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  • Writer's pictureKatie & Brian Boland

Giving Back or Cashing In?

Imagine a world where institutions designed to uplift communities are in reality feeding the insatiable appetite of the finance industry. This may sound like a dystopian novel, but it's happening right under our noses. Institutional philanthropy, with its foundations and donor-advised funds (DAFs), controls an astounding $1.5 trillion in assets. These aren't merely sitting in a vault somewhere; they are actively invested in everything from the stock market to hedge funds. What they largely aren’t invested in is impact. The intriguing part? These assets continue to grow, tax-free, while only a small percentage is used for public good.


The Illusion of Public Benefit


Let's talk numbers but in a way that tells a story. The National Philanthropic Trust's 2022 DAF report offers a sobering tableau. Private foundations alone hold $1.3 trillion in assets, with DAFs holding $234 billion. The total grants from both? A mere $140 billion a year. Now, imagine if this $140 billion were a single philanthropic effort; it would be hailed as revolutionary. But let's pull back the curtain: this $140 billion is minuscule compared to the assets held and their annual growth. These assets have ballooned from $547 million in 2009 to $1.25 trillion today. So, the question is, if this money isn't making the world a better place, what is it doing?


The MacArthur Foundation's Priorities: A Closer Look


Come with me on a journey through the offices of the MacArthur Foundation, a well-known entity in the world of philanthropy. When we examine how an organization allocates its payroll, we can gain meaningful insights into its core values and priorities. At the MacArthur Foundation, President John Palfrey is the seventh highest-paid employee. The six employees who earn more are responsible for managing the Foundation's diverse portfolio, covering Private Equities, Real Assets, Public Equities & Alpha Strategies, as well as Absolute Return & Fixed Income. Collectively, these investment professionals command an impressive $8.9 million in annual salaries.


The old adage, "you get what you pay for," rings true here. The high salaries of the investment team reveal a prioritization of skill sets that focus on asset growth and financial management. Moreover, compensation structures can serve as powerful motivators. By allocating a larger portion of the payroll to investment management, the organization is implicitly incentivizing the behaviors it values most—namely, the effective management and growth of its financial assets.


It's essential to note that this practice is not unique to the MacArthur Foundation. Across the sector, it is fairly common for investment team members to receive compensation that outpaces even the organization's leadership. This observation isn't an indictment but rather an indicator of where the focus often lies in 'financialized philanthropy.' The MacArthur Foundation has undoubtedly had a significant positive impact, with initiatives ranging from criminal justice reform to climate change solutions. However, the compensation structure does provide a lens into the financial priorities at play, which frequently lean towards asset growth and management, often meeting just the legally required minimum for charitable disbursements.


Fidelity Charitable: The Unlikely Philanthropic Leader


Transition with me from a vintage foundation like MacArthur to Fidelity Charitable, established in 1991. In just over 30 years, it has ascended to become the largest charity in the United States. But here's the kicker: it's fundamentally an appendage of Fidelity Investments' holding company, FMR LLC, a firm steeped in the world of financial services.


In 2021 alone, Fidelity Charitable raked in a staggering $121,614,046 in fees for managing their donor-advised funds. But the story doesn't end with Fidelity stuffing its coffers. Let's unveil the other players in this philanthropic fee-fest. The top five contractors connected to Fidelity Charitable make for an eye-opening list. Aside from Fidelity's parent company, FMR LLC, who walks away with $121,614,046, UBS Financial Services, another financial giant, pockets $7,854,858. Jordan Park isn't far behind, with $5,588,597. Iconiq Capital takes home $4,418,966, and Morgan Stanley Wealth Management rounds out the top five with $1,976,757. These numbers aren't just digits; they are the coordinates of a treasure map that leads back to the financial industry.


How Are The Assets Utilized?


Now that we've peeled back some layers, let's ask some critical questions about the core of the matter: how are these assets actually utilized? While you might expect a strong focus on impact investment, the reality can be quite different. Despite the public perception that philanthropic organizations are constantly working to better society, a large percentage of their assets often end up in less altruistic avenues. Traditional investments in public markets, private equity, venture capital, and hedge funds dominate the landscape. These aren't sectors necessarily known for delivering social or environmental impact; instead, they are designed to maximize financial returns.


What makes this even more concerning is that these are tax-exempt funds we're talking about. Money that could be serving public welfare is instead rerouted into the complex web of the financial industry. The paradox is glaring: the same institutions designed to ameliorate societal woes are perpetuating a system that often ignores these issues. It's an inconvenient truth about modern philanthropy, raising ethical questions about the true utility of these massive financial assets.


In summary, while society has granted these organizations the privilege of tax exemption with the expectation that these funds will serve a greater good, the focus on financial markets reveals a different priority. These funds grow tax free, pay huge fees to DAF providers, investment advisors, and financial professionals. The net result is that we have a philanthropic system that is as much, or perhaps more, about wealth preservation and growth as it is about social impact.


The Path Forward: Three Initial Key Steps


The current landscape of philanthropy, with its deep ties to the financial sector, raises a call for introspection and innovation. There are three pivotal changes that can help transform the system from a wealth-preservation engine to a dynamic force for good.


1) A New Investment Paradigm: Impact First


Foundations and Donor Advised Funds (DAFs) should pioneer a seismic shift in investment strategy, pivoting from a financial-first to an impact-first investing mindset. Currently, Program Related Investments (PRI) and Mission Related Investments (MRI) are mere slivers of a portfolio pie that is largely financial in nature. This needs to change. These impact-driven investments should make up the lion's share of portfolios, focusing on projects that yield tangible benefits for society. Think renewable energy, affordable housing, or sustainable agriculture; investments should address systemic issues, going beyond merely buffering the balance sheet.


2) A Reset on Grant Minimums: From 5% to 10%


The 5% grant minimum has long been treated more as a maximum than a true baseline. And that's not even the whole story; some savvy foundations even reroute money into DAFs they control, counting that transfer towards their 'granting' requirement. Let's not just stop at raising the minimum to 10%—let's ensure those grants get deployed effectively for public benefit. Money languishing in investment accounts serves no one except the foundation itself.


This is even more important to consider when you look at the data demonstrating that many foundations investment growth far exceeds the 5% minimum. At this rate, foundations will live in perpetuity and grow even faster to dominate our financial systems.


And for those running foundations - why not make a bold move and hit that 10% long before any legislation ask you to do so? Stop the accounting tricks like donating from foundations to DAFs and really put the money to work for good.


3) Rewriting the Rules of Compensation: Aligning Rewards with Impact


Lastly, compensation within these philanthropic organizations should be tied to their mission, not just the financial performance of their investments. It's high time the key players in these organizations—especially those in charge of investments—be held accountable not just for turning a profit, but for fulfilling the societal objectives that these foundations and DAFs claim to uphold. Introducing impact-linked compensation could become a game-changer, aligning the staff's incentives with the broader goals of societal upliftment.


In conclusion, society granted these organizations an initial tax break and continues to offer them tax advantages with the assumption that they will serve the greater good. The terms of this social contract need to be redefined. If philanthropic entities are to truly honor their societal obligations, it's time for these three paradigm shifts to take center stage. After all, we're talking about recalibrating the moral compass of an industry that holds the potential for transformative social change.


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