7 reasons donor-advised funds can be a good place for impact investing

Impact investing is a popular trend whose core promise resonates with a wide array of people. So why do so many of them never get started?

According to multiple surveys, it's not for lack of interest. Most investors, especially millennials, want to add investments that seek financial as well as social and environmental returns.

But less than half of those interested have added even one impact investment to their portfolio. I’ve seen first-hand the barriers that prevent action for a variety of reasons:
— “Impact investing is too complicated.”
— “I’m worried about sacrificing financial return.”
— “Do I need a lawyer involved to do this?”
— “How do I measure impact?”

A donor-advised fund, or DAF -- a fast-growing charitable vehicle -- offers one of the easiest ways for families to get started and make their first impact investment to grow into a portfolio. As we approach year-end, families that focus on their annual philanthropic giving may want to explore this attractive avenue.

I have witnessed first-hand the rapid evolution of the $120 billion DAF market and work with half of the largest donor-advised fund providers, which collectively oversee hundreds of thousands of accounts. Less than 3% of DAF assets are currently invested with an eye toward impact, but we have seen interest rapidly growing.

There are seven reasons that make DAFs ideal for families beginning their impact investing journey

1. Charitable. Using charitable assets is the natural place for many families to start their impact investing — this is the part of their wealth already set aside for social goals. DAF accounts are 100% charitable, and all the funds must be granted to nonprofits over time.

2. Low hassle. Many impact investments go to funds, companies and nonprofits in private markets. This requires coordinating financial and impact diligence, legal and compliance approval, accounting and capital calls, and financial and charitable reporting. DAFs allow you to outsource all of this to a third-party provider, letting you focus your time on what you care about most.

3. Low minimums. Impact investment opportunities have minimums ranging from $20 all the way up to $10 million. Because DAF providers hold charitable accounts on behalf of hundreds or thousands of families, they can pool allocations from multiple donors to access investments at up to 10x lower minimums than an investor working alone.

4. Flexible. There are hundreds of DAF providers, which have varying degrees of flexibility in how you can recommend grants or impact investments. The most flexible providers unlock the full capabilities for impact investing — from an education social enterprise in Africa or a social impact bond tackling incarceration to a recoverable grant to a nonprofit affordable housing fund.

5. Scalable. Many of us want to create change beyond the scale of our own assets. DAFs allow communities to invest together. In one model, a group of donors can create a communal DAF account to invest together toward a common goal while keeping transaction costs low. Or you could make an initial allocation to get the opportunity approved on a DAF platform, and then syndicate additional funding from your network.

6. Fee efficient. The average DAF provider is many times larger than the average family office or family foundation, allowing them to achieve scale in supporting the investment portfolios of their clients. I have witnessed a reduction in total fees of more than 50% when converting a private impact portfolio from a private foundation to a DAF provider.

7. Limited liability. You may be worried about your own personal risk as a fund limited partner or a foundation trustee. By working through a DAF, you transfer legal and fiduciary risk connected to impact investments to the DAF provider.

There are many approaches to aligning investments with your purpose: joining an impact angel group, working through a family foundation or investing from your personal assets.

But if you are in the majority of interested investors who have just been too overwhelmed, confused or cautious to get started, the new generation of donor-advised fund offerings may be just what you are looking for.

Adam Rein is co-founder and president of CapShift, an impact investing platform, and managing director for MissionPoint Partners, an impact advisory and asset management firm.