It only takes $5,000 to start a donor-advised fund with Schwab or Fidelity.

Eileen Heisman, president and chief executive of the donor-advised fund sponsor National Philanthropic Trust, recently spoke with ThinkAdvisor about the remarkable growth of DAFs as a charitable giving tool.

Heisman, a regular lecturer for the Nonprofit Board Leadership Program at the University of Pennsylvania’s Wharton School, also offered some observations on the recently announced Chan-Zuckerberg Initiative and a pendulum swing she has observed in how donors’ money is deployed at nonprofit organizations.

DAF Surge

National Philanthropic Trust in November reported the fifth consecutive annual increase in the number of individual DAF accounts, total grant dollars from these accounts, total contributions to them and total assets increased for the fifth consecutive year.

What accounts for this surge into DAFs?

For one thing, Heisman said, Fidelity and Schwab both lowered their minimum contribution size to $5,000 several years ago. “All of a sudden you have people who are only modestly wealthy starting DAFs. This is huge. It’s the democratization of philanthropy.”

In addition, DAFs have become a popular charitable giving tool inside financial firms. “That has allowed distribution of DAFs that previously was being done only by charitable fundraisers. That’s a really different distribution model.”

When DAFs first started, Heisman said, donors had no way of hearing about them unless they were involved with a charity that offered them. Then in the early ’90s, Fidelity launched its DAF, followed by Vanguard and Schwab.

“All of a sudden you had financial services marketing dollars and distribution strength that the for-profit world has and charities don’t, and seeing it applied to this easy-to-use giving vehicle, making it available through this new marketing effort.”

Now, the Web provides transactional simplicity. “You can open an account in a day, fund it in a couple of days and start making grants a week later. You can make a donation at 2 in the morning.”

People love the ease of it, she said, and not just moderately wealthy donors. “Very, very high-net-worth individuals are using DAFs. People can give from $5,000 to $100 million.”

Heisman noted that there have been rumblings in Washington about regulating DAFs. But Capitol Hill observers with whom she has spoken have seen little appetite among legislators to consider regulations, especially ahead of next year’s congressional and presidential elections.

Chan Zuckerberg Initiative LLC

Facebook CEO Mark Zuckerberg and his wife, Priscilla Chan, made a big splash in the philanthropic world in early December, when they announced that they would give away 99% of their shares in Facebook for charitable purposes during their lifetime — and that they had created a limited liability company to manage the assets.

The LLC is not a charitable vehicle, Heisman said, but it will give the couple flexibility to engage in activities they hope will ultimately benefit society, though not be eligible for a tax break: public policy advocacy and for-profit initiatives.

Zuckerberg and Chan have reportedly also donated $1.6 billion to charity and seem likely to continue to contribute to nonprofit organizations. They are major contributors to the Silicon Valley Community Foundation.

With the LLC, Heisman said, the couple are using something most people do not understand. “It will be interesting to see whether use of LLCs is going to spread beyond the ultra-high-net-worth domain. I think it’ll stay in that domain, but we always find new ways of doing things.

“One of the questions is, are LLCs going to find other uses? Are they going to migrate downstream? Are other people going to figure out how to use this tool?” Measuring Impact

According to Heisman, “Donors are being much more thoughtful in figuring out the impact of their gifts and also trying to figure out how to use metrics and data to determine whether their gifts are really having an impact.”

This is harder than people think, she said. “Smart donors realize that because you have a P&L sheet on the for-profit side doesn’t necessarily mean you can deploy that same technique on the charity side.”

Donors are pushing hard to get data, but are not sure what the data mean, and a big effort is underway to figure this out. “Donors are getting smarter about the questions they ask,” Heisman said.

Charities increasingly understand they have to answer those questions, but also that in order to do so, they need dollars for research and data collection.

For a long time, overhead was considered a bad part of philanthropy, Heisman said. But for a charity to obtain good data, it has to spend money on overhead.

Now, “the pendulum is starting to shift from an overhead-is-bad mentality to a realization that overhead is necessary to figure out what you’re doing, where you’re going and have good data that gives impact information.”

— Related on ThinkAdvisor: