On Financial Services

A Donor-Advised Fund (DAF) is a charitable giving account established at a public charity, known as the sponsoring organization, which manages and administers the fund on behalf of the donor. Eligible contributions such as cash, or appreciated securities generally allow for immediate tax deduction. The assets in the DAF can then be invested for tax-free growth. Grants can be recommended from DAF account to any eligible IRS-qualified public charity at any time.

The competitive landscape includes traditional wealth management firms, community foundations, and newer technology-focused providers, each offering different fee structures, investment options, and service levels to attract donors and their financial advisors.

Core Services:

• Initial Contribution: Donors contribute cash, securities, or other assets to their DAF account and receive an immediate tax deduction for the full fair market value of the contribution.
• Investment Growth: The sponsoring organization invests the contributed funds, allowing them to potentially grow tax-free over time while awaiting distribution to charities.
• Grant Recommendations: Donors can recommend grants from their DAF to qualified charitable organizations whenever they choose. While the sponsoring organization has legal control over the funds, they typically honor the donor's recommendations.

Key Advantages:

• Tax Benefits: Immediate tax deduction upon contribution, even if grants are made years later. This allows donors to "bunch" charitable deductions in high-income years.
• Investment Growth: Funds can be invested and grow tax-free, potentially increasing the total amount available for charitable giving.
• Flexibility: Donors can take time to research charities and make thoughtful giving decisions without time pressure.
• Simplified Administration: The sponsoring organization handles all the administrative work, tax reporting, and due diligence on recipient charities.

Major Players:

• Fidelity Charitable
• Schwab Charitable
• Daffy

More on DAFs:

• DAF is mostly the United States concept.
• DAFs were originated by community foundations to boost charitable giving. The first DAF was created in 1931 by the New York Community Trust. Overtime commercial investment services got involved which boosted charitable giving further.
• DAF — donor advised fund is an investment account which could be opened via a brokerage service that lets you take a tax deduction when contributions are made and give the money to a charity later.
• DAF allows for maximizing granting by investing the money tax-free.
• A grant can be made anytime from a DAF to a charity of your choice. Approval of a grant is at DAF sponsor's discretionary based on their internal policies.
• DAF provider charges an administrative fee to invest your DAF and make donations when you recommend them. Administrative fee varies based on an account balance and contributions.
• Investment options are limited to index funds unless you have a professionally managed account which requires a high account balance. There are certain players who are starting to offer ETFs but not widely adopted.
• DAF is a 501(c)3 organization which needs to comply with IRS guidelines.
• While there are certain charity exemption rules, IRS qualified charities need to meet eligibility requirements. More from IRS.
• IRS provides The Exempt Organizations Business Master File Extract which provides information about an organization from the Internal Revenue Service's Business Master File. It has the most recent information the IRS has for these organizations.
• There are IRS guidelines on charitable contributions. Contribution type varies from cash to non-cash to complex assets.
• To be eligible to claim a tax deduction in a given tax year, you must complete the contribution to your DAF by the last day of the year — December 31.

The investment management world is divided into retail and institutional investors. Products designed for middle-income individual investors, such as the retail classes of mutual funds, have modest initial investment requirements: $1,000 or even less. In contrast, managed accounts or funds for institutions have imposed minimum investment requirements of $25 million or more.

Between these ends of the spectrum, however, is the growing universe of separately managed accounts (SMA) targeted toward wealthy (but not necessarily ultra-wealthy) individual investors. Whether you refer to them as “individually managed accounts,” “separate account,” or “separately managed accounts,” these individual-oriented managed accounts have gone mainstream.

SMAs differ from pooled vehicles like mutual funds in that each portfolio is unique to a single account (hence the name). In other words, if you set up a separate account with Money Manager X, then Manager X has the discretion to make decisions for this account that may be different from decisions made for other accounts. Mutual funds cannot offer, due to their structure as investments shared by a group of investors, the benefit of customized portfolio management. Separate accounts overcome this barrier.

Key Features:

• Direct Ownership: Investors own the underlying securities directly, rather than owning shares in a pooled fund.
• Customization: SMAs offer flexibility to tailor the portfolio to specific needs, such as excluding certain sectors or companies.
• Professional Management: SMAs are managed by professional investment firms who make investment decisions on the investor's behalf.
• Tax Advantages: SMAs can offer tax-efficient strategies like tax-loss harvesting and can avoid embedded capital gains that mutual funds may have.
• Higher Minimums and Fees: SMAs typically require higher minimum investment amounts and come with higher management fees compared to mutual funds or ETFs.

