Keith SjögrenBy Keith Sjögren.

Over the past five years, assets held in donor-advised funds (DAFs) in Canada have increased approximately 20%, much of it achieved by DAF-holding foundations associated with financial institutions and financial-advisor networks. Community foundations have yet to embrace flow-through DAFs, the most popular form of DAFs, to the same degree as DAF-holding foundations.

What is influencing DAF increases?

Given the maturing of the DAF sector, and the damage to asset levels inflicted by capital market value declines, and assuming that DAF granting rates will remain at current levels, it’s unlikely that this rate of growth will be maintained, and a more modest gain in asset levels is projected for 2023.

Asset levels in DAFs are influenced by a number of factors, including:

  • the rate of new fund openings;
  • the level of donations to both new and existing funds;
  • distribution rates of funds;
  • the flow of investment income; and
  • the increase or decrease in the value of investment assets.

Average assets per DAF in Canada are about $275,000; as an average, this level is influenced by a relatively high number of funds – thought to be at least 10% of DAFs – with assets in excess of $1 million. For 2023, it’s not anticipated that this average asset level will decrease materially, although the experience in the US suggests that maturity, a rapid increase in fund numbers, and heightened granting activity will eventually lead to lower average DAF assets.

While most DAF indicators are positive, the level of awareness of DAFs among investors who make charitable donations remains low. In 2022, a survey by Mackenzie Investments indicated that less than 20% of investors were aware of DAFs. Both donor and advisor education are expected to be a key initiative for DAF foundations in 2023.

Changes in share within the DAF community

Qualitative research suggests that the appeal of administrative simplicity, convenience, privacy, and the need to integrate philanthropy into a multi-generational wealth plan will offset the impact of a weaker economy and lead to further increases in new DAFs at all types of foundations.

The link between philanthropy and wealth planning, coupled with the increased number of financial advisors with awareness of, and direct access to, DAF programs, may lead to a further erosion of the share of DAF assets held by community foundations in 2023, and a lower-than-average increase in the creation of new private foundations.

Based on data provided by Philanthropic Foundations Canada, there was a net increase of only 149 private foundations between December 2018 and September 2022. Based on a sample of 2021 DAF foundation data, it’s likely that the growth in number of DAFs with initial donations over $5 million during the same period was far higher.

Grants from DAFs

Preliminary estimates for 2021, indicate that the flow of grants from DAFs over the previous four years increased at a higher rate than the inflow of donations. This flow metric, together with an average DAF distribution rate of approximately 13%, goes a long way to counter criticisms of capital hoarding that is frequently leveled at DAFs.

Anecdotal evidence further indicates that high grant flows have continued into 2022, and there’s no indication the DAF donors plan to decrease their support to both national and local charities in 2023.

Charities benefit from DAFs

Large charities (hospitals, universities and disaster-relief organizations) continue to receive the bulk of grants (in terms of value) from DAFs, an area of concern to policy makers, some operating charities and other critics who would prefer to see a wider distribution. The support provided to small, local charities is a differentiator between community foundations and foundations linked to financial institutions, the latter tending to focus on planning and order execution services rather than their role as a charity.

The absolute number of charities benefiting from DAF grants has also recorded a significant increase. Using data filed by the foundations representing nearly 50% of DAF assets, the number of charities supported by the DAF community increased by 45% between 2018 and 2020, with one prominent DAF foundation recording an increase of 84%. Not only are the number of grants increasing but also the range of charities to which grants are directed is increasing. This expanding impact of DAF grants is expected to continue in 2023.

Regulation will likely increase

As the DAF sector becomes a more important participant in the Canadian charitable community, it will likely attract increased scrutiny from regulators. That was demonstrated in the April 2022 federal budget, and it’s likely that in 2023 there will be further initiatives taken to materially improve the collection of data dealing with DAFs.

The increase in the annual Disbursement Quota (DQ) to 5% from 3.5% (for charities with investment assets over $1 million) that has now come into effect is unlikely to have a significant impact on granting rates in 2023, other than at community foundations, where a majority of DAFs are in endowed, not spend-down, format. However, some other foundations that impose a DQ on each DAF will likely elect to change the required disbursement rate. This may lead to a clear distinction in 2023 between foundations, such as Benefaction, that imposes an internal DQ on all DAFs and foundations, such as the Private Giving Foundation and some community foundations, that allow donors greater flexibility by not requiring a minimum level of granting in any specific period.

Outlook: more growth

The outlook for 2023 is for further growth in assets and numbers of DAFs, as well as in the flow of financial support to operating charities.

The number of foundations offering DAF services will likely increase slightly, although the barriers to entry are getting more formidable as the sector becomes more concentrated among the largest community foundations (including religious communities) and bank-associated foundations and as the cost of technology increases, donors become more demanding in terms of services and reporting, and as the threat of disruptive regulation and more intense scrutiny becomes a reality.

Keith Sjögren is a consultant and researcher on wealth and financial services, as well as Chair of the MPNL Advisory Council. Read his 2021 article, “Fundraising Opportunities with High Net Worth Canadians & Their $5.9 Trillion.” Photos on this page are courtesy of Michelle Spollen, Justin Wilkens, Shane, Sean Pollock, Jungwoo Hong and Dahlia Katz.

Saturday, January 28, 2023 in , , ,
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