Tailor-Made for Charity

Private-label gift funds are growing in popularity

Donor-advised funds may soon be as ubiquitous as branch banks and mutual funds. Nearly a

dozen nonprofit and for-profit groups have begun selling so-called private-label plans — donor-advised funds that banks, brokerages, and nonprofit groups, including American Express, Morgan Stanley, Boston University, and the Rotary Foundation, buy to market under their own names.

Like other donor-advised funds, the plans allow donors to deposit money into special charitable accounts, get an immediate tax deduction on the gifts, then recommend which charities should receive the money. But private-label funds have a twist: Institutions that buy them to offer to their clients or donors don’t have to administer the funds. The entities that market the plans do those chores, for a fee.

Among the groups that have begun selling private-label plans is Fidelity Investments, the Boston mutual-fund giant that a decade ago offered the first commercial donor-advised fund to consumers. Others include National Philanthropic Trust, a nonprofit organization established by Pitcairn Trust, an investment company in Jenkintown, Pa. Salomon Smith Barney, a brokerage in New York, and SEI Investments, in Oaks, Pa., both plan to begin marketing private-label gift funds later this year.

“We could never do it ourselves,” says Mary H. Tambiah, director of major gifts and estate planning at Boston University, explaining why the institution turned to a donor-advised-fund provider to set up and run the university’s gift-fund plan.

An important incentive for groups selling the private-label plans is the promise of gaining a piece of the burgeoning donor-advised-fund business. A Chronicle survey of many of the biggest funds shows that they held about $12.3-billion in assets last year, and distributed more than $2-billion to charities that were recommended by donors.

“There’s no question their popularity among donors is growing fast,” Paul Schervish, director of the Social Welfare Institute at Boston College, says of gift funds. Private-label plans, he adds, may put the funds “on every street corner for whoever wants to invest their charitable dollars that way.”

Competing for Donors

A growing number of banks, brokerages, and other financial-services companies are eager to add donor-advised funds to the mutual funds, annuities, and other money-management products they already offer. And more and more charities regard the ability to offer their own gift funds as vital to competing for donors’ money and attention, especially as donors are given more options to invest their charitable dollars with commercial entities.

Charities that run donor-advised funds typically require donors to earmark for them a share of the gift fund’s assets. By having a gift fund, charities can ensure they will get some of a donor’s money. They also will be offering supporters a service that an increasing number of people are demanding.

A chief attraction of the private-label arrangements for groups looking to add gift funds to their planned-giving programs or asset-management business is convenience. Organizations marketing the plans do all of the management and administrative work associated with running a donor-advised fund, including investing assets, keeping account records, and writing checks to the charities recommended by donors. The sellers typically charge fees based on a fund’s asset size.

Another attraction is that most of the sellers have set up a host charity, registered under Section 501(c)(3) of the federal tax code, that is eligible to collect donations. That feature is important because donations to gift funds — even those offered by for-profit investment companies and banks — must be funneled through a charity. Thus, for example, a bank can offer a private-label donor-advised fund to its customers without starting its own charity to house the fund. Key to private-label arrangements is the understanding that the seller or its host charity will allow the financial-services company buying the private-label plan to manage the assets donated to the gift funds. In that sense, the deals are similar to ones between community foundations and some investment companies. In those cases, the investment companies steer their philanthropically minded clients to the foundations with the expectation that the foundations will, in turn, use the investment companies to manage donors’ assets.

Fund raisers say the trend toward using private-label funds will make it far easier for both for-profit and nonprofit organizations to offer gift funds than in the past.

“These new products solve a lot of the questions and issues institutions would have to address before they get into a donor-advised fund,” says Jeffrey W. Comfort, Georgetown University’s director of development. “At some point we are all going to have to answer the question, Why don’t we have a donor-advised fund?”

Still, the prospect of widespread availability of donor-advised funds through arrangements such as private labeling has raised concerns in the nonprofit world.

Some wonder, for example, whether it makes sense to flood the market with donor-advised funds when few clear legal guidelines exist to govern them.

Others worry that too many charitable dollars will end up being parked in gift-fund accounts instead of being put to use for charitable purposes.

