Donor-Advised Funds Experience Drop in Contributions, Survey Finds

Contributions to many of the largest donor-advised funds fell last year, with Fidelity Investments’ Charitable

Gift Fund — the first and largest commercial fund — for the first time distributing more money to charities than it received in new gifts, according to The Chronicle’s fourth annual survey of gift funds.

The declines in contributions, which stem from a weak stock market and wobbly economy, could signal an imminent shakeout in the commercial donor-advised-fund industry, in which many groups are struggling to attract gifts, observers say.

Donor-advised funds allow people to donate cash, stock, or other assets to special accounts, claim a charitable deduction on their federal income taxes, and then recommend how, when, and to which charities the money in the account should be distributed. Jewish federations and community foundations have offered such accounts for decades. Fidelity was the first commercial entity to start a donor-advised fund, and numerous other financial-services companies joined the competition in recent years.

Not only did contributions to many gift funds decline in 2002, but cumulative assets in the funds slipped as well, the Chronicle survey shows. Among 82 organizations that provided asset figures for their donor-advised funds in both 2001 and 2002, total assets fell 2.2 percent last year. Five of the six largest Jewish federations suffered declines last year in donor-advised assets, and two distributed less money to charities than they did in 2001. United Jewish Communities, in New York, an advocacy organization for 189 Jewish federations, had the second-largest donor-advised fund in The Chronicle’s 2002 survey, but declined to participate this year.

Awards to Charities Rise

The survey did uncover some positive news. The total amount awarded to charities from donor-advised accounts rose 5 percent for the 81 funds that provided grant information for both years, and the number of donors setting up gift-fund accounts rose 12.2 percent, to 70,066 from 62,425 in 2001.

Still, some of the largest community foundations experienced significant declines last year not only in donor-advised assets but also in contributions. The Community Foundation Silicon Valley took in 46 percent less money than in 2001 because most gifts had been coming in the form of appreciated technology stock — a market that has dried up, said Peter Hero, the foundation’s president. Silicon Valley set up half as many donor-advised accounts last year — 50 — as it had in 2001, and total assets in its donor-advised accounts fell 13.7 percent.

Fund assets also declined at community foundations in southwest Washington (-24.9 percent), Baltimore (-20.3 percent), Pittsburgh (-16 percent), St. Paul (-14.2 percent), Cincinnati (-13.2 percent), and Texas (-11.4 percent).

Despite a 4-percent decline in donor-advised-fund assets at the Cleveland Foundation, to $68-million, donors gave 47 percent more — or $10.7-million — to their accounts in 2002. Cleveland attributes the increase in contributions to two large gifts and to adding two development officers dedicated to attracting donor-advised funds.

The Boston Foundation saw its donor-advised assets drop 16 percent, partly because of a 23-percent decline in contributions last year, said Ruben D. Orduña, director of development. Mr. Orduña said he nonetheless remains optimistic, noting in part that the number of people opening donor-advised accounts rose last year by 11 percent to 516.

Further Tightening Ahead

Many bank and brokerage executives also continue to see donor-advised funds as a viable enterprise, in part because of an intergenerational transfer of wealth that is expected to generate huge gifts to charities. But because of the weak stock market and poor economic conditions, at least one donor-advised fund offered by a commercial company disappeared last year, and observers expect more to close or merge.

“You’re going to see a further tightening of competitors from the commercial side within the next couple of years,” said Eileen Heisman, president of National Philanthropic Trust, a charity in Jenkintown, Pa., that operates its own donor-advised fund and administers others that companies such as Bank of America and Morgan Stanley offer under their names.

“A lot of companies came into this thinking it would be no big deal to establish a donor-advised program, but I don’t think they truly understood it. Because the stock market has been so crummy, it’s forcing companies to look at their programs to see if it’s realistic to continue them.”

After introducing a donor-advised fund in 2001, Thornburg Investment Management, a mutual-fund company in Santa Fe, N.M., exited the market last year after failing to attract a “sufficient response” from prospective donors, according to David Miller, a spokesman for the company.

