AI Isn’t Profitable Yet, But It’s Already Destroying Companies

 And should you stick with mutual funds or switch to ETFs?

Plus, how DAFs can ease your charitable giving this season 

Ric Edelman: It's Friday, November 22nd. On today's show, how new innovations cause disruption in the investment world, plus a conversation with Adam Nash, the Co-founder and CEO of Daffy about donor-advised funds.

Got a question here from Edward in Chicago.

Edward: “Hi, Ric. Big fan of yours over many years. I have mutual funds primarily in American Funds and the Barron Funds family. I have large capital gains in them. If they do not convert their funds into ETFs, am I stuck with their mutual funds?”

Ric Edelman: Well, Edward, I'm not really sure that I would refer to the American Funds particularly, but also Barron, as being stuck with them. First of all, you have to recognize, and I think you do, which is why you asked your question, that mutual funds generally are more expensive than ETFs. This is a really big part of the reason why I advocate that people move their money from mutual funds and over to ETFs because the expense ratio and the ETFs are generally so much cheaper. However, that's not always the case, and a good case in point is the American family of mutual funds. American has always had a really strong reputation of being a low-cost fund provider, so if lowering your annual expenses is your really only reason for wanting to get rid of your American Funds investments, I don't think I would be terribly motivated, uh, to make that switch. So keep that in mind.

Second, you really have to do the analysis.  If you are dealing with a high expense fund, if you really do want to sell it and incur the capital gain. A better way of examining the answer to that question, rather than merely the tax implication, is the investment allocation. Meaning, is this a fund that you currently own? That you're willing to continue owning for the next 10 or 20 years?

If the answer is yes, then you might want to consider keeping it to avoid having to pay the tax right now. On the other hand, if it's not something that you really feel strongly about, that you're not really confident that its future performance is going to be competitive to alternative options, then you should go ahead and sell it.

Not because you're trying to lower your expenses, but because you're trying to get a more optimal portfolio. I think you should talk with a financial advisor, perhaps the one who helped you obtain these investments in the first place, or some other financial advisor for a second opinion to help you make the final decision.

Ric Edelman: Hey, let me ask you this question. Have you ever heard of Chegg? I'm raising this because of the conversation we had yesterday about new investment opportunities. I shared with you three new ETFs that were recently launched from State Street Global Advisors in partnership with Galaxy, a big crypto asset management firm.

And, I made the comment in the conversation yesterday, if you missed it the link is in the show notes, that crypto is a new and growing asset class, didn't exist 20 years ago, really hardly existed until the last seven or eight years. And all of a sudden, it's on the scene in a major way. This represents an opportunistic investment play, meaning it's an opportunity for you to engage in an investment opportunity that didn't exist until relatively recently.

And that's why I want to ask you if you've ever heard of Chegg. Chegg is an online education company. And for the past decade or more, it's been the go-to resource for students who need help with their homework. I'm not talking just college kids. I'm also talking about kids in junior high and high school. Kids pay $19.95 a month. They go online to Chegg and they can get pre-written answers to questions that they pose. Plus, they get on-demand help from online experts.

Chegg has hired thousands of people, mostly in India, to deliver this service. And during the pandemic, the shift to online learning sent Chegg's stock to record highs. It was a favorite on Wall Street. In 2021, in the middle of the pandemic, Chegg was worth $15 billion.

But then, last year, came ChatGPT. It's free, it's instantaneous, and it does everything Chegg does, and a lot of people would argue it does it even better. Since the launch of ChatGPT, Chegg has lost more than half a million subscribers. Its stock is down 99% from the high. The rumor is that the company doesn't even have enough revenue to pay its debts.

They've already fired 25% of the staff. Chegg, it looks like, is on its way to bankruptcy as a result of being an obsolete, outdated technology, replaced by newer, cooler, better tech. This isn't the first time technology has rendered one company worthless as another company comes on the scene.

Remember the Sony Betamax? That was all the rage until VHS came around. Remember Blockbuster Video? That was the rage until Netflix. Remember Lotus 1-2-3? You're really dating yourself if you do. That, of course, was wiped out by Microsoft Excel. My point is that companies have been blown away by technical advancements ever since we've had technology. Horse and buggies were wiped out by the Model T. That was 100 years ago.

