21st-Century Sell

Companies use high-tech services to help people create foundations

Two companies — one an upstart with roots in the Internet world, the other a financial-services giant — are vying to make forming a private foundation as easy as opening an online checking account.

Foundation Source, a three-year-old company here in Norwalk, and Fidelity Investments, a full-service brokerage in Boston whose Charitable Gift Fund has collected more than $5-billion from donors, both have begun marketing what they see as revolutionary ways to increase the number of private foundations: secure Web sites with 24-hour access that allow donors to view their foundation records and obtain all the legal and accounting services they need to comply with federal regulations.

The companies say their approach makes it simpler and cheaper to establish and manage private foundations than the traditional method of using the services of lawyers and accountants.

Both Fidelity and Foundation Source say they want to create a mass market for their products by collaborating with financial institutions, law firms, and accounting firms. But Foundation Source has an even bolder vision: to create an online presence that allows people with an interest in private foundations to share ideas, problems, and advice. “We want to be the hub — the backbone — of the foundation world,” says Douglas K. Mellinger, the company’s chief executive officer. “When someone thinks of foundations, we want them to think of us.”

What Attracts Foundation Donors?

The moves by Foundation Source and Fidelity underscore the growing interest of for-profit companies in the burgeoning business of charity. But some observers doubt whether wealthy people accustomed to personal service will pay for a cookie-cutter approach to foundation management.

“This is fundamentally not a mass-market business, and these companies are trying to treat it that way,” says Roger D. Silk, chief executive officer of Sterling Foundation Management, in Reston, Va., which helps donors administer their foundations. “We have yet to run into a client who wants to be treated like a mass-market customer.”

Adds Jackie Copeland-Carson, managing director of philanthropic services in the Private Client Group at U.S. Bank, in Minneapolis, which helps foundations manage their assets and grant making: “Foundation Source and Fidelity are using 21st-century technology, but that doesn’t fit with what a lot of our clients need or want. I don’t see a lot of people being comfortable calling a 1-800 number to set up something that will operate in perpetuity.”

Despite questions about the market for computerized foundation services, Americans certainly have grown more interested in setting up foundations. From 1990 to 2000, the number of foundations in the United States rose 75 percent, to more than 56,000. Some observers say that as Americans seek more control over their charitable dollars, they will continue to create foundations, which allow them and their heirs to say where donations should go, and when they should be distributed.

And as more Americans age, Foundation Source and Fidelity think they can be persuaded to establish their own foundations. The companies point to an expected $41-trillion transfer of wealth between generations that is expected to occur in the next 50 years, according to a study by the Boston College Social Welfare Research Institute.

Rush of Business Interest

Foundation Source and Fidelity aren’t the only companies hoping to cash in. In recent years, large financial institutions such as Fifth Third Bank, Merrill Lynch, Northern Trust, and Salomon Smith Barney have sought to manage the assets of more foundations. And many smaller companies and nonprofit organizations devoted entirely to foundations offer a variety of services, such as helping donors to establish grant-making goals, training young adults on the responsibilities of giving away money, and evaluating charities. Most employ fewer than 10 people and work one-on-one with clients.

Despite growing interest in foundation business, the evidence is inconclusive about whether foundations will continue to be established as rapidly as they were in the 1990s. Anecdotally, financial institutions agree, foundations are not being set up as frequently as they were a few years ago, primarily because Americans have less money to give and fewer appreciable assets as a result of the downturn in the economy and decline of the stock market. And donors need plenty of money to start their own foundations. Foundations have complex legal and tax requirements and need frequent administrative oversight, leading foundation officials, tax lawyers, and others to say that unless donors have at least $1-million, they shouldn’t even set them up.

Successful Entrepreneur

Mr. Mellinger, 38, thinks that if foundations were easier and less expensive to set up and operate, more donors would establish them. And if anyone can sell an idea to the business world, it’s Mr. Mellinger, who once graced the cover of Inc. magazine under the headline, “The Next Bill Gates.”

After he took a software-development company public in his 20s, and his family’s stock soared to more than $100-million, Mr. Mellinger created his own private foundation and began to think about how he could use his technology skills to start a business in the philanthropic world. He co-founded Foundation Source in 2000 and says he has tapped his business contacts to acquire $10-million to operate the company. Currently, Foundation Source administers 40 private foundations.

