Distressed Largesse
The strategy was born out of donor frustration, according to Paul Schervish, director of Boston College’s Center on Wealth and Philanthropy and codeveloper of the DMI Account concept. “Mismanagement is one of the biggest issues you hear from regular donors—in terms of investment returns, use of funds and the effectiveness of a project and how it is run,” Schervish says. With the top 1 percent of philanthropists contributing 20 percent of all lifetime donations, Schervish contends that charities should leverage the entrepreneurial and investment instincts of these donors by allowing them to take part in the progress and management of their gifts. “The DMI Account meets these greater donor needs while directly bypassing some of the flaws in other, similar vehicles,” he says. “You have two strong partners entering into a binding agreement: a donor with insights about wealth management and long-term success, and a charity that has needs and is able to protect its interest.”

TOP VIEW Donor Managed Investment Accounts, or DMI Accounts, represent a new tool for nonprofits to attract more financially savvy donors. DMI Accounts enable donors to actively manage gifted assets for up to 10 years after they have been given to a charity. Donors must adhere to a set of investment and performance guidelines set by the nonprofit, at the risk of having their investment privileges revoked.

For the Hafleighs, a DMI Account provided the opportunity to stay directly connected to the school after their donation was made. “I think a lot of people would like to get more involved with philanthropy, but just writing a check and handing off the money feels sort of empty,” Susan Hafleigh says. “I didn’t want to be divorced from the process.” With her background managing portfolios for Oracle, she researched gifting options before bringing the DMI Account concept to Woodside Priory. Last spring, the Hafleighs’ account was funded with $150,000—a relatively modest amount, she admits, for a funding vehicle designed for gifts upward of $250,000. “It provides a template for this school and others, and may help to make other donors more comfortable with the concept,” Hafleigh says. “I think a lot of generous donors would be interested.”

The DMI Account model was formalized late last year by Winklevoss Consultants of Greenwich, Conn. The firm created a market for the vehicle by soliciting and receiving the blessing of the IRS. Through a private-letter ruling, the IRS confirmed that gifts made through a DMI Account would be deductible for federal income and gift tax purposes. Winklevoss designed the program according to the terms outlined in the ruling, although theoretically any charity can spell out this type of relationship with a donor.

The charity extends an investment management privilege to the donor that can be revoked at any time and for any reason. Although there are no known cases of a charity revoking a donor’s privileges in the short history of DMI Accounts, the option remains the charities’ strongest safeguard against donor mismanagement.

Winklevoss suggests carefully spelling out terms of conditions prior to the donation and closely monitoring the relationship. The donor and charity enter into an agreement that sets up investment guidelines to reflect the charity’s particular risk profile and establishes benchmarks. The charity can withdraw the investment privilege if funds in the account fall below the average return of the S&P 500, for example, or if the account principal erodes below a certain point. Such agreements can also determine when funds will be used. If the donor and charity agree, the principal can be left to accumulate for the maximum 10-year term. Woodside Priory uses a portion of the Hafleighs’ donation each year to fund a scholarship. “One client has structured it like an endowment, where 5 percent each year is spun off to help meet the charity’s operating expenses,” says Mark Rakov, senior managing director at Winklevoss.

After the gift is made, Winklevoss will act as monitor, aggregating account and performance information and reporting it to the charity, along with any breeches of the agreement, such as an investment in a forbidden asset class. Winklevoss also serves as a go-between, acting on the charity’s behalf should conflicts arise. Choate’s Courcey says that outsourcing conflict management to Winklevoss is a primary benefit. “If the account is bleeding money, Winklevoss handles that. The school does not have to have an uncomfortable conversation—Winklevoss does,” he says. “This is important, because we have to manage donor relationships.”

“I think a lot of people would like to get more involved with philanthropy, but just writing a check and handing off the money feels sort of empty.”

Winklevoss charges a fee based on a sliding scale according to the amount under management, up to 75 basis points. Because of this cost, charitable institutions have suggested that the program is best suited to donors giving upward of $250,000; accounts, however, can be established for much less. In fact, in an effort to widen the scope of appeal to charities with larger bases of donors giving smaller gifts, Winklevoss is working on an altered version of the program that could attract donors giving as little as $10,000.

The company has moved to patent and trademark the DMI Account to prevent other firms from offering the same administrative services, but Rakov admits, “We do not intend to limit or prohibit any charity from offering this program.” Winklevoss will license it to eligible nonprofits on a no-fee basis, while requesting that charities outsource administrative services to the firm.

The DMI Account strategy seems tailor-made for a hot-hand fund manager or investment professional confident in his or her own financial prowess. Even hedge fund managers are authorized to keep donated assets in their own funds, according to Rakov, as long as they comply with the IRS rules on self-dealing—generally meaning the donor cannot own more than 5 percent of total assets in the fund and is not collecting fees for managing the donated funds.

Whether the DMI Accounts will be widely accepted remains unclear. At charitable institutions such as Cornell, however, the gift is far more important than the means of giving. “Administratively, [DMI Accounts] are more difficult than putting the money into your own fund, but the question is: Would we get the gift otherwise?” Cornell’s Murphy posits. “Giving is becoming more complex these days, and the more vehicles we have to meet a donor’s objectives, the better off we are.”

Just a few months into managing her account, Hafleigh is thrilled with the results. Working with the school has given her a sense of purpose in the wake of her daughter’s death. “I think this is the most positive thing way we could have dealt with this situation,” she says. 

Melissa Phipps, based in Jersey City, N.J., is a senior correspondent for Worth.

Illustration by Jim Frazier