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How to Get the Most Out of a Donor-Advised Fund: Vanguard

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Vanguard Charitable, a donor-advised fund sponsor, released a white paper on Tuesday written to show charitably minded individuals and families how they can best achieve their giving goals using DAFs.

Vanguard based its recommendations on an examination of the investing behaviors of some 6,000 account holders who have maintained DAFs for five or more years.

According to the paper, donors should start by writing a mission statement about what they want to accomplish with their giving, keeping in mind that different goals will have different timeframes and may require different strategies.

They should have a clear idea of which charities they wish to support with how many grants they want to recommend and when, and include steps to reach these goals.

In addition, the paper says, it is important for donors to create and maintain a balanced charitable portfolio, diversifying investment options in order to minimize losses and maximize gains over time. By considering their risk tolerance and desired time horizon, they will be equipped to select funds best suited to help reach their charitable goals.

DAF account holders should invest in options with minimal fees, allowing more dollars to be invested rather than paying investment fees. The effects of minimizing costs can have a significant effect on a donor’s portfolio, and the positive effects of low costs are compounded over time, according to the paper.

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It shows that over a 17-year period, an account with $500,000 and an expense ratio of 0.75%—versus an expense ratio of 0.25%—with a similar portfolio allocation and grants can eat away some $63,000 and nearly 7% of the amount available for granting to charitable causes.

The paper says that a focused, consistent giving strategy that includes periodically checking and rebalancing the investment allocation can help donors reach their goals and avoid unwanted risk.

Sometimes, it says, even a set strategy can occasionally evaluated against current constraints, such as retirement or a large gift for a new charity.

“Applying these key considerations can benefit donors’ charitable goals and the causes they support,” Ann Gill, Vanguard Charitable’s chief philanthropic officer, said in a statement.

“By taking the time to carefully evaluate investments, you’re committing to making greater change.”

— Check out Bloomberg Philanthropies Pushes Governments to Drive Change on ThinkAdvisor.