Following the Money: Alex Kotch on Charitable Giving

They say charity is a virtue, but sometimes it’s a little more complicated. The donor advised fund or DAF, has been a financial instrument for charitable giving in the United States for nearly a century – it’s a useful tool for wealthy individuals to make philanthropic donations. But as the inequality gap continues to expand … Continue reading Following the Money: Alex Kotch on Charitable Giving →

This article and podcast Following the Money: Alex Kotch on Charitable Giving appeared first on Sea Change Radio.

They say charity is a virtue, but sometimes it’s a little more complicated. The donor advised fund or DAF, has been a financial instrument for charitable giving in the United States for nearly a century – it’s a useful tool for wealthy individuals to make philanthropic donations. But as the inequality gap continues to expand in this country, the DAF has come under increased scrutiny as people push for transparency within the moneyed class. In 2018 the New York Times published a piece asserting that donor advised funds are being exploited by high net worth individuals as a way to shelter them from capital gains taxes. And more recently, this week’s guest on Sea Change Radio, Alex Kotch, wrote a piece for Optout and The New Republic examining the role of DAF fiduciary sponsors, particularly big investment firms like Fidelity, Vanguard, and Schwab. We discuss this article, learn more about DAFs, and explore the question of who should be held accountable when a donor advised fund facilitates donations to red-flagged hate groups.

00:02 Narrator – This is Sea Change Radio covering the shift to sustainability. I’m Alex Wise.

00:27 Alex Kotch (AK) – I think it’s a pretty reasonable thing to, you know, ask an organization whether it’s a company or it’s a charity, to be responsible for the money that they are giving out.

00:38 Narrator – They say charity is a virtue, but sometimes it’s a little more complicated. The donor advised fund or DAF, has been a financial instrument for charitable giving in the United States for nearly a century – it’s a useful tool for wealthy individuals to make philanthropic donations. But as the inequality gap continues to expand in this country, the DAF has come under increased scrutiny as people push for transparency within the moneyed class. In 2018 the New York Times published a piece asserting that donor advised funds are being exploited by high net worth individuals as a way to shelter them from capital gains taxes. And more recently, this week’s guest on Sea Change Radio, Alex Kotch, wrote a piece for Optout and The New Republic examining the role of DAF fiduciary sponsors, particularly big investment firms like Fidelity, Vanguard, and Schwab. We discuss this article, learn more about DAFs, and explore the question of who should be held accountable when a donor advised fund facilitates donations to red-flagged hate groups.

02:03 Alex Wise (AW) – I’m joined now on Sea Change Radio by Alex Kotch. He is an investigative journalist and the co-founder of Opt Out Media Foundation. Alex, welcome to Sea Change Radio.

02:16 Alex Kotch (AK) – Thanks a lot. Great to be here.

02:17 Alex Wise (AW) – So explain to listeners what Opt Out is – the Opt Out Media Foundation is a pretty bold new initiative.

02:25 AK – Yeah, we’re a 501C3 nonprofit charity currently based in New York City, and we advocate for financially independent news media. So we have a website with curated news content. We have an app that we’ve we developed ourselves. It’s a news aggregation app with hand curated news. Content as well from hundreds of financially independent, trustworthy newsrooms around the US. That includes national players like the New Republic, the nation, the Intercept and a lot of state and local newsrooms around the country. So you know, our goal is to elevate these independent media outlets and eventually through our app and our website and our newsletters, bring them into the national conversation and hopefully have them compete. For air time, you know, with big corporate media outlets. So we also do original reporting and we do collaborations often with members of our network like the New Republic.

03:22 AW – And there’s a piece that you published in partnership with the New Republic that I wanted to speak with you about today. It’s entitled blood money. How America’s biggest charities are bankrolling hate groups without anyone noticing. So you did a lot of research into understanding the donor advised fund. Why don’t you first explain what a DAF is a donor? But it’s fun for our listeners.