Foundation Source and Fidelity set up and run foundations in much the same way lawyers and accountants do — with the aid of technology. But while lawyers rely on standardized forms and accountants use computer programs to simplify tax filings, Foundation Source and Fidelity take technology a step further. They maintain secure Web sites for each foundation where donors can monitor their foundation’s financial status, keep track of contributions to charitable organizations, see how much money they are legally required to distribute annually, and make sure Foundation Source or Fidelity assists in paying any taxes they owe and in filing their annual informational tax returns, known as IRS Forms 990-PF.

Foundation Source’s Web site looks similar to Fidelity’s, but it offers more information for donors. It links to GuideStar, an online charity database, so that donors can search financial records of charitable organizations. The company also is developing a system that will enable grant seekers to submit proposals electronically. Fidelity says it plans to offer similar resources to help donors.

Traditional Philanthropy

To help create services that would appeal to donors, Mr. Mellinger hired Page Snow, a former foundation official, as “chief philanthropic officer.” Ms. Snow, who most recently spent 10 years evaluating foundation programs for the Pew Charitable Trusts, in Philadelphia, sees herself as a “bridge” between the for-profit world and the foundation world.

“Foundation Source could have brought in anybody, but the company chose someone from traditional philanthropy,” Ms. Snow says. “There’s a commitment here beyond, ‘We’re just going to get these new foundations signed up, get the bucks rolling in.’”

The potential for helping donors to collaborate is what attracted Ms. Snow to Foundation Source. If the company can attract hundreds of foundations, she says, it will have the cash to be able to help donors research the kinds of issues that only big foundations are now able to study.

Mr. Mellinger brims with ideas for helping donors collaborate. He says he thinks people would give more through their foundations if they could award “grant certificates” to family members and friends, letting them choose charities to support. He wants to create an online bulletin board where donors can suggest areas of need and recruit other donors to give to the same causes. He wants to collaborate with community foundations to help donors understand local needs. And he says that as his company grows, he will offer a matchmaking service so that donors can find more information about charities that specialize in the causes they want to support.

But before Foundation Source builds any of those partnerships, Mr. Mellinger says, the company recognizes that it needs to form alliances with people who help donors establish and maintain their foundations. Foundation Source has allied with 12 financial institutions, including BankOne and Morgan Stanley, which manage the foundation assets. And this year, Foundation Source is telling lawyers and accountants — the very people its product eliminates in the process of establishing and managing foundations — that they can stay involved in the process by reviewing the computerized work it does. Says Mr. Mellinger: “We realized that overlooking lawyers and accountants and the relationships they have with clients was a roadblock to our success.”

With the help of those partnerships, Foundation Source is promoting its service to donors with as little as $100,000 to give away in the hopes of reaching a mass market, Mr. Mellinger says. “Everything we do,” he says, “is geared toward getting thousands of donors to set up a foundation.” Still, he says, the company knows it has to focus its effort on delivering plenty of personal service to clients: “If we deliver a Honda or Ramada to someone expecting a Mercedes or W Hotel, they won’t stay with us long.”

Cost Not a Key Issue

Foundation experts agree that donors who have enough money to start a foundation rarely base their philanthropic decisions on cost.

But Foundation Source and Fidelity say that a key component of their services is that they charge less than their competitors do. Many law firms charge about $10,000 to set up a foundation and annual administrative fees of 5 percent of assets. Foundation Source charges $2,000 to $5,000 to set up a foundation, and quarterly administrative fees that start at 1 percent and decrease to one-quarter of 1 percent as assets rise. Fidelity charges donors $7,500 to set up a foundation. To administer it, the company charges donors 5 percent of the money their foundation gives each year in grants.

Besides making it less expensive to set up foundations, the companies say they remove the burdens of managing them. A Foundation Source client, Oliver W. Jones, a retired professor of medicine and pediatrics in San Diego, says that using the company’s services was much easier than establishing his foundation through a law firm. Dr. Jones says he spent $1,200 and waited four months for a law firm to set up his family foundation last summer. Tired of waiting, he called Foundation Source after hearing about the company through his financial adviser. Two days and $2,000 later, Foundation Source had created the Paula B. and Oliver W. Jones Foundation. “Whereas a law firm does a hundred different things,” Dr. Jones says, “Foundation Source has one responsibility — setting up foundations.”

