Donor Advising Funds (DAF) - Vehicles to Give Well and Feel Good

I was fortunate to be in the audience at the Grant’s Interest Rate Observer Conference in New York City when New York Times columnist Brett Stephens interviewed Seth Klarman, a value investing legend, and CEO and founder of the Baupost Group. I got to know the Baupost Group as I performed due diligence on the fund while working for a $2B Foundation in San Francisco. Wisely, Baupost raised cash right before the Great Financial Crisis of 2008. As part of the due diligence, I got access all of their old letters and investment holdings. Needless to say, we invested, and I learned a lot. 

At the conference, Brett asked Seth what he thought the main reason was for his firm’s track record of outperformance. Seth gave an elucidating and somewhat surprising answer. He said it was that Baupost helped facilitate a virtuous circle. Most of Baupost’s investors are endowments and foundations- organizations seeking to do good with their money. Since Baupost was in the business of growing money for these philanthropic organizations, the company tended to attract ethical and bright people who derived satisfaction from knowing their work grew wealth for a good cause. This was what led me to use my training as a chartered financial analyst (CFA) for a foundation, so it especially resonated.

Recently, I was reminded how seeking to do good for others can enhance your own well being in a delightful conversation with Jordan Fruchtman, a nonprofit executive. You can listen to it here on our podcast. During the conversation, my colleague Mark Kuperstock mentioned how he got into philanthropy by volunteering as a big brother. That led to him ultimately becoming Chairman of Jewish Big Brothers Big Sisters Los Angeles. Interestingly, Mark mentioned how it made him feel great to help others though this organization. Jordan echoed the sentiment. He mentioned that one of the most philanthropic individuals he knows confessed that the reason he gave so much was for selfish reasons: because it felt so good!

One of the reasons I enjoyed working for a foundation was that our investment group of four was surrounded by a nonprofit staff of over forty that were solely focused on how to give away the money most effectively. It’s infectious being around people that derive satisfaction from helping others. And as Jordan and Mark pointed out, it simply feels good to help others too.

To recapture that energy and positive spirit, I plan to act on one of the ideas we discussed on the podcast. I will be setting up my first donor advised fund (DAF) and I encourage you to do the same.

A donor advised fund is a vehicle that provides you with an immediate charitable deduction on your taxes upon contribution. You can invest the money and watch it grow tax-free. You then allocate the capital over time to your favorite causes. As Jordan mentions on the podcast, most donor advised funds even have resources to help you select causes that align with your values and goals. Jordan also has some great tips on the podcast on how to select an organization yourself. I encourage you to give the podcast a listen. And, if you do not already have a donor advised fund I encourage you to set one up.

The idea of setting up a pool of capital that is tax-free, generates a return over and above it’s withdrawal rate, and with a goal of doing good has always appealed to me. To maximize the impact of the DAF I plan to discuss it with my son and get him involved. He can learn about investing and beneficence, one of the requirements Adam Smith lays out to be a virtuous person in “the Theory of Moral Sentiments.” If you have any questions about setting up your own donor advised funds and how to invest it, please don’t hesitate to reach out.

However selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.

Never complain of that of which it is at all times within your power to rid.

Adam Smith, “Theory of Moral Sentiments”