03:44 AK – Yes, a donor advise fund is the kind of the fastest growing method of making charitable donations in the US. So individuals and organizations can create their own charitable fund with a third party, you know, money manager, who then will dole out the money to the charities that the donor specifies kind of whenever or possibly never. So the idea is that you are. Transferring money and you can transfer stocks in and not have to pay capital gains tax on the stocks and other appreciable assets. Into this fund that then the donor advised fund manager actually owns the money but is generally responsive to your request for whom will receive the money. Community foundations operate in a similar way in that you know you also have an account with the Community Foundation, and then you would quote, advise them as to where to send the money. One key element of both gaffs and community foundations is your name as a donor is anonymized, the donor advised fund manager. Because it takes control of that money listed. The donor to the ultimate recipient charity and also the donor advised fund sponsor does not have to submit your name to the IRS, so even internally, the US government doesn’t know where your money ultimately goes.

05:08 AW – It sounds like a lot of these community foundations kind of encourage their clients to park their donor advised funds within the foundation. So then it kind of facilitates the giving process. So then the foundation can say, “OK, these are our recommended giving targets for the year. You know just check this box and you’ll be part of our mass giving.”

05:30 AK – Right. There’s a lot of that. And we’re also finding that a lot of private family foundations and even other kind of public charities often use donor advice for managers. So I’m not really quite sure why the latter group would do it, but the former. Again, you can hide your name as the ultimate donor to the charitable recipient.

05:50 AW – I wanted you to take us through the troubling side that you found and why you’re it’s called blood money because there’s some very good charities that are on the receiving end of charitable giving through donor advised funds, but obviously there’s the flip side as well. Why don’t you walk us through the genesis of this project?

06:12 AK – So I began reporting on donor advise fund managers or also known as donor advised fund sponsors donations to groups in the US that the Southern Poverty Law Center considers hate groups. So these are predominantly anti-LGBTQ, anti Muslim, anti-immigrant and white nationalist hate groups. So unfortunately, a lot of the biggest charities in the country, which are these donor advised fund managers are anonymously transferring their donor clients’ money to a lot of these hate groups and so over the last four years of reporting and data collection, I’ve now compiled a database that documents about $210 million that has gone from dozens of donor advised fund sponsors and community foundations to about 60 hate groups, and so some of the largest recipients of this money, who’ve gotten some of the biggest amounts are very prominent anti-LGBTQ hate groups like Alliance Defending Freedom and Family Research Council. And you even have a white nationalist hate group, The VDARE Foundation which has received over a million and a half dollars from donor, advised fund sponsors since 2014, so you know this is something that a has been going on for a while and is showing no signs of stopping and despite some of my reporting and reporting from others. But most of these large financial institutions have not really taken responsibility for their role in funding hate, which you know in America continues to be on the rise.

07:51 AW – So Alex, with these donor advised funds, the generally wealthy individuals who the owners of these funds, they are limited in terms of direct political donations. So you couldn’t give to like Donald Trump’s super PAC or something through your donor advised fund.

08:09 AK – Ohh no, no, no. You know the donor advised fund managers have very few restrictions, but the one main restriction is the recipient has to be another 5O1C3 charity that has in good standing with the IRS, in other words, they they’re not, they’re not being investigated for fraud or something like that, which actually at the VDARE Foundation is being investigated for financial fraud right now.

08:29 AW – Now connecting the dots for me was a little difficult when I read this piece and so walk me through it because I don’t really know the fiduciary responsibilities that a fidelity vanguard or Schwab might have in this. But if I worked as a money manager at Fidelity and one of my wealthy clients said yeah, I’d like to set up a donor advised fund because I have oodles of money and I don’t want to, and this would be a good vehicle for me to give. And then that person started wanting to steer that money into organizations that did not align with my values. How could I put the brakes on that if I were just a middling wealth advisor at Fidelity? So how culpable are these organizations? How complicit are they in this in in the giving to hate groups? I don’t quite understand. Aren’t they just creating the vehicles for giving?

09:31 AK – I mean, yes, but so every donor advised fund manager, let’s say, Fidelity Charitable, Vanguard Charitable, Schwab Charitable, those are some of the biggest charities in the country, by the way, by contribution revenue Fidelity is the largest. So these are charities, they have a board of directors like any other nonprofit would have. And you know, if you look at the fine print, the Board of Directors has the ultimate call. So they actually, once a donor, puts their money in the donor advised fund, they’re actually donating to that fund. And that’s when they get their charitable tax deduction. So they’re basically off the hook for any further action. But of course, most people who are going to want to eventually send the money to an actual charity doing charitable work. So what they do is they recommend the recipients of their money, you know, added how much and a certain date and everything. And ultimately, the Board of Directors of that donor advised fund manager has the final say as to where the money goes because they legally possess the money. So no, a middle management person, any staff are at these donor advised fund sponsors has no control over that and I’m sure they’re not encouraged to try to advise beyond what the board decides. So the board essentially decides you know which foundations are kosher and which are not. And again, they very rarely refuse a donors. All the donors request, but yes, they have full legal control over the money and that’s why people like me are trying to hold them accountable despite their lack of comment on my latest story.