So, my point is simply this. As you are looking at your investment portfolio, you've got to ask yourself two questions. Number one, is your portfolio filled with old, established, but old, out of date companies with 20th century tech? If so, a lot of those stocks are going to go the way of Chegg as they get replaced by bigger, better, newer companies.

And secondly, does your portfolio own any of those new companies? This is opportunistic now. The notion of a long term, set it and forget it, buy and hold approach to investing is quickly falling by the wayside. This is why you need to consider adding crypto to your portfolio like we discussed yesterday.

It's an opportunity you didn't have 10 years ago, and maybe the opportunity won't exist 10 years or 20 years from now, but today it's a huge opportunity. Many, including me, think it's the best opportunity available on Wall Street. Think about it. You don't want a portfolio filled with Chegg’s.

Ric Edelman: You know, it's that time of year, isn't it? We're beginning to think of year-end gift giving and the most important gift that you can make this year is to a charity or a nonprofit organization. And that is something lots of Americans do every year.

There's a relatively new opportunity available these days that you may not be terribly familiar with. They're called DAFs. A DAF is a donor-advised fund and to help us understand what these really are, and a really new pretty cool DAF that's available is coming from Adam Nash. Adam is the co-founder and CEO of Daffy.

If you're a financial advisor, you know Adam very well. He was the president and CEO of Wealthfront, one of the first and one of the biggest robo advisors. Prior to that, Adam was with Dropbox, LinkedIn, eBay, Apple. He's now teaching at Stanford. He's a Silicon Valley guy. Adam, it's good to see you here. How are you doing?

Adam Nash: Hey, Ric, it's, it's good to be here. And just to make it very clear, you know, Daffy is one of those fun acronyms, one of those fun app names. It's the Donor-Advised Fund For You. But very, very happy to talk with you and certainly your listeners about the opportunity to give better.

Ric Edelman: So, I'm glad we're putting to rest any illusion to the Looney Tunes. And so we want to talk about donor-advised funds and I think we need to start at the beginning.  I've been involved with donor-advised funds, I think ever since Franklin Templeton launched theirs decades ago, and I had accounts at Fidelity's donor-advised fund and with Schwab's donor-advised fund, these things are holding an awful lot of money for an awful lot of people.

But let's start from the very beginning, Adam, and explain to folks what on earth is a donor-advised fund. How does it work?

Adam Nash: Yeah, the donor-advised fund has actually been around in the U. S. for a very long time. It actually dates back in some accounts to the thirties, but most people haven't heard about them until more recently. The larger brokerages, the Fidelity's, the Schwab's, and Vanguard's started offering them in the last couple of decades.

But for most people, the way I explain the donor-advised fund is I put it in the context of other tax-advantaged accounts that serve a financial purpose for people's planning.

Most of us are familiar with retirement accounts, like individual retirement accounts, or 401(k)s offered by our employer. Some of us might even be familiar with 529 plans, a tax-advantaged account for college savings. And in some ways the donor-advised fund is just a tax-advantaged account for charitable giving.

The way it works is pretty simple.  You have some money that you want to put aside for charity. You put it aside with a donor-advised fund, a platform provider who offers that type of account. When you give them the funds, it counts as a charitable donation, so you get that tax deduction for making a charitable donation at that moment.  

The money is invested tax-free and can compound over time. And then anytime you want that money to go to an operating charity, just tell the donor-advised fund where to send the money, And they get the money to the charity. And in theory, a donor-advised fund can support almost any legal charity across the United States, over 1.7 million of them at last count.

Ric Edelman: So it sounds pretty simple and easy, but why would somebody want to do this? I'll play devil's advocate, which is if you want to donate money to a charity, why not just donate the money to the charity? Why bother putting the money into the donor-advised fund as an intermediary step.

Adam Nash: Well, that's a great question. And by the way, our entire mission at Daffy is to help people be more generous and give more often. So, I'd be the first to say that if you want to give money to a charity, give money to a charity. That's fantastic. But like a lot of accounts, the donor-advised fund serves multiple purposes and really is a better system for giving.

First and foremost, we all know how important it is to put money aside for the goals that you have that are important to you. It's one of the ways people hit their financial goals. If you want to save money for retirement, you put some money aside out of each paycheck. If you're saving up to buy a house, a down payment, you might put aside money every month.

And the donor-advised fund lets you do that for charity by separating the question of when do you put money aside, from the question of who do you want to give it to. And as you and I both know, a lot of people struggle with the basic financial housekeeping of just putting money aside for their goals.

