Donors also use the accounts as a way to collaborate and pool funds with others on shared initiatives.

But the transfers can make it seem as if more money is flowing to working charities than actually is. The National Philanthropic Trust includes DAF-to-DAF payments in a widely circulated report, which says the industry distributed 27% of assets to charity in 2021. (The trust says there’s no reliable way to quantify transfers to other DAFs.) Fidelity says its own payout rate, which includes DAF-to-DAF transfers, has ranged between 22% and 27% in the past five years. The industry has cited these statistics to bolster the argument that donors are moving money to charity and accounts should, unlike private foundations, be free from mandatory distributions. The average payouts also obscure how many donors empty their accounts each year and how many hardly touch them.

Having the money sit in the accounts can be a boon to the sponsoring organizations. As of June 2021, about half of the almost $50 billion at Fidelity Charitable was parked in Fidelity investment pools, the most recent financial statements show. These pools are predominantly low-cost, but they probably generated more than $90 million a year in fees, based on current expense ratios. The most recent tax return also shows that Fidelity collected $94 million from its DAF operation for administrative and other services.

Fidelity Charitable says that nonprofits always rely on for-profit businesses to provide services such as investment management and accounting. Its link to Fidelity Investments keeps costs low for donors because services are offered “at or below market value,” allowing more money to go to nonprofits, according to the organization. (The biggest donors to Fidelity’s DAFs can have their own investment advisors manage the money in their accounts.)

In its annual Giving Report, Fidelity highlights the most popular charities, which it defines as those getting the largest number of gifts. In 2021, Doctors Without Borders led that list, followed by St. Jude Children’s Research Hospital and the American National Red Cross. Yet none of them cracked the top 25 grant recipients measured by total dollars in Fidelity’s most recent tax return. Over the five years Bloomberg reviewed — which cover July-to-June reporting periods, rather than calendar years — Doctors Without Borders received $107 million. Harvard University and the Mormon church each got almost five times as much ($503 million and $506 million, respectively), and Stanford University almost twice as much ($205 million).

Like many ultrawealthy people, Jack Dorsey, the co-founder and former CEO of Twitter, has used donor-advised funds.

Some of Fidelity Charitable’s other top recipients are more idiosyncratic and likely explained by the preferences of a few billionaires. A handful of historically Black colleges, including Prairie View A&M University and Virginia State University, vaulted up the list in the most recent tax return, after Scott, former wife of Amazon founder Jeff Bezos, made tens of millions of dollars in grants to each.

The filings also show that actor Sean Penn’s nonprofit Community Organized Relief Effort made the list of top 25 recipients the year that Twitter co-founder Jack Dorsey pledged a total of $30 million. Chicago’s Museum of Science & Industry rose on the list in the years after a $125 million gift from Ken Griffin, CEO of the hedge fund Citadel.

And the biggest recipient of money from Fidelity Charitable over the five years analyzed, getting about $813 million, was Johns Hopkins University. It saw a surge in donations the year Michael Bloomberg pledged $1.8 billion for financial aid to low- and moderate-income students. Representatives of Bloomberg, Dorsey, Griffin and Scott either didn’t respond or declined to comment about their gifts.

Even though Fidelity Charitable, like many tax-exempt organizations, is required to file annual public tax forms with information about where its money goes, the IRS doesn’t compel DAF sponsors to say who’s behind a gift or even how many donors supported a particular nonprofit. Fidelity Charitable says its donors often tell the charities they’re supporting where the gift came from. But they don’t have to make a giver’s identity public.

This lack of transparency has been a draw for some who want to keep their affairs private. It’s allowed more than $12 million over the five years analyzed to move anonymously from Fidelity Charitable to organizations identified by the Southern Poverty Law Center as hate groups. They include the David Horowitz Freedom Center, which SPLC says has given “anti-Muslim voices and radical ideologies a platform to project hate and misinformation,” and the Alliance Defending Freedom, which the law center says has supported efforts to criminalize sex between consenting LGBTQ adults.

The alliance says the SPLC’s blacklist has been discredited but that Fidelity Charitable has deterred gifts by preventing some donors from making contributions unless they give up their anonymity. The Horowitz Center didn’t respond to messages seeking comment. Fidelity Charitable says it’s “cause neutral” and doesn’t impose values on donors, relying on the IRS to “determine a charity’s legitimacy.”