Still others fear that by offering gift funds — especially funds that give donors wide latitude in recommending which organizations should receive their money — nonprofit officials may spend too much energy raising money that benefits other groups, and too little on their own missions.

“If everyone jumps into it just to play catch-up or because it looks like the thing to do, they may lose what they do and do well,” says Vaughn W. Henry, a donor consultant in Springfield, Ill.

Despite such reservations, the market for off-the-rack donor-advised funds is ripening, and a growing number of organizations are jumping in to meet the demand.

Fidelity created a separate business, National Charitable Services, which along with a related nonprofit group, National Charitable Donor-Advised Fund, started marketing gift-fund services last year. So far the company has deals with seven organizations, including Bear Stearns and Goldman Sachs, both major brokerages, and two nonprofit groups: Boston University and the Rotary Foundation.

Among the other organizations marketing private-label gift funds:

• National Philanthropic Trust works with GivingCapital, a for-profit Internet company, to run donor-advised funds for American Express, Credit Suisse First Boston, JPMorgan Chase, Legg Mason Trust, and Morgan Stanley, all major financial-services companies. In addition, Legg Mason is using its arrangement with National Philanthropic Trust and GivingCapital to offer to its charity clients the opportunity to open their own gifts funds, with the investments managed by Legg Mason.
• Two other Internet companies, DoTheGood, in Minneapolis, and Magner.Network’s DirectGiving, in Atlanta, are working separately with nonprofit partners to sell tailor-made gift funds. DirectGiving’s first client: GE Financial.
• The Cleveland Foundation says it is ready to strike its first deal to create and run a donor-advised fund for a regional bank, Cleveland’s National City Bank. The deal differs somewhat from similar arrangements the Cleveland grant maker and many other community foundations have with other financial-services companies in that the Cleveland Foundation will create for National City Bank its own named product, the National City Bank Charitable Gift Fund, to market to its clients. Traditionally, a community foundation would administer a gift fund for bank clients, but not allow the bank to offer it under its own name. The new deal is intended to give the bank more marketing power and to keep it more involved in its clients’ charitable activity.
• Other financial-services businesses are beginning to offer their clients a turnkey approach to gift funds. They included Kaspick & Company, a planned-giving investment company in Boston and Menlo Park, Calif.; the trust company of TIAA-CREF, a nonprofit pension and mutual-fund company in New York; and National Fiduciary Services, a trust company in Houston.

Ms. Tambiah of Boston University says that she began pushing her institution a couple of years ago to create a donor-advised–fund program when she saw the growth in the amount of money being donated to the university through gift funds established by donors at such places as Fidelity. Last year, nearly $1.7-million was donated to the university from donor-advised funds, up from about $640,000 the previous year.

“We could offer donors a whole lot of choices — trusts, annuities — but for donor-advised funds we’d have to steer them elsewhere,” Ms. Tambiah says. “It made sense for us and the relationship we want to have with our donors to have a gift fund.” But, she says, university officials weren’t sure it made sense for the university to run its own.

At the end of last year, Boston University seeded, with $20,000 each, three investment pools set up through Fidelity’s National Charitable Services to start a university gift fund. The institution will get its initial investment back after the funds reach $600,000.

So far, Boston has received about a half-dozen donations, totaling $100,000, half of which, according to the university’s policies, must eventually be distributed to the institution.

According to the deal, all of the gift-fund money will be put into Fidelity mutual funds, and, depending on the funds chosen and the size of the assets, investment and administrative fees will together range from 2.3 percent to 2.7 percent.

Along with handling the administration of the donor-advised funds, National Charitable Services will train university fund raisers and otherwise help the institution market the gift fund to its donors.

Ms. Tambiah says that while service providers like Fidelity do much of the heavy lifting when it comes to operating a donor-advised fund, the sponsoring charity has important responsibilities, too. Not only must it work hard to woo donors, it also must oversee the entire arrangement.

“The due diligence when it comes to investments and grants approval is up to Fidelity,” she says. “But it is up to us to make sure they are doing their job up to our standards.”