A Surge in Assets

Donor-advised funds are growing exponentially

Assets of the nation’s largest donor-advised funds reached

$19.2-billion in 2006, up more than 21 percent from $15.9-billion a year ago, says a new Chronicle survey.

At 99 funds that provided data for 2005 and 2006, assets increased a median of 16 percent, meaning that half grew by more and half grew by less. Officials at many funds say a strong economy and heightened interest in giving accounted for the gain.

Donor-advised funds allow people to donate cash, stock, or other assets to special accounts; claim a tax deduction for the gifts; and recommend how, when, and to which charities money in the accounts should be distributed. The funds are offered primarily by financial companies and community foundations, but some other charities, such as Jewish federations and universities, also offer them.

$6-Billion in Gifts

Relatively obscure until the past decade, donor-advised funds has become one of the fastest-growing forms of giving. That trend continued in 2006, as the Chronicle survey found that donors gave $6-billion to such funds that year — an increase of 25 percent from $4.8-billion the year before — and the growth in total assets that far outpaced inflation, which was 3.2 percent last year. Strong investment returns account for the rest of the growth.

More than a quarter of the 99 organizations that reported two years’ data for the survey said their assets spiked by more than 30 percent in 2006. And four funds — the Lutheran Community Foundation, the University of Florida, the Rotary Foundation of Rotary International, and the Schwab Fund for Charitable Giving — said that their donor-advisedfund assets increased by more than 100 percent.

As donors put more money into the funds, they also increased the amount they gave to charities. Collectively, the total value of money awarded to charities from donor-advised funds was $3.5-billion in 2006 — a jump of nearly 18 percent from $3-billion in 2005. The funds awarded a median of 17 percent of their assets.

Taken together, these trends suggest that donor-advised funds should continue their rapid growth as long as the economy remains strong, says Kenneth D. Strmiska, managing director of community foundation services at the Council on Foundations, in Washington.

“Unless you see dramatic drops in the [stock] market, these trends should continue,” he says. “It’s only when we see, like at the turn of this last century, the market take dramatic swings to the low side, that donors and potential donors pull back.”

But as those who oversee donor-advised funds celebrate their performance, pressure from policy makers and charity watchdogs is building, sparking fears that the funds’ growth could be derailed by efforts to curtail abuse. The Pension Protection Act, passed by Congress last year, for the first time defined and set standards for donor-advised funds. And more sweeping regulations could soon be on the way, as Congress has ordered a Treasury Department review of the funds.

Fidelity Tops the List

The Fidelity Charitable Gift Fund, with $3.5-billion in assets, continued to dominate the survey. Its assets grew 16 percent since 2005 and it is larger than the combined assets of the next three largest funds in the Chronicle survey — the Vanguard Charitable Endowment Program, Schwab Fund for Charitable Giving, and National Christian Foundation.

In 2006, Fidelity looked to further expand its reach by lowering its initial account minimum from $10,000 to $5,000. David Giunta, the fund’s president, says that change produced immediate results. Since the threshold was lowered in October, more than 30 percent of the fund’s new accounts have been established with initial donations of $5,000 to $10,000.

Many of those new donors are younger and less wealthy than previous donors, Mr. Giunta says.

“We’re starting to get more of the younger donors, to get people earlier on in their lives. That new $5,000 minimum has allowed us to attract some of those new donors,” Mr. Giunta says. “We’re seeing a lot of donors in their 50s and early 60s. What we’re also starting to see is a little bit more of the younger donors in their 30s and 40s.”

Fidelity has not been alone in its pursuit of smaller funds and younger donors.

Last year, the Renaissance Charitable Foundation, in Indianapolis, set up donor-advised funds for three companies, which in turn set up payroll-deduction plans for employees who wanted to give to the funds. About 8,000 people made contributions to those three donor-advised fund accounts, producing about $700,000 in donations.

Those donations were immediately granted to charities in the Indianapolis area, says Gregory W. Baker, Renaissance’s president.

“It’s a little bit trickier than our normal donor-advised fund, but it was interesting to do,” Mr. Baker says. “We are hoping that over time, [the employees] would see that there is something here and maybe say, ‘I want to do something myself and I want to do something bigger.’”

Many officials of donor-advised funds say they are marketing the funds to younger people because they offer them an easy way to make significant contributions.

“It’s a great way to test-drive their philanthropy instead of going to a private foundation, for example,” says Claudia Sangster, executive director of Harris myCFO Foundation, in Palo Alto, Calif. “We’re seeing a trend with younger individuals wanting to get involved in philanthropy at a younger age. They’re still working. They don’t have a lot of time to start another entity. That’s exciting. We’re training the next generation of philanthropists.”

