Let’s say that, rather than leading a team at a financial institution, you own a restaurant. You’ve got a solid customer base that loves what your kitchen turns out. From appetizers to desserts, they know they can rely on your culinary team to give them a great meal and an exceptional experience.
Lately, though, you’ve heard that some of your more sophisticated customers are catching onto a popular specialty dessert that your team has neither the tools nor expertise to create. The good news is that those customers continue to dine with you, but they’re skipping out after the entrée to get dessert at another restaurant.
So you consider your options:
- Option 1: Do nothing, confident that your customers will stay with you for the biggest part of their meals.
- Option 2: Gear up to create the specialty dessert in your own kitchen. This will require purchasing new ovens and equipment and either hiring new staff or training your existing staff to take on this expertise in addition to their current responsibilities.
- Option 3: Collaborate with the restaurant that specializes in this popular dessert by offering its version on your menu under its brand.
- Option 4: Collaborate with that restaurant to offer the dessert under your own brand.
Obviously, I’m not here to tell you how to run a restaurant. I offer that scenario as an analogy for something you might be experiencing at your financial institution: Your customers are happy with the products and services you offer, but they’re going to other sources for one of the most popular charitable giving vehicles, donor-advised funds (DAFs).
That presents you with a dilemma similar to the one I described above: Do you let your customers find their DAF services somewhere else, do you gear up to provide in-house DAF services, or do you find a partner that can help you provide DAFs, either under their brand or yours?
The increasingly popular DAF
Before I look at those options, let’s talk briefly about why this scenario matters.
First, it matters because the majority of your clients likely give to charity in some way. A Lilly Family School of Philanthropy study suggests that nearly 50% of all Americans give to charity, but a recent Bank of America study revealed that the percentage leaps to 90% when the focus is on high-net-worth (HNW) individuals.
Second, it matters because it’s likely that your charitable clients either already have made DAFs a part of their philanthropic strategy or they’re thinking about it. DAFs have been recognized as the nation’s fastest-growing philanthropic vehicle, with the 2022 DAF Report reporting that there are nearly 1.3 million DAF accounts with more than $234 billion in assets.
Why are DAFs so popular? Because they are one of the most flexible and tax-effective ways to contribute to charity. They give investors a tax-advantageous way to create a pool of funds from which they can recommend grants to nonprofit organizations that matter to them.
This approach allows them to set aside money for charitable giving before they decide exactly how they want to distribute it, which means they have greater flexibility and opportunities to give when and where they feel the impact will be greatest. DAFs also allow families to plan and execute giving together and allow the establishment of long-term legacies. For all of these reasons, DAFs mesh well with most clients’ long-term financial goals.
That’s why if you’re not offering DAF services, it’s likely that many of your customers are finding those services somewhere else – and, as a result, putting some of their assets under someone else’s management.
Two options, two potential headaches
Let’s look at your first two options, which offer a couple of extremes in that one is easy but carries perhaps a lot of risk in terms of client relationships, and the other is incredibly difficult but would allow you to strengthen relationships.
Option One: Do nothing. Yes, you can do nothing, confident that even those clients who find DAF services somewhere else will continue to rely on your team for wealth management and counsel. But there are some problems with this option.
First, with so many people making charitable giving a key part of their financial lives, it would seem that you’re not truly providing holistic wealth management if you aren’t involved in that aspects of their lives. Second, there’s always the risk that the organization providing DAF services to your client might lure that client away with other wealth management services. And, finally, if clients are getting DAF services elsewhere, you’re missing out on assets that could be under your management.
Option Two: Develop an in-house DAF operation. This approach may seem to be the most logical, as it allows you to offer DAF services without surrendering control, client relationships, or assets to another institution. To do this, you’ll need to build a team that can provide a range of activities, including donor and advisor education and support, transactional and accounting processes and reconciliations, grant processing, due diligence, and more. You’ll also need to acquire or develop technology to serve DAF clients and to be able to respond to seasonal fluctuations in activity, such as when activity triples or quadruples toward the end of the year or when tax season requires the generation of documentation.