Benefits of SMAs:

• Personalization: Investors can tailor their portfolios to their specific needs, values, and risk tolerance.
• Tax Efficiency: Tax-loss harvesting and avoidance of embedded capital gains can lead to tax savings.
• Transparency:

Investors have direct access to their portfolio and holdings, unlike mutual funds.

• Control: Investors can work with their financial advisor to set parameters and guidelines for managing their investments.

Who Benefits

• High-net-worth individuals: SMAs are often suitable for individuals with significant assets who want to customize their investment strategies.
• Those seeking personalized investment solutions: SMAs are ideal for investors who want to align their portfolios with their values, goals, and tax situation.
• Individuals seeking greater control and transparency: SMAs provide investors with more direct control over their investments and a clear view of their holdings.

Things to Consider:

• Higher Minimums and Fees: SMAs have higher minimum investment requirements and management fees compared to mutual funds and ETFs.
• Complexity: The level of customization and detail in SMAs can be more complex than traditional investment vehicles.
  • Limited Diversification for Smaller Accounts:
  • It can be challenging to achieve optimal diversification with smaller balances in SMAs.

Major Players:

• Charles Schwab
• Fidelity
• Blackrock
• JP Morgan Chase
• Goldman Sachs

Robo-advisors are digital platforms that automatically create and manage investment portfolios based on your financial goals, risk tolerance, and time horizon. They use modern portfolio theory and algorithms to build diversified portfolios primarily composed of low-cost exchange-traded funds (ETFs). A risk assessment is required during account open based on investor's suitability and willingness amongst other criteria.

Robo-advisors work well for investors who want professional portfolio management at low cost, prefer hands-off investing, are comfortable with technology, have straightforward financial situations, and are focused on long-term wealth building rather than active trading. They're particularly suitable for young professionals, new investors, busy individuals who don't want to manage investments themselves, and cost-conscious investors seeking diversified portfolios. Below is an overview of the offering.

Core Services:

• Portfolio Management: Automatic asset allocation, rebalancing, and tax-loss harvesting based on your profile and goals.
• Financial Planning: Goal-based investing for retirement, home purchases, education, or general wealth building.
• Account Types: Support for taxable accounts, IRAs, Roth IRAs, and sometimes 401(k) rollovers.
• Monitoring and Adjustments: Continuous portfolio oversight with automatic rebalancing when allocations drift from targets.

Key Features:

• Low Fees: Typically charge 0.25-0.50% annually, significantly lower than traditional financial advisors (usually 1-2%).
• Low Minimums: Many platforms have no minimum investment requirements, making investing accessible to beginners.
• Tax Optimization: Advanced tax-loss harvesting to minimize tax liability on gains.
• Automatic Rebalancing: Maintains target asset allocation without manual intervention.
• Goal-Based Investing: Separate portfolios for different financial objectives with appropriate risk levels and time horizons.

Major Players:

• Schwab Intelligent Portfolios: No advisory fees but higher cash allocations.
• Betterment: One of the pioneers, known for goal-based investing and user-friendly interface.
• Wealthfront: Strong tax-loss harvesting capabilities and financial planning tools.
• Vanguard Personal Advisor Services: Hybrid model combining robo-advisory with human advisors.
• Fidelity Go: No fees for accounts under $25,000, then 0.35% annually.

Advantages:

• Cost-Effective: Lower fees than traditional advisors make professional portfolio management accessible to smaller investors.
• Convenience: 24/7 account access, automatic investing, and hands-off management.
• Emotional Discipline: Removes emotional decision-making from investing by automating the process.
• Transparency: Clear fee structures and investment strategies.
• Accessibility: Low barriers to entry for new investors.

Limitations:

• Limited Customization: Less flexibility for complex financial situations or specific investment preferences.
• No Human Relationship: Limited access to human financial advisors for personalized guidance.
• Basic Planning: May not address complex estate planning, tax strategies, or business financial needs.
• Market Exposure: Still subject to market volatility and downturns like any investment.