Upscale Supporters

Many funds, however, are focusing mainly on attracting more-affluent donors like Sheldon Stone, an investment manager with Oak Tree Capital, in Los Angeles, who contributes 10 percent of his annual income to a donor-advised fund at the California Community Foundation. Mr. Stone says his family’s fund has been the ideal conduit for its philanthropy because it offers the ability to write multiple grants to worthy causes without having to deal with the bureaucracy of establishing a private foundation.

In an effort to target wealthy donors, some donor-advised funds, such as the Vanguard Charitable Endowment Program, in Malvern, Pa., are more aggressively pursuing donations from hedge-fund managers and those who hold shares of private equity.

Vanguard has lured more than 40 such donations, totaling about $50-million in gifts, says Benjamin Pierce, the program’s executive director. Hedge funds use a wide range of investments designed to protect, or hedge, against changing market conditions.

Mr. Pierce says the transactions, which typically involve the interest earned in hedge-fund holdings, are complex. But he says the ultimate payoff from hedge funds could be tremendous.

“It has to be done very carefully, but the realization is that, yes, that interest can actually be given away,” he says. “The donor doesn’t have to liquidate his or her holding and send cash over. They can actually send the interest to the charity, get the tax deduction, and become a major philanthropist.”

The California Community Foundation, in Los Angeles, meanwhile, is taking advantage of the continued strong housing market in that region by pursuing donors who are interested in giving their real-estate assets. Mr. Dunn says the foundation is working with potential donors on real-estate gifts totaling about $30-million.

The Schwab Fund for Charitable Giving, in San Francisco — the third-largest fund in the Chronicle survey, with more than $1-billion in assets — is also shifting more of its efforts into attracting wealthy donors, a departure from its traditional focus on small- to midsize donors.

“Though we have a very significant majority of our accounts in lower-balance accounts, we have shifted our focus some to higher-balance accounts,” says Kim Wright-Violich, the fund’s president. “If you can open 10 $10-million accounts, it goes a lot further than if you open a whole bunch of $50,000 accounts.”

The impact of major donors can be seen easily in the 2006 performance of the Denver Foundation, which received a $37.5-million stock gift from Tim Marquez, an oil executive, and his wife, Bernadette, helping its assets to rise nearly 68 percent in 2006, to $206.7-million.

Expanding Partnerships

Competition for donors between foundations and the so-called commercial funds, which are frequently charitable extensions of large financial-services companies, such as Fidelity Investments, remains stiff, according to officials who responded to the Chronicle survey.

But there is also a growing realization that both types of funds have a place in the market.

“Ten years ago, there was a concern about national gift funds coming in and seeing it as another gift transaction,” says Mr. Strmiska of the Council on Foundations. “We know now that it is a legitimate giving vehicle. We’re all about growing philanthropy. They have increased the pie for charitable giving in the United States.”

The growing comfort with commercial funds has opened new doors to communication, even in highly competitive markets such as Boston, where the Boston Foundation markets donor-advised funds in Fidelity’s home city. The Boston Foundation had $265.9-million in donor-advisedfund assets in 2006, an increase of more than 22 percent.

“I learned very quickly that Fidelity is very local,” says Ruben Orduña, vice president for development at the Boston Foundation. “We see them in the same places and we have a very cordial relationship. They know there are certain donors that are going to be better suited for the Boston Foundation. And I know we’ve sent some donors to Fidelity.”

Some partnerships are more formal. For instance, 27 community foundations in the Chronicle survey are managing some of their donor-advised funds through a partnership with the Merrill Lynch Community Charitable Fund, in New York.

Merrill Lynch’s four-year-old program has been growing rapidly, with more than $153-million in assets spread under the management of about 60 community foundations. In 2005, the program had just under $92-million in assets.

“In some communities, we have been more successful than others,” says Collis Townsend, a national agent for the Community Foundations Service Corporation, which helps community foundations interested in taking part in the Merrill Lynch program. “Overall, we are financially healthy and doing very well.”

All of these efforts reflect what Chris Andersen, leader of the Lutheran Community Foundation, says is a maturing of donor-advised funds in the charity world.

His group has been offering the funds for about 12 years; recently it has seen a surge in donations and an increase in donors’ abilities to make meaningful grants.

In 2006, the group’s assets nearly tripled, spiking from $21.5-million in 2005 to more than $59.1-million. Its assets have increased nearly tenfold since 2002, when they were $6.7-million.

Grants, meanwhile, totaled $5.5-million in 2006, up about 14 percent from 2005, and Mr. Andersen says he expects that number to increase significantly.

“During our first 10 years, we looked a lot like a fund-raising organization. Now that has started to flip over and become more of a grant-making organization,” he says. “It’s an exciting time for us. We can make positive and effective changes in people’s lives.”

Sam Kean contributed to this article.