You also have to decide if you want to establish your own 501(c)3 nonprofit organization to act as a sponsoring charity for your clients’ DAFs. This is a technical process that requires the development of the nonprofit organization’s bylaws and policies and other documents as well as the compliance processes and expertise. While a challenging undertaking, the creation of the sponsoring charity would give your institution greater control over the DAF program as a whole.
It should be noted that some institutions adopt a hybrid model in which they handle some DAF activities – such as donor and advisor support – and outsource activities such as transaction processing, accounting, and grant processing. This allows the financial institution to maintain the client relationship without adding so much technical expertise to its team.
Obviously, creating an in-house DAF program carries certain enterprise risks, including the risk of program failure. On the other hand, if successful, it could cement relationships with your existing clients and give you a differentiating client benefit.
The outsourced option(s)
While I have tried to be straightforward and factual about the pros and cons of your first two options, it should be obvious that, as an organization providing DAF services – and with an affiliated sponsoring charity, Renaissance Charitable Foundation – Ren contends that most financial institutions would benefit from outsourcing their DAF operations, either letting Ren be the face of DAFs to your clients or tapping into our white label option to put your brand front and center.
Either way, outsourcing your DAF infrastructure and operation relieves you of the need to add a new product ecosystem – processes, technology, systems, expertise, and human resources – without surrendering control or assets under management.
That last point is a key one: Outsourcing your DAF function to Ren means assets in the DAF remain on your firm’s balance platform as assets under management. Plus, your advisors can continue to work with their clients to direct how DAF funds are invested and to recommend what organizations receive grants from the DAF.
When you work with Ren on your DAF program, you get a partner who has worked in the charitable gift space for more than 35 years and has the expertise, technology, and infrastructure you need to provide DAF services to your clients. We can scale our services to virtually any size institution or any level of business, and we can flex to accommodate seasonal fluctuations in activity.
Here’s what one of our clients had to say about partnering with Ren:
“I have worked with the team at Ren for almost 10 years and their partnership has allowed my firm to grow our DAF business exponentially since private labeling our program. Their transparency, communication, and collaboration have been incredibly valuable— when issues or opportunities arise, I know I can reach out to folks at any level of the organization and receive a prompt response and work toward a mutually beneficial outcome.
Their tech platform has grown by leaps and bounds and makes grantmaking incredibly easy for donors and their advisors. In addition to serving as the backbone of our philanthropic programs, their consulting group is our go-to for particularly tricky charitable planning questions!” – Heather Zack, Manager, Advanced Planning at Commonwealth Financial Network
In all, Ren offers more than 60 specific services under six broad program areas:
- New Accounts: Ren makes setting up new DAF accounts easy by handling myriad activities including such things as client enrollment, validation, donor communication, and legal review.
- Investments: Ren provides investment support that includes: account web access; daily, monthly, and quarterly reconciliations; general ledger integration; monthly activity reports; and statement generation.
- Contributions: Ren accepts contributions into the DAF account in various forms, including cash, publicly traded securities, complex assets, credit cards, asset liquidation, and more. We also generate documentation and tax receipts and provide legal review.
- Disbursements: Ren processes grant disbursements through various means, providing daily or weekly disbursements, bank account reconciliation, and more.
- Grants: Ren supports the distribution of grants to nonprofit organizations by providing services such as charity vetting, grant due diligence, grant board approval, and grant payments.
- Program Support: Ren surrounds all these services with the team, technology, and expertise necessary to ensure smooth DAF operation. Each DAF account has a designated support team, 800 number, and email address, and Ren can provide training to your team. We prepare and file required federal and state forms, support audits, calculate fees, and generate reports. In short, we do everything DAF-related so you can focus on client relationships and wealth management.
And, again, Ren can provide all those services under our brand or yours.
Put DAFs on your menu
Just as not everyone wants dessert after a good meal, not every client will want a DAF. But the growth of DAFs is impossible to ignore, and financial institutions that don’t at least facilitate DAF services for clients likely are losing some share of client relationships, even if they’re retaining their clients for general wealth management.
In other words, it isn’t a question of how you should add or enhance DAF service, but how you will do so. If you’d like to talk about how to begin that process, talk to our experts at Ren.