July 15, 2024
Chris Weil
At Christopher Weil & Company we have philanthropy in our DNA. We have for many years routinely supported a number of San Diego area non-profits. Our Giving Committee, comprised of WEIL employees, solicits grantee recommendations from our staff and makes grants. Our firm’s employee compensation plan has a profit sharing component, and still we receive enthusiastic employee support for this program, which speaks to the values of the people on our Team.
Given our history, it will not surprise you to learn that we continue to expand our philanthropic offerings, including an advisor, Tyler Hewes, who specializes in philanthropic giving, the rationale and expectations for which are the subject of what follows.
Many of you are familiar with Donor Advised Funds (“DAF”s). DAFs often serve the same purpose as Family Foundations but with much less complexity. For those who are not familiar with DAFs, here is a brief primer.
As the name suggests, a DAF is an account or fund established by a donor, on a “platform,” typically a community foundation, or large financial institution, such as Fidelity or Schwab into which the donor contributes money or other valuable assets, which are intended by the donor to be used to support non-profit enterprises of the donor’s choosing.
Technically, the assets in the DAF become the property of the community foundation. (Indeed, all charitable donations yet to be deployed to the end beneficiary are deemed to be “held in public trust” and no longer the property of the donor, even if being held, for example, in a foundation bearing their name and which they helm.) With DAFs, the donor is said to be the Grant Advisor and can name the non-profits to which they wish funds to be directed, as well as the amount and timing of any distributions. Generally, the platform provider almost always approves the Grant Advisor’s choices with little to no issues.
DAFs can satisfy a multitude of donor purposes, one of the most important of which is to serve as the focal point for family philanthropy. Ideally, this will involve key (sometimes all) family members in decisions regarding amounts to be contributed and beneficiaries to be designated.
And there may be circumstances where, for example, the donor wishes to make a large contribution to their DAF, with the associated current tax deduction but, for whatever reason, make little or no current grants. This is in fact, permissible.
Caveat. The above is a greatly simplified sketch and omits the 15 to 20 pages of small print which needs to be read in order to understand DAFs properly.
There are about two million DAFs on various platforms in the United States. Their grantees, as you might expect, number in the thousands and range from churches, to schools, hospitals, food banks, homeless shelters, think tanks, animal welfare organizations, scholarship programs, and the list goes on.
In the San Diego area, there are between 3,000 and 5,000 active non-profits. These range from the very large (hospitals, universities) to the very small (of which there are many). By my estimation, San Diego area DAFs have billions in cash and assets.
So, let’s say about 4,000 non-profits in the San Diego area; and billions in San Diego area DAF assets. And how much each year is being granted from DAF assets to these 4,000 non-profits? The numbers tend to be fuzzy but it looks like somewhere in the neighborhood of 16% of DAF assets. (If this seems high, remember that many DAFs are pass-throughs such that a significant portion of their distribution in any given year arises from that year’s donor contribution.)
In many situations, these DAF assets sit undistributed year after year, a subject, by the way, of much interest to many in the philanthropic community for some years now. I think the funds go undistributed because 1) since the deduction is taken in the year the donation is made to the DAF, there’s no tax incentive to prompt decision-making, and 2) people like to see their money grow, even if it’s money they’ve given away but over which they still have some asset allocation control. And in what form are these undistributed assets? In virtually all cases, they are invested in liquid assets (cash, stocks, bonds, mutual funds, ETFs).
It is an interesting paradox at the heart of the DAF enterprise – a DAF established exclusively for charitable purposes sits for lengthy, sometimes indefinite periods of time, with virtually all of its assets invested for no direct charitable purpose whatsoever.
I have a good understanding of some corners of the philanthropic community (particularly in San Diego), and a supporters perspective for others. But I do not live in the daily triage of non-profit work (which is often how the work can manifest), so in that way my perspective is limited. But my position also provides me the luxury of a macro view, to dream a little bigger, and to promote the conversation.
So here is my abbreviated version of how the paradox of the DAF enterprise might be resolved. Allocate a percentage of DAF portfolio investments away from conventional assets and to investments in qualified non-profits (and, incidentally, to qualified for-profits whose operations serve a socially significant purpose) - not as grants but as debt or equity instruments to be added to the existing DAF portfolio. (Think of the advantages of recycling; that is, where appropriate, converting grants from money gone to money back for further use.)
At first blush, this seems somewhere between unworkable and crazy. We all have experienced non-profits who are running on fumes where the likelihood of repayment of debt or redemption of equity is zero to nil. Here is the way I think about it.
Start with the 4,000 and make some assumptions. One obvious assumption: a much lesser number will meet the qualifications necessary for investment. These qualifications would include that the non-profit:
be well managed;
provide a much needed product or service;
be able to demonstrate that new capital would allow investment in capacity building and so expand service provision capability going forward;
be able to demonstrate a realistic plan of repayment (which could be from earned income or from guarantees provided by supporters or both) within a realistic term, say 5 to 10 years.
As of yet, we can only guess at the number of entities meeting these qualifications. I have done some nonprofessional surveys and have concluded the number is somewhere in the range of 8 to 10% of 4,000, so say 400 and then, in the interests of conservatism, cut that in half and call it 200.