So, first and foremost, from a personal finance standpoint, the donor-advised fund is a great product. And the second fact is just from a system of giving, having all of your giving in one place really takes the stress out of tax time. I can't tell you how many of our members actually just really enjoy the fact that at the end of the year they can find all their donation receipts in one place.

Simple questions of how much money you gave to a charity last year. How much money did I give to my kids school last year or my alma mater or to that organization? And donor-advised funds make it very easy to set up things like recurring donations. Many of us support the same organizations every year and having a donor-advised fund lets you actually set up that system so it happens automatically, which is really fantastic. But the last benefit of the donor-advised fund] which I think too many people don't really take advantage of is that it turns out that you don't have to give just cash to charities.

Actually, we can donate investments: stocks, ETFs, mutual funds, even crypto things that you've held more than a year, you could actually donate to charity. And it's a wonderful thing to do, not just for the charity, but with amazing tax benefits. The problem is most charities don't accept and can't accept things like stock or ETFs or mutual funds or crypto, but the donor-advised fund can.

So, if you have a donor-advised fund, you can take advantage of the benefits of donating appreciated investments while not complicating the issue for the charities you support. You give the money, the donor-advised fund gets the money to the charity. And so it really can be useful across the board for people who care about giving on a regular basis.

Ric Edelman: So let's elaborate a little bit on those tax benefits. Let's say that I've got a bunch of money in some investment of some kind, like you said, bonds, mutual funds, ETFs, crypto. And if I were to sell that asset, I would pay taxes. So talk about how the donor-advised fund lets me avoid that.

Adam Nash: Yeah. And we can use a simple example. I think when people think about donating stocks, they think of high flyers. Maybe you were, you were lucky enough to have invested in NVIDIA years ago. And all of a sudden it's a multi-trillion dollar company, but the truth is it works with any investment that you've held more than a year.

Let's say you bought a Vanguard total stock market fund more than 10 years ago. That fund is up a lot. The stock market is up a lot in the last decade. And you're right. If you sell that fund, if you sell that ETF, you're going to pay capital gains, taxes, federal, in some cases, state, and even local. But when you donate that ETF or a mutual fund, you get two great tax advantages in one.

The first is you get that charitable tax deduction for the full market value of the investment, that current price. And so whatever that mutual fund or ETF is worth at this point, you get to deduct that and you can deduct when you donate investments up to 30% of your adjusted gross income. It is one of the largest and most generous tax deductions in the tax code.

And I don't need to remind you that income tax rates tend to be the higher rates. But the second tax benefit is when you donate that investment, you never pay the capital gains taxes. So if you had sold the investment and then donated cash to the charity, while you would have less cash to give, because some of that money would go to taxes.

When you actually donate the investment without selling it, all of that money can go to the charity. And since that charity itself is a nonprofit, they get to keep all the money as well to use for their cause for their organization. And so it's one of those rare win-wins in a tax code where you can be smarter about your taxes, but also get more money to the organizations and causes you support.

Ric Edelman: So if I donate $10,000 worth of shares of my ETF to Daffy, the charity will get the full $10,000. I get the full tax break of the $10,000 and I didn't pay maybe 20% capital gains tax on that 10 grand. I didn't have to pay $2,000 in taxes.

Adam Nash: Oh, that's exactly right. And better yet, of course, by using a donor-advised fund, maybe you want to give that $10,000 to one charity. Maybe you want to set up a recurring donation where you give them a thousand dollars every year, and because that money is invested, you have that money to give. Maybe you want to split it amongst multiple charities. But saving money on those taxes, when you put the investment in is really the big win, especially if you care about getting more money to the charities you support.

Ric Edelman: Now let's talk about another example where I think this is a huge opportunity for individuals. Sometimes people get a windfall. They get a big block of money that is unusual for them. You know, we all get our salaries on an annual basis, but sometimes if you're, for example, a business owner and you've sold the company, or you're a senior executive of a company that got sold and your stock options just came due, or you just got some kind of windfall of some sort.

And we're talking, it might be hundreds of thousands of dollars, even millions. And it's a one-time event. That's ordinary income in most cases for most people. Ordinary income or capital gains income. You're going to have to pay taxes on that one-time event, but the donor-advised fund can really help you deal with that can’t it?