Convenience is one of the best features of his new foundation, Dr. Jones says. His three children live in different areas of the country, and his foundation Web site allows family members to manage their grant making easily. “The product helps our children and grandchildren to get involved in philanthropic work,” Dr. Jones says, “and it is bringing us all closer.”

Making It Simple

Although more the upstart, Foundation Source is the rabbit in the race with Fidelity Investments, whose Charitable Gift Fund is the largest commercial donor-advised fund in the country. Donor-advised funds are aimed primarily at smaller donors than the foundation market: Fidelity allows people to set up a donor-advised fund with a minimum of $10,000, while it expects them to have $750,000 to give before they set up a foundation.

Fidelity Private Foundation Services has signed up 12 private foundations since it opened in September. But the company thinks it will be administering 75 to 100 foundations by the middle of 2004, says Andrew M. Tappé, the company’s senior vice president of private foundation services. “Our mission at Fidelity has been to modernize and simplify the modern giving process,” Mr. Tappé, 41, says. “Whatever we get into, we go at full force with a lot of conviction. We expect phenomenal growth, and we have the infrastructure to support it.”

Fidelity already has started to flex its marketing muscle to promote its private foundation services. It has bought a sponsorship on National Public Radio, placed print ads in trade publications for accountants, estate planners, and lawyers, and promoted the service to its existing brokerage customers. Before starting its foundation-services business, the company already managed more than $400-million in foundation assets; it hopes to persuade those customers to computerize their foundation record keeping by using its service. The company also thinks it will attract additional clients by tapping its 18 million customers who do other types of tranactions through Fidelity’s array of financial and brokerage services.

Fidelity expects even more of its growth to come from the establishment of new foundations, and from partnerships it is forming with estate planners and accounting firms such as Ernst & Young. Fidelity thinks that if lawyers and accountants bought its service, they would encounter fewer hassles from handling the administration of foundations and could spend their time strengthening their relationships with clients and recruiting new ones.

But if Fidelity wants to succeed, it will need to do more than build partnerships and gain market share, says Mr. Silk, of Sterling Foundation Management. He thinks the key to foundation work is giving donors personal service — something Fidelity failed to do, he says, when one of his colleagues called to inquire about setting up a foundation. “They couldn’t answer very basic questions,” he says. “It showed me that they’re a money-management service, not a philanthropic organization.”

Concerns Raised

Even if Foundation Source and Fidelity make it easier to set up and manage private foundations, some foundation officials question whether that is an entirely positive development.

As more financial institutions enter the foundation world, they bring a sales mentality to the field, often encouraging donors to use one approach for their giving rather than counseling them on all the philanthropic options they have, says Dorothy S. Ridings, president of the Council on Foundations, a trade group in Washington. That can sometimes lead donors to establish small foundations when they might be better off giving another way.

The fees charged for managing small foundations can deplete the charitable good that the foundation does, Ms. Ridings says, and that has drawn the attention of lawmakers. “I know that there is concern in Congress about very small foundations not being run as efficiently as they should be — where their money is not being used to maximize its philanthropic value,” she says. “People in Congress aren’t champing at the bit to hold hearings, but it’s a concern.”

Mark R. Kramer, president of Foundation Strategy Group, a Boston company, says he worries that the proliferation of efforts to encourage people to set up small foundations or donor-advised funds that distribute only the investment earnings each year is discouraging affluent people from giving large sums directly to charity, which he says is how the money might do the most-immediate good for society. While donors could choose to give away as much as they put into their foundation or donor-advised fund each year, the attraction of a foundation or donor-advised fund is that it allows giving to be done over time, he notes, even though the donor gets immediate tax benefits for the assets put into the fund.

The idea that creating more foundations keeps charitable money out of circulation is a “preposterous” argument, says Mr. Mellinger. “If another $25-billion went to charities last year instead of into foundations, it’s not like charities could have used it anyway,” he says. “Anything that gets people more engaged in philanthropy is a positive thing that should be embraced.”