The secrecy of donations from DAFs, and their surging popularity, has made it harder for nonprofits to target donors for solicitation. Smaller organizations lack Harvard’s fundraising office and alumni lists, says Jon Pratt, senior research fellow at the Minnesota Council of Nonprofits.

“Here’s a whole new class of institutional philanthropy that’s a black box,” he said. “We don’t know who the donors are, when they gave or what the purpose is.”

As the debate intensifies over whether DAFs are hoarding donations, Fidelity Charitable has honed a pitch that keeps pulling in money. During a webinar in October, one of its consultants shared tips with wealth advisors on how to maximize donor benefits from contributing to its DAFs, including selecting the right assets to give and “bunching” donations into a single year to squeeze tax bills to a minimum. Another presenter explained that marketing the accounts deepens relationships with clients and gets closer to their children. The online chat pinged with additional information. Notably absent from the discussion were mentions of any charities or how to help clients find a cause that matters to them.

Fidelity Charitable says that more than 80 people there work with nonprofits. Its dialogue with other charities has led it to encourage more DAF clients to make unrestricted gifts and use electronic funds transfers to speed giving. It also provides research on its website to help donors select charities.

But interviews with several of its DAF donors suggest no one’s prodding them much to figure out what to do with the money in their accounts. Emails go out periodically to encourage distributions, especially after natural disasters or major crises such as the Russian invasion of Ukraine. Even these notices are optional and include links to unsubscribe.

“You can receive as little information from them as you want,” says Mac Liman, a co-trustee on a Fidelity DAF. Her father, Les, set up the fund with more than $1 million in 2017 after making a fortune in the waste-disposal business in Colorado. The money initially sat. As Liman started pestering her dad to give it away, she realized they needed a plan. Liman found that Fidelity had a team of philanthropic consultants who would help them — for a fee — but the Limans decided to pay an outside advisor instead. The experience left her feeling that the DAF was designed to warehouse wealth rather than give it away. “It’s like a storage unit,” she says.

Fidelity requires that donors keep their accounts active or risk having 5% of the assets distributed on their behalf. The minimum to stay current is just a single $50 donation every two years; Fidelity says 99% comply.

Boston College law professor Ray Madoff and John Arnold, a former Enron trader who became a billionaire running an energy-focused hedge fund, proposed a plan to speed up giving from DAFs by putting a time limit on distributions. Congress took up the idea last year, but it hasn’t advanced.

“The incentive for DAF sponsors is to grow AUM,” Arnold said, referring to assets under management. “I do not see it solved without regulation.”

Even some of Fidelity Charitable’s donors are supportive. Richard LeBaron, a 71-year-old retired diplomat, has contributed to one of its DAFs for about a half-decade and disburses most of the money he puts there each year. He says the industry should accept regulation mandating minimum annual payout rates of 20%, four times the level required of private foundations.

“Fidelity should know that some of their owners of donor-advised funds are for reform, not against it,” he said.

Others aren’t waiting for legislation. Jennifer Risher and her husband, David, earned millions from working at Microsoft in the 1990s before he went on to a job at Amazon and co-founded a nonprofit to promote reading. For years, they made donations through a Fidelity DAF. But they grew concerned that others were piling up money in the accounts, especially after the pandemic began and the needs of so many soared. In 2020 they started a campaign called #HalfMyDAF that offers matching grants to encourage people to give away 50% of their balances.

Their effort has spurred more than $33 million in giving. The reaction from Fidelity and other sponsors was “Love it, love it, love it,” Jennifer Risher says. But she’s struggled to get any of them to promote the effort, something she chalks up to their economic interest in seeing the money accumulate. (Fidelity Charitable says its more than 250,000 donors have their own timing priorities and rushing them is a disservice.) After researching alternatives, the Rishers opened a new DAF at a sponsor called Possibility Labs, which requires donors to distribute at least 10% of their balances annually and waives fees for those who move more than 40% a year, she says.

The Rishers continue to use Fidelity for an account they set up to handle matching grants for people who halve their DAFs. The campaign gives out hundreds of donations in a day sometimes, a task best suited for the market leader, Jennifer Risher said.

“Sometimes the best way to change a system is by working within it.”



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