Adam Nash: That's right. And that's actually an increasingly common occurrence, More and more of us have variable income. We have good years and not so good years. But for a lot of people, they discover the donor-advised fund when they have one of those windfall events, a large amount comes in, even for myself, I learned about the donor-advised fund years and years ago. I was the executive at a company called LinkedIn, which most people know, but went public in 2011, and all that hard work and all that stock suddenly was liquid, and you had potentially a very big tax bill.

And so it turns out the donor-advised fund solves this problem because in the years where you have that big windfall. Well, guess what? Your tax rates are also higher because we have a progressive tax system. You hit those highest rates when you have the most money coming in. And so the advantages of putting money aside for charity in the same tax year where you have that windfall are phenomenal.

But most people aren't prepared to make that decision right away. What if that windfall came in November or December? Even if it came earlier in the year, figuring out what to do with that sum of money or what organization should get it is a hard problem. And the donor-advised fund is perfect for this situation because you can take the right of my money to control your tax bill, figure out how much you want to give to charity over time.

You can put aside multiple years worth of giving, put it in the donor-advised fund. You get that charitable tax deduction that year, and then, then money is invested tax-free. So you have the time to figure out which organizations you want to support. And for many people, they will use that windfall through their lifetimes to support organizations they care about. But yes, windfall situations.

Actually many of the members of Daffy just have variable income. We have airline pilots, real estate agents, and certainly people in technology who get paid in stock options. Some years the market is better than others and the donor-advised fund lets them smooth out how they put money aside for charity so that they take advantage of that charitable tax deduction when it's most valuable to them, but then they can also support their giving for years, or even in some case, decades.

Ric Edelman: So, for those who are not familiar with donor-advised funds, where this is kind of new and interesting information, they may be wondering, gee, this almost sounds too good to be true. This can't be legit. There cannot be very many people doing this. But in fact, there are an awful lot. How many people have engaged with donor-advised funds?  

Adam Nash: Yeah, it's really one of the fastest growing categories, certainly in tax-advantaged accounts. There's about a quarter of a trillion dollars already in donor-advised funds, more than 2 million accounts in the U. S. alone. And it keeps growing year after year as more and more people discover the donor-advised fund. Unfortunately, there's a good reason why people haven't heard of this. The truth is if you don't have a high-quality financial advisor or accountant, you may not have had anyone recommend this to you.

And unfortunately, the business model of the existing donor-advised funds tends to skew them to focus on really the extremely wealthy. And it's just the way that they make their money, et cetera.

Ric Edelman: I think that's one of the reasons you created Daffy and what makes Daffy different. Elaborate on that.

Adam Nash: Yeah, that's right. It's part of the motivation to do Daffy. I have a longstanding history in technology with a real passion of using technology to bring real solutions to people, to use the frontiers, to bring things to be able to solve old problems in new ways, and I've done that in fintech  in financial services, the last 10 to 15 years.

We've seen so much innovation in different products that help people save better, spend better, invest better, but why not giving? Giving is such an important thing. You know, 50 to 60 million Americans give to charity every year. And yet, this donor-advised fund, this wonderful financial product, has been locked up kind of in the very high end. A product used regularly by the wealthy.

The idea behind Daffy, the Donor-Advised Fund For You, is that we could use technology to make this simple and easy and accessible for all of those Americans who care about giving on a regular basis. So it's been growing rapidly and I think it's because when people hear about it, they go, this can't be true, this is too good.

And I will say that there are some things people need to think about. This is an account for a purpose. It wouldn't make sense to put money aside in a donor-advised fund if you don't intend to give money to charity because once you put it in a donor-advised fund, that money is earmarked. In fact, you can't use it for anything else. That's the price you pay for that tax benefit.

But if you regularly give to charity, right, if you belong to a church or synagogue, if you give money to your kids school, an alma mater, or some national causes, it turns out when most of us look at our spending for a given year, you discover you actually did make donations to charity. And maybe you didn't take the tax deduction, maybe you didn't think about it, but it turns out the donor-advised fund is a great way to take this important part of people's financial lives and do it in a more efficient manner.

Ric Edelman: So talk about the economics. How big, how small are the accounts that you've seen people open at Daffy?