We already know, intuitively, that the impact could be dramatic. For instance, if a particular qualified non-profit has an annual budget of $2 million, we know without yet being able to quantify the effect, that an investment of, say, $500,000 would cause a demonstrable increase in the ability to build capacity and so considerably expand impact on its constituency. DAF advisors instructing their platform providers to allocate some percentage of their investment portfolio (10%, 20%?) to impact investments in qualified investees in the San Diego area sounds like a winner.
So how does one go about allocating part of their DAF to impact investing?
Our primary DAF platform, Fidelity, does not currently have the ability to offer such a solution, but we’re working with them to explore options as part of their investing strategies, and we will continue to push them to offer better solutions. However, in the meantime, we have identified a DAF platform that will allow the DAF Advisor to allocate funds to a qualified local non-profit that is seeking equity or debt.
We believe that our clients and prospective clients (those who have or want DAFs) will resonate to the opportunity to identify and then invest in quality local non-profit enterprises. If you are one of these, then call us to discuss your interest and how we might support it.
Speaking of philanthropic endeavors (and at the risk of patting ourselves on the back), I share below an example of one component of my family’s philanthropic work, with which we are particularly pleased. Here is the text of a short talk my daughter Kit gave at the recent Preuss UCSD scholarship ceremony which highlights some of this role. (Preuss UCSD is a college prep charter middle and high school for low-income students):
“My sister Caitlin and I are here to recognize the 2024 Weil Family Foundation scholars on behalf of the Weil Family Foundation board, which in addition to us, includes our brother Matthew Weil, and our parents Chris and Pat Weil.
Back in 1999, our parents read about the opening of the Preuss School UCSD. They were the first in their families to go to college, so Preuss’ First Generation mission immediately resonated with them. In 2004, when Preuss had its first graduating class, our parents started the Weil Family Foundation Preuss Scholarship and invited my sister, brother, and me to run the scholarship program with them.
This is a hallmark year for us, too, because it’s our 20th anniversary of providing scholarships to Preuss students. Due in large part to our parents’ hard work, good fortune, privilege, and generosity, in total (so far) the Weil Family Foundation has awarded, including the scholars being recognized today, 260 Preuss scholarships totaling a little over 2.4 million dollars. But, the Preuss scholarship is not just about numbers for us. Our family has been enriched by treasured friendships with many of our scholars (some of whom are now pushing 40)!
I share all of this because I know we can all get weary about the political, economic, and environmental state of the world. In my case, sometimes I find myself feeling hopeless.
But then scholarship selection season rolls around. As I do every year, I spend hours and hours (and hours) reading applications, essays, transcripts, and Letters of Recommendation, and I participate in hours and hours (and hours) of interviews. And what I always find in all of those materials and in all of those conversations is a cohort of aspiring college students diligently going about the business of preparing themselves. Preparing themselves to serve and strengthen their communities. Preparing themselves to improve social justice so that opportunities might reside in places, and for people, where they didn’t before. Preparing themselves to participate in reshaping the economy so that it works for the well-being of people and the planet. I see all the work they have done so that they may be in the spaces where critical decisions are being made and impactful change is being deployed. Then I think about how much of this work is being done by past Preuss students. And I realize that what I’m seeing in the applications I’m reading is actually being duplicated tens of thousands of times over, all across the country. And I find myself feeling extremely hopeful.
Members of this year’s cohort have big dreams. Three are attending UC San Diego, one is attending Yale, and two are attending UCLA. At this point in their journey, our scholars are working toward careers in stem cell research, nursing, pediatrics, mechanical engineering, architecture, and improving access to healthcare; all vital work needed to sustain a healthy society.”
Our relationship with Preuss has inspired us to establish similar scholarship programs with Gompers Preparatory Academy, Borrego Springs High School, Students Without Limits, and the San Diego Black Students Scholarship Program.
This communication may contain privileged and confidential information; people other than the addressee should not review, distribute or duplicate it without permission. Nothing in this communication constitutes a solicitation by us for the purchase or sale of any securities. We do not accept account orders or instructions by e-mail, and will not be responsible for carrying out e-mailed orders or instructions. We provide reports as an accommodation to help you monitor your investment activity; securities pricing may not reflect reliable values. In the event of a discrepancy, the information in your confirmations of daily activity and monthly statement of account shall govern. While the information in this communication comes from sources believed to be reliable as of today, we make no representation as to its accuracy and completeness and provide no assurances as to future returns or performance. We may own positions in securities mentioned in this communication. Investing involves risks, including the possible loss of the principal amount invested. There can be no assurance that recommended investments will be successful in meeting their objectives. Investment in mutual funds is also subject to market risk, investment style risk, investment adviser risk, market sector risk, equity securities risk, and portfolio turnover risks. More information about these risks and other risks can be found in the fund prospectus. You may obtain a prospectus for CWC's mutual funds by calling us toll-free at 888.550.9266 or visiting www.cweil.com. The prospectus should be read carefully before investing. CWC's mutual funds are distributed by Arbor Court Capital, LLC, Member FINRA/SIPC. Nothing herein should be construed as legal or tax advice. You should consult an attorney or tax professional regarding your specific legal or tax situation. Christopher Weil & Company, Inc. may be contacted at 800.355.9345 or info@cweil.com.
Comments