A Run for the Money

Growth in donor-advised accounts spurs fierce competition for funds

Robert J. Brennan, the top fund-raising official at the Humane Society of the United States, says he is concerned about a change in the giving habits of the charity’s biggest donors.

Instead of sending checks for $10,000 or $20,000, as is their custom, many donors have started parceling out their gifts in $1,000 or $2,000 increments.

It’s not that the donors are getting poorer, Mr. Brennan says. Rather, they have joined thousands of other people nationwide who are stockpiling their charitable dollars in planned-giving instruments known as donor-advised funds.

Such funds allow donors to give cash, stock, or other assets to a community foundation or similar charity, claim a charitable deduction, and then recommend how to distribute the money. While the donor considers when and where to suggest that gifts be made to charities, money in the accounts is invested in the financial markets so it can keep growing.

As Mr. Brennan has discovered, some donors are giving only the income that is earned by their donor-advised accounts, and leaving the principal intact. “If their $10,000 balance is earning 10 percent, we’re getting $1,000 instead of $10,000,” Mr. Brennan laments. “That has to be alarming for any charity.”

Donor-advised funds are exercising a powerful — and controversial — influence on many aspects of charitable giving these days. Long offered by community foundations and Jewish federations, the funds have risen to prominence in the past few years as people have made millions of dollars in the stock market and as Fidelity Investments and other companies have set up charities to offer the technique.

A study by The Chronicle shows that from 1995 to 1999, the total assets of donor-advised funds offered by 20 of the largest community foundations; by Fidelity Investments, in Boston; and by a handful of other companies grew 231 percent, to $5.5-billion. Fidelity’s donor-advised fund, the Charitable Gift Fund, with $2.2-billion in assets, has quintupled in value in that period, and the number of people with donor-advised accounts at Fidelity rose 271 percent, to almost 21,000.

In addition, the nation’s 189 Jewish federations held nearly $2-billion in 7,500 donor-advised accounts as of last June. That was double the size of those assets in 1995.

Such growth is being greeted in the non-profit world with both applause and apprehension. Many observers believe that the funds are helping to spark a boom in American philanthropy, because they satisfy a desire among many donors to be involved in the hands-on work of grant making. In a survey of Charitable Gift Fund donors last year by Fidelity, nearly two-thirds of respondents said they gave more money to charity after they opened their Charitable Gift Fund accounts than before, and one-third said they gave to more charities than they did before.

But other observers say that donor-advised — or gift — funds present unprecedented challenges. Some argue that new government rules are needed to regulate the funds — and to make sure they are not used in ways that unduly benefit the donor. Others argue that as more people use the gift funds to funnel their money to charity, it will be difficult for fund raisers to build close and lasting personal relationships with donors — a problem that, for some charities, could lead to less giving.

And still others worry that the growing number of commercial competitors entering the gift-fund market could cause community foundations to miss out on millions of dollars in donor-advised assets. Because community foundations have close ties to local charities and understand local needs, some observers argue that they are better able than big, national banks and brokerages to help donors shape their gifts for maximum effect.

The debate over the growing influence of commercially run gift funds is likely to expand as more companies enter the donor-advised market. In September, Charles Schwab Corporation, a major brokerage company, started its own fund program, and by the end of 1999 it already had attracted $50.7-million in assets. OppenheimerFunds, another mutual-fund company, said it plans to start a donor-advised program by the end of the year.

Meanwhile, some financial advisers are earning special fees if their clients open donor-advised accounts at certain companies, including Fidelity and the American Guaranty and Trust Company, which markets a donor-advised program called the American Gift Fund. Critics contend that such fees create an incentive for advisers to steer donors to commercially run gift funds rather than to those at community foundations or other charities. But proponents say the fees are designed to help make donor-advised funds more easily available to people who invest through brokers and financial advisers. “The real goal is to get as many people in the United States to establish themselves as organized givers,” says Cynthia L. Egan, president of Fidelity’s Charitable Gift Fund.

Non-profit groups are taking a variety of steps to deal with the increasingly competitive environment that surrounds donor-advised giving.