11:08 (Music Break)

12:30 AW – This is Alex Wise on Sea Change Radio and I’m speaking to investigative journalist and the co-founder of Opt Out, Alex Kotch. This week’s show is dedicated to the memory of Robbie Robertson. So Alex, I’m a little hazy on the role and the makeup of the board of directors on a donor advised fund – say Fidelity controls 25,000 donor advised funds. Do they have a separate board of directors for each one, or is that just one Advisory Board of directors that handles all of the DAFs that are parked at Fidelity?

13:04 AK – Right. Yeah. Yeah. So the, you know, the individual donor advised funds don’t have boards themselves. I mean, they’re just, it might be just one person’s charitable fund. It’s often just one person’s charitable fund, but you know the many thousands of DAFs that these managers you know, manage are all part of the same organization. So let’s say if they manage 25,000. All of the dollars, if you add them up for all of those 25,000 DAFs is the money that they are in control of. So Fidelity charitable investments, that is, a donor advised fund manager that has one board, you know, and those board members determine which recipients are kosher and which are not.

13:48 AW – If we could improve the system, how would a board of directors be able to steer their clients more effectively into non hate group charities?

14:00 AK – Well, I think it’s the opposite. It’s more steering their clients away from hate groups, you know, so they don’t really have to do a whole lot of work. There are established organizations that, like the Southern Poverty Law Center, primarily that already put out once a year heavily research reports as to which are the hate groups in the United States. And there’s people like me who have, all of those hate groups, have determined which ones are 501C3 charities and thus are eligible recipients of the donor advised fund money. And so, you know, it would. It would really take a quick e-mail. You know, SPLC or I or anyone could send them the list and you know they could just say, “OK, we’re going to anyone who request these, we’re going to say no now.“ If they want to do their own research, they want to put together a committee with a number of different organizations, not just one like SPLC that they could absolutely do that and you know. There are examples of community foundations that have done that, the Innovia Foundation, which I believe is out of, I think it’s out of Washington or it’s on the West Coast. They were giving money to VDare, the white nationalist group, for several years they got some pushback. A few articles were written about this phenomenon, and they ended up creating an anti-hate policy and they’re enforcing it now.

15:17 AW – But we’re assuming that a lot of these owners of the DAFs not the sponsors, but the individuals themselves, aren’t they the ones who are directing the money towards these hate groups? They’re saying like, you know, I want to give my money this year to the Creationist Museum, and I want to give it to the Southern heritage pride Mothers of the Confederacy this year. That’s an individual’s doing that’s not a Fidelity or Vanguard, correct?

15:43 AK – Well, the individual was advising the manager that that’s why they’re called donor advised funds. And so all they can do is advise, I mean, let’s kind of simplified the example. Let’s say you have $10,000 that you want to give me. You’re giving me in order to have me donate that money because I’m very well-connected and I have an E-transfer system and I’m very fast at it, right? So you’re actually giving me $10,000. I now possess the $10,000, but I’ve agreed with you. We’ve signed a contract that says you’re going to advise me on where that money goes. I’m going to give the money even though I own the money and I will do my best to honor your advisement unless I have a major problem with, you know, one of these recipients.

16:29 AW – You think that these Fidelitys of the world should have a major problem with the giving targets for their clients, but there’s an awful lot of them to weed through.

16:40 AK – There’s a ton of them. Yeah, but there’s not a whole lot of hate groups. There’s 60 recipients that I found. So, you know, I think I think the way it works is if someone flags something or you know that they’ll go and check it out. I don’t think they’re doing annual maintenance on, you know, every single recipient and doing a sort of evaluation.

