If you are an advanced investor or getting advice from one, a big problem with DAFs is that they generally have limited investment options. When I evaluated them in ~2010, I found that the lower expected return in the DAF would consume the tax advantage in a few years. However, then we found the Community Foundation in Boulder (you don’t have to be in Boulder, but you probably have to be in the US), which actually gives investment freedom. Though there are fees, they are significantly less than the initial tax advantage plus the advantage of being able to grow tax-free. I have been using this DAF since 2015 and it has worked well.
One concern I have with the Community Foundation in Boulder is it’s not clear how committed they are to letting donors direct money however they want. Unlike the national DAF providers (Schwab, Vanguard, Fidelity), it seems like there’s a decent chance they will at some point change their mind and decide you are only allowed to give to the causes that they like. How are you thinking about that risk?
I don’t think that’s how DAFs work? I believe the DAF legally owns the money and can do anything they want with it. You can ask them to donate the money to a different DAF that you created, but they have the right to refuse to do that.
I confirmed with them that the donor has the control of where the money goes, unless they deem it a hate group. And they are also okay with transferring to another DAF.
If you are an advanced investor or getting advice from one, a big problem with DAFs is that they generally have limited investment options. When I evaluated them in ~2010, I found that the lower expected return in the DAF would consume the tax advantage in a few years. However, then we found the Community Foundation in Boulder (you don’t have to be in Boulder, but you probably have to be in the US), which actually gives investment freedom. Though there are fees, they are significantly less than the initial tax advantage plus the advantage of being able to grow tax-free. I have been using this DAF since 2015 and it has worked well.
How did you estimate the expected return in a DAF vs. unconstrained?
Calculate the expected return of the investments based off a 7 year mean reversion (GMO) or 10 year mean reversion (Research Affiliates).
Cool! Does that mean you’re overweighting emerging markets?
One concern I have with the Community Foundation in Boulder is it’s not clear how committed they are to letting donors direct money however they want. Unlike the national DAF providers (Schwab, Vanguard, Fidelity), it seems like there’s a decent chance they will at some point change their mind and decide you are only allowed to give to the causes that they like. How are you thinking about that risk?
I’m fairly sure I could change custodians if that happened (like people can do with retirement accounts).
I don’t think that’s how DAFs work? I believe the DAF legally owns the money and can do anything they want with it. You can ask them to donate the money to a different DAF that you created, but they have the right to refuse to do that.
I confirmed with them that the donor has the control of where the money goes, unless they deem it a hate group. And they are also okay with transferring to another DAF.
Good to hear, thanks for confirming!