Thornburg rolled its fund into the Raymond James Charitable Endowment Fund, in St. Petersburg, Fla., which itself saw contributions decline 49 percent last year. Dave Ness, president of the Raymond James Trust Company, said the fund has been “sputtering along sideways.”

Still, Mr. Ness remains sanguine. Assets in the Raymond James fund grew a modest 6.2 percent last year to $13.8-million. With its overhead expenses “minimal” and its assets just shy of the level needed to break even on operating costs, Raymond James sees a value in using donor-advised funds as an entree to discussing charitable giving with its wealthier customers, Mr. Ness said.

“We’re using these funds to talk with our clients not only about current gifts, but about planned-giving opportunities, where we expect greater things,” he said. “Donor-advised funds don’t cost that much, and they allow us to capture some assets long term. It’s easy to be patient.”

Fidelity’s gift fund declined 9.8 percent in value, to $2.4-billion, but it is still the largest of any donor-advised fund. Fidelity’s fund received $735-million in contributions from donors last year — 30 percent less than in 2001 — and the company distributed $751-million to charities. It was the first time since the formation of the Fidelity fund in 1992 that it gave more money to charities than it received in contributions, the company said.

Fidelity attributes the drop in contributions to donors having less appreciated stock to give than in past years. Three years ago, 79 percent of contributions to Fidelity’s fund came through appreciated stock; last year, about half did. Still, the gift fund attracted more than 2,500 new accounts in 2002, a fact that Jon J. Skillman, president of the Fidelity fund, said is a sign of the fund’s long-term potential.

“What’s gratifying is that we’re in the depths of the worst stock-market performance since the 1930s, and we’re still adding a lot of new accounts,” Mr. Skillman said. “We think the donor-advised market is still very much in its early stages of development.”

A similar sense of optimism prevails at the three-year-old T. Rowe Price Program for Charitable Giving, in Baltimore, whose assets — albeit a fraction of some other large commercial funds — increased 19 percent, to $8.1-million in the 2003 fiscal year, which ended in March.

Despite that increase, donors’ contributions to T. Rowe’s fund fell 24 percent, to $4.1-million, during the same period. Ann Austin Boyce, the group’s president, lamented the company’s late entry into the donor-advised market. “Our timing on getting into this could not have been worse,” she said. Still, Ms. Boyce added, “We’re in it for the long haul.”

After seeing the difficulty other financial institutions have had in establishing donor-advised programs, Merrill Lynch, the New York investment giant, opted against it. Instead, the company created a partnership with community foundations to manage the assets of their donor-advised funds, according to David E. Ratcliffe, director of the Merrill Lynch Center for Philanthropy and Nonprofit Management.

Merrill Lynch is currently working with 13 community foundations, including those in Philadelphia and Atlanta. By the end of the year, it hopes to be managing $75-million in assets from 100 community foundations.

More-Efficient Operations

At community foundations, some of which have offered donor-advised funds for more than 25 years, the question is not whether to stay in the market — many community funds get most of their money from such funds — but how to create a more efficient way to operate their funds.

When community foundations’ assets appreciated sharply in the strong stock market of the late 1990s, many say they didn’t mind subsidizing the cost of managing the accounts, writing checks to charities, and otherwise administering the funds for donors. Now that the market has softened, community foundations are looking for ways to cut costs and raise fees charged to donors’ accounts.

The Community Foundation for Greater Atlanta determined that it was spending $575 a year to manage each of its donor’s funds, but was charging many of its donors only about $100. “It was like taking a $575 round-trip flight to pick up a $100 check,” said Bryan Clontz, vice president of development at the foundation.

Compounding the problem, Mr. Clontz said, was the fact that the foundation had attracted more than 100 small donor-advised funds — what he calls “acorns that we hoped would grow into oaks.”

“Unfortunately,” he adds, “they were just attracting more acorns.”

Now, the community fund charges donors $500 a year for having a $10,000 donor-advised fund — an amount that deters donors from setting up small accounts. Over the past five years, Mr. Clontz said, the average size of a first gift to its donor-advised fund increased 64 percent, to $405,000.

“Now,” Mr. Clontz said, “at least we’re starting with a sapling instead of an acorn.”