Chasing Charitable Assets

Groups try new strategies as donors turn to financial-services companies

Last year, fund raisers from Providence Health System of Oregon, in Portland, began showing up on the doorsteps of some of the group’s biggest donors,

hand-delivering checks bearing income from the donors’ charitable gift annuities and other planned gifts.

That personal touch, says K. Gene Christian, Providence’s regional director of planned giving, is designed to help the charity stay in close contact with contributors, who increasingly are making gifts through outside financial planners employed by banks, brokerages, and other financial institutions.

“We are out looking at the whites of the eyes of our donors as much as we can, letting them know we are here and why, so that when they get with their planners we are in their minds,” Mr. Christian says.

Providence is among a growing number of charities that are rethinking the way they raise money and relate to their wealthiest donors in the face of an unprecedented stampede by for-profit advisers and financial institutions into the philanthropic arena. Financial enterprises are marketing charitable trusts and other tax-savvy giving techniques, helping wealthy clients make decisions about their philanthropy, and earning fees for managing and disbursing charitable assets.

“Our goal,” says Mr. Christian, “is not to stop the onslaught of professionals doing charitable planning or the onslaught of financial institutions getting involved, but to learn how to capitalize on it.”

Nonprofit groups already are taking steps to do just that. For example, nearly 200 community foundations have forged an agreement with the investment giant Merrill Lynch & Company that encourages the company’s brokers to steer charity-minded clients to the participating foundations. Several dozen of those foundations and others also have made a similar deal with a California mutual-fund company.

Many fund raisers say that the growth in commercial services will increase the total amount of giving because thousands of consumers who might never have become donors are learning about philanthropy from brokers and other financial advisers.

“There’s opportunity for this to be an additional source of revenue for us,” says Michael I. Friedman, vice president of planned giving and endowment at The Associated: Jewish Community Federation of Baltimore.

But the surge of for-profit activity in philanthropy also is forcing charities to wrestle with a number of tough questions:

• Should charities offer a wider range of gift options to compete with the for-profit providers? Or should they turn more of their attention to philanthropic activities, such as working closely with volunteers, and leave financial-management tasks to banks and brokers?
• How can charities stay connected with donors who are working more closely with their own financial advisers and institutions in making charitable gifts?
• How can charities adjust to the changing job market for planned-giving officers as more and more financial-services companies recruit experienced fund raisers from the nonprofit world?
• What kinds of deals can charities strike with financial institutions that are helping their clients with estate and charitable planning? And if charities do form alliances, how can they prevent commercial advisers from recommending illegal or unethical giving techniques or steering clients into tax-saving plans that lack a charitable purpose?

“Some of these financial-services firms — brokerages, C.P.A. firms — are highly aggressive,” cautions Erik Dryburgh, a San Francisco lawyer who specializes in charitable gifts. “Whether it’s because they don’t fully understand charitable techniques or they are so blinded by consummating deals, they structure poorly designed transactions where there’s zero charitable intent. Or they design products that are really just scams.”

Even when charitable plans are within the law, financial advisers may not always tell donors that they might have choices that are more suitable for their giving.

“In a market that’s considered hot, you run into a lot of people trying to put a complicated product or process into a box,” says Elizabeth Mathieu, chief executive officer of Neuberger Berman Trust Company, a subsidiary of the New York investment company Neuberger Berman. The trust, which administers nearly $4-billion in assets, has operated in three states but is about to offer its services nationwide. “I’ve seen various types of trusts put in a package and sold, instead of the company saying, ‘This is an option. Here are the risks. Here are the implications.’”

Growing Competition

As experts both inside and outside of philanthropy try to sort out the long-term ramifications of the boom in commercial philanthropic services, the number of companies providing such services continues to grow. Among them:

Bank of New York. It last year introduced a trio of mutual funds designed to give donors a tax break on the income they receive from charitable remainder trusts. Since the funds’ inception, they have attracted $30-million in charitable assets.

Bank One Corporation. In August, the nation’s fourth-largest bank holding company, based in Chicago, began offering a service that advises wealthy clients on charitable-gift planning and other financial needs.

Comerica Bank. The one-year-old Charitable Services Group of this Detroit bank has helped charities and donors create nearly $100-million in planned gifts so far this year. The group, which manages that money and millions more in charitable assets, also has arranged with other companies, including the investment company PaineWebber to handle all the tax-related paperwork and other administrative duties for planned gifts that PaineWebber’s brokers create.

National Philanthropic Trust. The trust, a donor-advised fund created by Pitcairn Trust Company, in Jenkintown, Pa., is working with a for-profit Internet company, GivingCapital, to package and sell to other financial institutions an online gift program. The program allows companies to put their name on a donor-advised fund without having to go through the legal and administrative complexities of establishing one from scratch. This fall, two investment companies — Legg Mason, in Baltimore, and Credit Suisse Asset Management, in New York — started using the new program, paying fees to National Philanthropic Trust.

While financial companies and professionals have long been part of the philanthropic scene, new forces are helping to push their involvement to new levels.

One is the huge competitive response within the financial-services industry to Fidelity Investments’ Charitable Gift Fund. The donor-advised fund has grown to $2.5-billion in assets in 23,500 accounts since its debut in 1992. Since then, at least a dozen other financial companies have started similar donor-advised funds, which allow people to claim a tax deduction on deposits and then recommend how and when to make charitable gifts from their accounts.