The Humane Society, for example, opened its own donor-advised fund last month in partnership with Mellon Private Asset Management, a part of Mellon Bank. Not only will donors’ assets be invested in the stocks of “animal-friendly” companies, Mr. Brennan says, but donors will be able to receive advice from the society’s 300 “animal-protection experts” in deciding what programs and charities to recommend as recipients of their money.

Mr. Brennan sees the new fund as an antidote to the growing power of gift funds offered by companies like Fidelity. “They’re already controlling so much of the average donor’s assets,” he says. Charities “are not going to get an opportunity to present what we do if people are making gift decisions with their brokers.” For more and more donors, he adds, giving is becoming “a pocketbook decision, not one of the heart.”

The Humane Society’s move is emblematic of other changes that are occurring across the nation as competition for donor-advised funds heats up.

For example, a growing number of non-profit groups, including some United Ways and universities such as Harvard, operate their own donor-advised funds, and charities such as World Vision are stepping up their efforts to promote long-established donor-advised programs.

In addition, a recently formed association, Community Foundations of America, is working on a nationwide plan to help financial-services companies that don’t offer donor-advised funds put their wealthy clients in touch with community foundations that do.

The popularity of gift funds reflects a growing desire among donors for flexibility and perceived control over their grant making — the kind of influence that they could not otherwise get without starting a more strictly regulated private foundation. Even though donor-advised accounts are under the legal control of the institutions that offer the funds, donors generally have broad latitude to recommend which charities should receive grants, and donors’ wishes typically are honored.

Donor-advised giving still represents only a slice of the total planned-giving pie. In 1997, the latest year for which data are available, Americans reported to the Internal Revenue Service that they held more than $72-billion in charitable trusts and pooled-income funds. But in coming years, billions of new dollars are likely to flow into gift funds as affluent baby boomers look for ways to contribute a portion of their inherited wealth to charity.

Younger donors want “involvement and expression, including a desire for more participation in the process of gift dissemination and project design,” says Jay Steenhuysen, a veteran fund-raising executive who in May will become director of philanthropic planning at Brown University, where he will run a new program that helps people design and operate family philanthropies. “Donor-advised funds are one expression of that hands-on philanthropy.”

A desire for hands-on philanthropy may indeed be engaging a new generation of donors, but it poses formidable challenges for fund raisers, many experts say.

One such challenge is to maintain close personal relationships with donors who have chosen to give through an intermediary organization, such as a gift fund operated by a commercial broker or bank. “The dollars are not coming directly to charities, they’re going to these third parties,” Mr. Brennan says. “Does that mean I have to go to Fidelity and ask them to make gifts? Who am I going to call at Fidelity?”

Some fund-raising experts argue that development officials should be able to use creative strategies to reach all kinds of donors. But that isn’t always easy. Gift checks made by donor-advised funds are signed not by the donor but by the entity that holds the gift-fund account, and donors have the option of remaining anonymous to the charities that receive their money. When that happens, Mr. Brennan says, fund raisers “don’t know who to talk to, or who to say thank you to. And if you don’t know who the donor is, how can you know what projects and programs the donor wants you to be involved in?” He adds, ”How can we be responsible and accountable?”

Besides putting a distance between donors and charities, donor-advised funds also make it easy for donors to change their minds repeatedly about which causes should receive their money.

“A charity that thought it was going to get a lot of money today might find out tomorrow that it’s not the charity of preference,” says Dan Busby, an official at the Evangelical Council for Financial Accountability, a watchdog group for religious organizations.

For charities that offer their own donor-advised funds, still another challenge arises: The charities must ensure that they benefit enough from the funds to warrant the work of managing them. One way to do that is to require that a fixed portion of the payout from such funds stays close to home.

Harvard University, for example, stipulates that one-half of the principal and annual income from its donor-advised fund, which requires a minimum initial deposit of $250,000, be used for Harvard-related programs. The Humane Society insists that 10 percent of principal and earnings from its new donor-advised fund, which requires an initial deposit of at least $10,000, must go to the animal-protection charity.