Adam Nash: Yeah, it comes in all sizes. It turns out that giving is fairly universal. We have accounts at Daffy that are as large as eight figures. Tens of millions of dollars, but the minimum that you need to contribute to open a donor-advised fund at Daffy is just $10. We have a lot of members who put aside $10 a week, $25 a month. Most of our members put aside a few thousand dollars every year or three to five charities that they support regularly.

But it's really an incredible variety. I mean, I can tell you last year in 2023, our largest stock contribution to Daffy was over $12 million. But our median, the average stock contribution, was about $6,000. In crypto, it was very similar. Our largest crypto contribution was about $5 million dollars worth in U.S. dollars. But our median crypto contribution was just $1,000. So, we really see all kinds.

I think giving is something very personal, but people from all walks of life seem to have been raised, at least many of them, to believe that giving back is part of the way they want to live their lives. And the donor-advised fund just makes it easy to do so.

Ric Edelman: And talk about how much all this costs.

Adam Nash: Well, that's actually the best part.  You're giving me the easy ones here. The whole idea behind the donor-advised fund and rethinking for Daffy, what it would mean to support everyone who gives to charity, is we've tried to make our pricing really approachable. And so actually we're free to get started under $100.

We charge $3 a month for most of our members. So, like a lot of the nonprofits that people give to Daffy is structured as a membership-based nonprofit. And so for $3 a month, you get the basic donor-advised fund. If you want to include your family on the plan, we support up to 24 members. You can include your siblings, parents, grandparents, or your kids and grandkids, or anyone you want to give with. That's $5 a month. And then at the high end, if you want to put aside an unlimited amount of stock, crypto, other types of investments,

if you want to customize your portfolio, we charge $20 a month. And so this may sound simple, but most of the industry, most of the donor-advised funds on the market have very high minimums and very high fees. Even one of my favorite companies, Vanguard is one of my favorite organizations. But Vanguard Charitable has a minimum of $25,000 on their donor-advised fund and a fee of 0.6%. 60 basis points which is kind of shocking. There's almost nothing at Vanguard that costs that much, but you can estimate, a $100,000 account at Vanguard Charitable or Fidelity or Schwab will end up costing about $600 a year. And Daffy is much, much less expensive. We try to make it very easy for people to get started because our goal is to help people give.

Ric Edelman: Well, it's really very exciting what you're putting together. The goal is to get as many people to donate as possible, to get as many people to donate as much as possible. And the donor-advised fund is a technological solution that I really think facilitates the ability for people to be generous and make it easy to be generous, make it easy for tax record keeping and reporting, make it easy to avoid the capital gains tax, make it easy for you to determine who you're going to give to, when you're going to give, how often you're going to give…just flexibility is the key word in this whole conversation. So, if you're unfamiliar with donor-advised funds, I encourage you to, if you have an account at Schwab or Fidelity, talk to them. Even if you do, I think you should compare them to what Daffy is offering. The website is Daffy.org. We've got a link to it in the show notes, so you can check them out really easily. And this is the time of year to be doing this kind of year-end gift giving. So, I encourage you to do that this very month.

Adam Nash, the CEO and founder of Daffy. org. Thanks so much for being with us on the program today.

Adam Nash: No, thank you, Ric. It was great to be here.

If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube, and remember leave a review on Apple podcasts. I read them all. Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app.  

I'll see you Monday.

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Links from today’s show:  

Yesterday's Podcast on New Investment Opportunities: https://www.thetayf.com/blogs/this-weeks-stories/three-new-funds-that-give-you-exposure-to-the-crypto-ecosystem

Daffy.org Website: https://www.daffy.org/

12/9 Webinar - What the Election Results Mean for Crypto: https://dacfp.com/events/what-the-election-results-mean-for-crypto

12/10 Webinar - The Retirement Revolution: ETF Solutions for Modern Retirement Planning: https://www.thetayf.com/pages/the-retirement-revolution-etf-solutions-for-modern-retirement-planning

11/13 Webinar Replay - An Innovative Way to Generate Income in a World of Declining Rates: https://www.thetayf.com/pages/november-13-2024-an-innovative-way-to-generate-income

10/9 Webinar Replay - Crypto for RIAs: Yield, Staking, Lending and Custody. What’s beyond the ETFs? https://dacfp.com/events/crypto-for-rias-yield-staking-lending-and-custody-whats-beyond-the-etfs/

Certified in Blockchain and Digital Assets including Crypto Taxation Course/Webinar: https://dacfp.com/certification/

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