Fees Paid to Donors’ Financial Advisers Stir Debate in the Philanthropic World

By DEBRA E. BLUM

When Eaton Vance Management, a Boston mutual-fund company,

opened two charitable-giving funds this year, financial advisers received some generous incentives to sell the funds to prospective donors.

For helping a client open an account in Eaton Vance’s new donor-advised fund, an adviser gets an annual fee equaling 1 percent of the account’s average daily balance. And Eaton Vance’s new pooled-income fund pays advisers as much as 4 percent of a donor’s initial deposit, plus an annual fee equaling 0.25 percent of the account’s balance, starting in the second year.

Those numbers may not seem like much, but a fund that holds $100,000 over three or four decades could pay an adviser tens of thousands of dollars. Those fees are charged against the total amount of money in all the charitable accounts, and they don’t include the additional money that Eaton Vance earns for managing and administering the accounts.

Eaton Vance is not alone in paying advisers to steer gifts to the company’s charitable accounts. A Chronicle sampling of 10 major financial companies that run charitable funds shows that four — including Eaton Vance — offer adviser fees.

Many charity officials find the trend troubling. They worry that adviser fees reduce the amount of money available for charity. In addition, they contend that the fees may encourage brokers to make their sales pitches to donors on the basis of which funds pay the most in commissions, not on what is best for philanthropy.

“It’s a marketing effort by people who want to sell their products,” says Irwin Brod, vice president for development at the New York Institute of Technology, in Old Westbury. “That doesn’t make it bad. That doesn’t make it illegal. That doesn’t make it philanthropic, either.”

Officials of Eaton Vance and other companies that pay similar fees dispute such arguments. Rewarding financial advisers for bringing in new clients helps to generate more money for charity and is no costlier than traditional fund raising, they contend. Some company officials also defend the payments as reasonable service fees for overseeing donors’ accounts.

“We have a real appreciation for what is involved in managing and servicing clients, especially for this kind of product, which is labor-intensive,” says Meg Pier, a spokeswoman for Eaton Vance. She points out, for example, that advisers often help donors fill out forms that are used to recommend which charities should receive gifts from Eaton Vance’s donor-advised funds.

Donor-advised funds enable donors to deposit cash or other assets, claim an income-tax deduction, and then recommend, over time, which charities should receive money from the funds.

Traditionally, such funds were available through community foundations, but in recent years financial institutions have begun offering them as well.

American Guaranty & Trust Company, in Wilmington, Del., was among the first companies to pay sales fees to advisers two years ago when it started its donor-advised fund, called the American Gift Fund. Advisers who help a client set up an account keep 1 percent of the donated assets, then receive 0.75 percent of the account balance each year after that.

Fidelity Investments, in Boston, which in 1992 created the Charitable Gift Fund, the first commercially run donor-advised fund, has started a second fund for donors who invest through financial professionals rather than on their own. The Advisor Charitable Gift Fund operates similarly to the Charitable Gift Fund but pays advisers an annual fee equaling 0.25 percent of account balances.

“We recognized that there are people who work solely or extensively with professional advisers,” says Cynthia Egan, president of Fidelity gift funds. “We wanted a program to give them the opportunity to participate in a donor-advised fund.”

Other observers say that because financial planners make their living from fees earned for managing assets, they need an incentive to advise their clients to give money to charity.

“Money out of their clients’ portfolio is money out of their pockets,” says Ron Feinman, a lawyer in Lynchburg, Va. and president of the National Association of Philanthropic Planners, which represents stockbrokers, insurance agents, and other financial advisers whose practices focus on charitable-gift planning. “The fees mean that planners can talk about philanthropy with their clients without having to worry about losing money.”

But such arguments have met with resistance within the nonprofit world. The National Society of Fund Raising Executives has a long-standing policy against paying so-called finder’s fees or commissions to financial advisers or others who help steer gifts to charities. The National Committee on Planned Giving has similar guidelines, though the committee is reviewing its policies to determine whether certain commercial fee arrangements might be considered appropriate.

Drawing a Line

Even executives at some for-profit financial-services companies see dangers in paying adviser fees.

“Where do you draw the line?” asks Eric I. Swerdlin, vice president of Swerdlin White, a division of the Bank of New York, in Cedar Knolls, N.J.

Swerdlin White manages charities’ investment portfolios and is an investment adviser for three mutual funds that give donors a tax break on the income they receive from charitable remainder trusts. In both cases, Swerdlin White charges conventional management fees but does not pay brokers or financial advisers additional compensation for bringing in new clients.

Mr. Swerdlin worries that adviser fees might escalate to exorbitant levels, leading government regulators to step in and impose stiff rules on many types of estate-planning and charitable-gift techniques.

“In an extreme example, someday 99 percent will be diverted to an adviser as fees,” Mr. Swerdlin speculates. “That’s 1 percent for charity. If it keeps getting ratcheted up, you know it will end up in Washington. Is 80 percent, 50 percent, 10 percent too extreme? Where is the cutoff?”

But officials of companies that pay adviser fees say that it is unlikely that such fees will grow much larger than they are now — mainly because donors won’t stand for it.

“This is not a bidding war among companies to get advisers’ business,” says Lee Cheney, chief executive officer of American Guaranty. “This is the way we sell our products and have relationships with advisers. If anything, if it is a price war, it will drive the fees down because donors want more of their money to go to charity.”