As commercial gift funds continue to expand, some community foundations are taking aggressive countermeasures to hold on to a share of the donor-advised business. The stakes are high. Gift-fund assets at 20 of the largest community foundations rose 153 percent from 1995 to 1999, to $3.1-billion, according to the Chronicle study.

But assets in gift funds offered by Fidelity and six other major commercial companies rose nearly 450 percent in that period, to $2.4-billion, suggesting that community foundations face a large and growing competitive threat for donor-advised accounts.

The California Community Foundation, in Los Angeles, last month began retooling its World Wide Web site to make it more accommodating to people who have opened donor-advised funds at the foundation. The new features allow donors to use the Internet to check the balance in their accounts, get weekly updates on contributions to the accounts and grant expenditures from them, and suggest charities that they want to receive gifts.

Community funds are “part of the financial-services industry,” says Allan Parachini, vice president for communications at the California foundation. “We have to start reacting as if we were a hip, contemporary investment industry and not just a stuffy old-fashioned one.”

By marrying online services and the local expertise of community foundations, Mr. Parachini adds, “we think we see a number of ways to leapfrog right over the ground we’ve conceded” to commercial companies like Fidelity. One thing the nation’s more than 500 community foundations can offer, Mr. Parachini says, is the expertise of local program officers who can help donors make wise recommendations about which charitable programs should receive their money.

That same philosophy is propelling Community Foundations of America in its effort to create a system through which large financial-services companies can steer clients to donor-advised funds offered by community foundations throughout the country.

Carla Dearing, chief executive officer of Community Foundations of America, says the organization hasn’t made a final decision on whether to proceed with the plan but will put it into effect this year if it is deemed feasible.

The strategy would not only help community foundations attract more donors, but would also help financial companies better serve their clients who are interested in philanthropy, she says.

“Historically, a larger brokerage would have to deal with 500 or 600 community foundations instead of doing a deal with one organization that can help standardize the operation,” she says.

The effort has won support not only from the community-foundation world, but also from such people as W. Christopher Singleton, director of non-profit financial services at Merrill Lynch, a major brokerage company. Merrill Lynch does not offer its own gift funds, but it does run a program called the Community Foundation Alliance, through which it directs Merrill Lynch clients who are interested in philanthropy to community foundations. The Merrill Lynch alliance now comprises 200 community funds, up from 34 when the alliance was formed in 1996.

“We’re very encouraged” by the Community Foundations of America plan, Mr. Singleton says. “We need to bring a new order to the way community foundations interact.”

Just as the community-foundation world is becoming more aggressive at pursuing donor-advised dollars, so too are some charities.

World Vision, in Federal Way, Wash., is an example. It began offering donor-advised funds in the mid-1980’s and now has 54 of them, with total assets of $26.1-million, all of it managed in-house by World Vision, according to Marlon Sandlin, national director of gift planning.

The religious charity is considering two changes to its gift-fund program that could significantly broaden its reach and appeal, Mr. Sandlin says. First, it is thinking of starting a second group of donor-advised funds whose assets would be overseen by for-profit investment managers, some of whom would be part of an existing network of financial advisers who have close ties to the charity. Because the managers would earn a fee for their work, Mr. Sandlin says, they would have an incentive to encourage their clients to open donor-advised accounts with World Vision.

World Vision also is thinking about starting still another set of donor-advised funds, ones with a lower minimum-deposit requirement — between $10,000 and $25, 000, compared with the current $100,000. The idea, Mr. Sandlin says, would be to reach more donors of modest means who want to support the charity’s relief work.

World Vision’s main motive in considering both moves is to spread the organization’s Christian mission and to help people fulfill their philanthropic interests, Mr. Sandlin says. But he acknowledges that the white-hot climate of competition for donor-advised money also is shaping World Vision’s strategy.

“If we didn’t do this, then donors may be doing the same thing with a Fidelity or somebody else,” he says, “and we may not be part of the equation.”

Amanda Marshall contributed to this article.