16:58 AW – In full disclosure, I’m a philanthropy research consultant in addition to being the host of Sea Change Radio, so I have Wise Social Impact where I have clients who have money, who want to give, and I try to help them give more effectively. I don’t have a fiduciary responsibility with them, but if they have an account at Vanguard and their donor advised fund is set up there and they decide they want to give to whatever organization it is, let’s say they give to a hate group. Where is my culpability? Where does it begin? And that’s kind of like, I guess getting back to that question of some guy at Fidelity. You’re saying that they should be reining their clients in and they should be having more of a hand-holding role in their donor advised fund giving targets.

17:46 AK – I mean really just the board though, and they’re the people with the authority. I don’t think anyone else on staff at one of these organizations, they don’t, if they wanted to, you know, do something they couldn’t right they don’t. It’s not within their role, but you know, just remember that the money is legally the donor advised fund managers, money and so ultimately where they give is first of all their choice and second of all should represent them. It is their reputation. And you know these organizations are so big and I think they the amount of money that they’re giving to hate groups is so small compared to the rest of the money that’s coming out of their organization, that they think they can kind of sweep it under the rug and they don’t feel like they are actually responsible. But when you look at the numbers and you say, “look, VDARE Foundation, the New Century Foundation, these are two white nationalist hate groups.” I mean, these are despicable organizations, you know, their budgets are pretty small.  So when you get $1,000,000 from a donor advised fund, that’s a huge chunk of their budget. In fact, it was a Donors Trust that gave the money to VDare and Donors Trust is a right wing ideological donor advised fund sponsor. So it’s not really, I think in the same realm as a fidelity or Schwab, but regardless, you know we don’t know who the original donor was because they went through this kind of anonymization system. But, you know, going back to what you said, I mean, I think it’s a pretty reasonable thing to, you know, ask an organization whether it’s a company or it’s a charity to be responsible for the money that they are giving out.

19:18 AW – So in an ideal world, this wealth advisor would have a client who would say, hey, I want to give to this new century as part of my giving for next year, and that wealth manager would not be part of this decision making process, but it would be the board would kind of red flag it at what point would it be communicated to this individual that he or she cannot give through the donor advised fund to this hate group because it’s designated as a hate group.

19:47 AK – I mean, I don’t know the inner workings of these organizations, so I’m guessing they all do it differently. I don’t know the timing, but they certainly wouldn’t allow a donation to actually happen to any organization that they either hadn’t reviewed or they hadn’t given the green light to or hadn’t given the red light to, so that’s really up to them. I do think that it could be a damaging to the clients relationship to the donor advised fund manager and I think that’s precisely why they’re refusing to create anti hate policies to blacklist some recipient organizations, even if they’re white nationalist groups, which again baffles me. So you know, there’s a there’s a foundation called the Foundation for the Carolinas. It’s based in I think Charlotte, NC and a few years ago I did a report and I wasn’t the first person to report that they were giving money to a bunch of anti-immigrant hate groups. And I don’t think we ever found out for sure, but based on some local reporting, it was pretty clear that it was one wealthy donor, who was kind of old. And was kind of bankrolling, you know, their operations and he was a kind of a nativist, you know, anti-immigrant, nativist type and they would not take responsibility for those donations. They continue to give, I think they’re giving a lot less now, but they still are. They do show up in my data. So you know that that’s another, I mean there was some local press about it. There were people were concerned and I think they were just, they were just too scared of a lawsuit or losing that donor.

21:23 (Music Break)

22:00 AW – This is Alex Wise on Sea Change Radio and I’m speaking to an investigative journalist and the co-founder of opt out, Alex Kotch. So Alex, you’re the Co-founder of a foundation, the Opt Out Media Foundation. You need to have a board of directors and do your due diligence on recipients as well. It’s not so cut and dry. Sometimes you have to dig. You can’t just accept those monies, sight unseen. You have to research it and understand where this money comes from. Is that a challenge for you?