The rise of donor-advised funds reflects in part another key force that is driving the growth of commercial philanthropic services: a projected explosion in personal wealth, which experts believe will generate trillions of dollars in charitable gifts in coming decades.

Over the next 50 years or so, Americans could inherit as much as $136-trillion from their elders, with charities gaining as much as $25-trillion of that sum, mostly in bequests and other planned gifts, according to Paul G. Schervish and John J. Havens, both researchers at Boston College.

A healthy economy and booming stock market are also combining to boost people’s wealth. By 2004, an estimated 15 million U.S. households will have more than $1-million in assets, nearly five times the number as in 1994, according to the Spectrem Group, a financial consulting and research company in New York.

As more and more Americans accumulate significant wealth, financial companies have decided that they must offer a full range of services — including advice and expertise in managing charitable assets — to retain their clientele, experts say.

“There’s a recognition that this market must be looked at holistically in that there are many, many needs that need to be served,” says William R. White, an official at the Spectrem Group. “One important need is to help people decide how they want to spend their philanthropic dollars. If you are not meeting that need, those clients will go elsewhere.”

Big Rewards

The potential rewards for companies and independent financial planners who offer charitable services are huge. A survey by Russ Prince, a researcher in Shelton, Conn., found that for every $10,000 that a typical financial planner who specializes in philanthropy generates in revenue by providing financial products related to charitable gifts, the planner could earn an additional $108,000 in revenue from other kinds of products such as insurance policies.

With so much at stake, the financial-services industry is aggressively seeking to enlarge its business of managing charitable assets. To do that, it is encouraging charities to cede their asset-management activities to for-profit companies and to concentrate on purely philanthropic endeavors.

“What charities do best is fulfill their mission,” says Joel M. Breitstein, a former fund raiser at the Baltimore Jewish federation who now is managing director of the Philanthropic Advisory Services Group at Legg Mason Trust. He argues that charities can be more effective if they relieve themselves of the complexities of managing donor assets. “Why,” he asks, “should they have the responsibility of administering a trust?”

Dividing Duties

Many company executives say that charities — especially community foundations — are fighting a losing battle if they try to compete with the vast marketing power of banks and brokers.

Gregory A. Schupra, vice president of Comerica’s Charitable Services Group and a former fund raiser at the Community Foundation for Southeastern Michigan, says the goal of nonprofit groups should be not to manage and administer gift money but to work with financial institutions to help donors increase their charitable assets and figure out how best to allocate their gifts.

“A community foundation’s goal is to build assets, and the goal of the financial institution or adviser is to maintain assets and clients,” Mr. Schupra says. “Those two goals oppose each other. Our message to the community foundations is that they need to rethink their goals, be willing to develop true alliances with financial institutions, and be able to measure success not by how quickly they accumulate assets but by how well they help donors accumulate and spend their charitable dollars.”

Some community foundations, recognizing the growing clout of the financial-services industry, are forming the kind of alliances that Mr. Schupra advocates.

Merrill Lynch and American Funds, a California mutual-fund company, each has a program that encourages its brokers to direct clients who are interested in charitable giving to participating community foundations. In turn, the foundations agree to invest gift money from those clients with the financial company. That way, the foundations get new gifts, the companies can manage the assets, and the brokers earn fees from the donors’ gifts.

So far, Merrill Lynch has generated more than $700-million, and American Funds about $400-million.

A group formed last year — Community Foundations of America — is working to formalize, expand, and streamline those kinds of deals. Key to the arrangements, says Carla Dearing, the association’s chief executive, is a forthcoming software program that will give brokers and other financial professionals online access to information about their clients’ community-foundation gifts, no matter which investment firm the donor chooses. The idea, says Ms. Dearing, is to deal with concerns among advisers that by introducing clients to charities, the advisers might wind up losing the clients’ asset-management or gift-planning accounts.

“It’s a way to keep the person who may be ultimately responsible for building those donors’ assets over time in the loop,” Ms. Dearing says.

Services for Donors

In other ways, too, charitable groups are trying to reckon with the growing power of the financial-services industry.

The Community Foundation of Greater Atlanta, for example, is aiming to serve big donors who want help with their philanthropy, such as advice on shaping personal giving goals. The foundation will encourage smaller donors who do not want advice on their gift-giving to contribute through commercial donor-advised funds, which earn management fees from donors’ accounts but typically do not focus as much on philanthropic counseling as do many community foundations.

“We had to find a way to differentiate ourselves” from the growing universe of commercial companies in the charitable market, says Bryan Clontz, the foundation’s vice president for advancement. “Our job is to take the funds that need philanthropic services and that can benefit from our local resources and knowledge.”

Last month, the Atlanta foundation introduced a program called the Center for Family Philanthropy, which provides donors of at least $250,000 with all kinds of free support, including advice on how to disburse their money to local charities.

It is that type of innovation that charities will need to develop if they want to thrive in the new era of commercial philanthropic services, fund-raising experts say. One other key to success, they say, is to have a realistic understanding of the interests of those who work in the financial-services industry.

“They are not your friends. They are not your enemies. They are neither,” says Robert F. Sharpe Jr., a planned-giving consultant in Memphis. “They are doing a job for their clients, just like fund raisers or executive directors are doing a job for their charities.”