22:32 AK – I wish I had more opportunities to do that kind of research. We are, we have a very small budget and almost all of the larger donations we have solicited ourselves. So we know the potential donor and we are able to get money from them, whether it’s an individual or it’s a foundation. I think there was one instance, and by the way, all our financials are on our website. So we reveal all our donors and stuff. But there was one, you know, person that I’d never heard of before, who gave us $10,000 in 2021. I looked him up. He seemed like a normal guy. He worked at a, I think some kind of video production company or a media company. And we were very glad for the grant and we got another one this year. So you know, I did a little Internet research and reached out to him, of course. But there was there were no red flags. I mean, like I said, if we had, if I if my job was to do research on all this money coming in, I would love that because we could really use a bigger budget. We’d like to hire full time staff. We’re starting a news outlet. We have an app with no marketing budget. So anyway that’s just me being honest to the public here, but I would have no problem researching donors. In fact, that’s what I do as a journalist. So I think if you’re a huge donor, advised fund sponsor, I mean, we’re talking Fidelity C took in $19 billion in the fiscal year of 2022, I believe so. Most of that money, of course, is going is not their money, it’s they’re managing it, but they can’t use it for their budget. Like they technically own it, but they’re not.  They can’t spend it on what they want. So the point is they’re a different kind of charity than the Red Cross, but they are extremely well financed organization connected to a major investment firm. I think they have more than enough resources to do any research that needs to be done.

24:16 AW – So you think that they should ramp up their research departments in these areas so that they are able to better red flag? When there’s questionable giving occurring and it’s just, it’s a huge they’re gatekeepers of a huge amount of money and that that would in turn. And should require them to hire a lot of people to keep those gates, but you could see why there’s not as much of a return on investment for some of those hires, right?

24:46 AK – But they don’t have to. I mean, there’s a lot of people who would do it for free. I would consult for free with them because there are coalitions out there right now that are begging these organizations to let them consult with them. For example, the “hate is not charitable” campaign – The Amalgamated Foundation, which is the foundation connected to Amalgamated Bank. They also operate donor advised funds, so they are a DAF sponsor. But after my 2019 report came out, they created something called the hate is not charitable campaign and since then I think it’s a coalition of nearly 100 members. It’s financial institutions and individual philanthropists. And they’re working on standards to give to these DAFs and say, hey, look, we have this rubric right here, and I’m sure they’d be willing to work with them further, to individualize things. SPLC is a charity they would love to work with these staff, free of charge. So even if finances was something they had to worry about. I’m not sure it is. I don’t think they have to really spend a whole lot of money.

25:45 AW – And the donor advised fund itself is that something that you think needs to be adjusted is the structure, the fundamental structure going back to what the New York Times wrote about is being kind of a a way to dodge capital gains tax and et cetera is the DAF itself, something that you think needs to be reevaluated.

26:10 AK – Yeah, absolutely. And you know that there was a bipartisan bill in the Senate last year which sought to reform the sort of payout requirements, or should I say the lack of a payout requirement from donor advised funds. So like I said, when you’re funding your fund, you put the money in. That’s when you get your charitable tax deduction, so you don’t have to actually give the money out of your fund at all, and other or fidelity investment fidelity charitable sorry doesn’t have to actually dole that money out. So it could literally sit there forever and no real charity that’s doing charitable work on the ground would receive it so that Senate bill was trying to put a requirement, you know, a certain number of years. I’m not sure how many years that money that goes into a DAF has to come out of the DAF and really go to a recipient charity, because otherwise the charitable tax deduction, which you know, really is US taxpayers, are subsidizing all charities, right and all credible tax deductions so the taxpayers are subsidizing these charitable donations that don’t necessarily end up at a charity. And so that’s the fundamental problem, I think with the issue of not having to pay capital gains tax I don’t feel like I need to input on that. I mean, I think that charitable donations should be honored. So, you know, I think it’d be probably a lot better if you would just donate your stock to a nonprofit and add to their stock portfolio. And I think you could probably do that tax free as well. I’m not sure. But I think to me the bigger issue is just making sure that the donor advised fund money actually goes to charities.

27:47 AW – He’s the co-founder of Opt Out and he’s an investigative journalist, Alex Kotch. Alex, thanks so much for being my guest on Sea Change Radio.

27:56 AK – Thanks a lot for delving into this and tackling a pretty complicated subject. I appreciate you sharing my work.

28:17 Narrator – You’ve been listening to Sea Change Radio. Our intro music is by Sanford Lewis and our outro music is by Alex Wise. Additional music by The Band and Robbie Robertson. To read a transcript of this show, go to seachangeradio.com stream or download the show or subscribe to our podcast on our site or visit our archives to hear from Doris Kearns Goodwin, Gavin Newsom, Stewart Brand and many others, and tune in to Sea Change Radio next week as we continue making connections for sustainability. For Sea Change Radio, I’m Alex Wise.

This article and podcast Following the Money: Alex Kotch on Charitable Giving appeared first on Sea Change Radio.