A Soaring Year

Assets at donor-advised funds rose by more than 20%

The buoyant stock market caused assets of the nation’s largest donor-advised funds to grow by a median of more

than 20 percent from 2004 to 2005, the largest gain since 2001, according to a new Chronicle survey. That figure tops the 15-percent increase from 2003 to 2004.

At 88 funds, assets were worth a total of $15.5-billion, up from $12.7-billion in 2004.

As assets have risen, the money the funds award to charities has risen as well.

Collectively, the funds distributed $3.3-billion to charity last year, a 20.8-percent increase from the $2.7-billion awarded in 2004, and the largest amount given to charity in the survey’s history. At 22 organizations, the value of grants awarded in 2005 increased by 50 percent or more from the previous year.

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 community foundations and financial companies, but other charities, such as Jewish federations and universities, also offer the accounts.

Officials at donor-advised funds said that the stock market was the primary reason the funds did so well. They added, however, that the funds also benefited from their efforts to develop stronger relationships with financial advisers, who often suggest that clients set up a donor-advised fund.

Many donors use appreciated securities to set up such funds, so growth is often closely related to how the stock market is doing, says David Giunta, president of the Fidelity Fund for Charitable Giving, in Boston. About 70 percent of the money donors use to create or add to their funds at Fidelity, which has more than $3-billion in total assets, come in the form of stocks and bonds.

Under Congressional Scrutiny

As the assets of donor-advised funds have soared, they have attracted increased scrutiny from members of Congress. Lawmakers have expressed concern that donors are not required to distribute a minimum amount to charity each year. Legislation now pending in Congress would require donor-advised fund programs to distribute at least 5 percent of their aggregate assets each year.

The Chronicle’s survey found that few big funds would have any trouble meeting that requirement.

The median payout rate for all funds was about 17.5 percent of assets, meaning half of the groups had higher payout rates and half had rates equal or lower.

Only three funds — the Christian Legacy Foundation, in Tampa, Fla.; the Hartford Foundation for Public Giving, in Connecticut; and the Rhode Island Foundation, in Providence — failed to distribute at least 5 percent last year.

The popularity of the funds is also leading more organizations to offer them to donors, and that means that the well-established funds are facing new competition.

Mergers and alliances could be on the horizon for groups that offer donor-advised funds, says Kim Wright-Violich, president of the Schwab Fund for Charitable Giving, in San Francisco, which saw its assets jump more than 60 percent last year, in large part because it has done more to build relationships with financial advisers and encourage them to steer their clients to Schwab.

“It’s very, very difficult to provide the kind of service that we do for the fees that we’re charging,” she says, noting that competition over fees could lead some of the smaller funds to consolidate their operations.

The Schwab fund, like all groups that offer donor-advised funds, charges fees for administrative expenses as well as fees for managing investments. Donors to the fund, on average, are charged about 0.5 percent of their accounts’ assets annually for administrative costs, like processing grant recommendations, and about 0.7 percent for investment-management fees.

“As there are more donor-advised funds in the marketplace, it actually benefits from competition,” Ms. Wright-Violich says. “I think that might force some consolidation in the future.”

The competition grew even fiercer last month when Fidelity announced that it would lower administrative fees for donors beginning in July, from 1 percent to 0.6 percent of an account’s total assets. For accounts with more than $500,000, the reduction will be even greater. Fidelity is also lowering some of the fees associated with investment management for two of its investment pools.

Mr. Giunta says the fund is able to reduce its fees because it has become more efficient in processing grants and contributions, as well as verifying the charity status of groups that donors support.

“We’re able to pass on some of those savings,” he says. “Hopefully, it will help people to get more excited about the gift fund, as well.”

Cutting Fees

Community foundations, some of which have been offering donor-advised funds for more than 50 years, are finding it hard to compete with the corporate-sponsored funds’ lower administrative fees.

Chris Nicholson, vice president of development at the East Bay Community Foundation, in Oakland, Calif., says competition for donors in the San Francisco Bay Area, which is home to five community foundations, is heating up. “The major threat we see is the corporate-sponsored funds have the ability to offer clients lower price points than we can,” he says. “And that’s challenging.”

He notes that the Marin Community Foundation, in Novato, Calif., recently reduced its administrative fees to 0.5 percent, while such rates typically hover between 1 and 1.5 percent at community foundations.

“Someone asked me very directly who our competition is,” says Mr. Nicholson. When he provided the prospective donor with information about other funds in the area and the fees assessed for each, “The response that I got back was ‘Why should I pay you more?’”

He told the donor that community foundations tend to have higher staff costs because they provide donors with more extensive advice on giving than the commercial funds do. Commercial funds also have lower costs because investment options are more easily available to them.

To combat the increasing competition and to emphasize the work the foundation does in its region, the East Bay Community Foundation started running advertisements in local bar-association journals aimed at financial advisers, encouraging them to steer their clients to the community foundation’s donor-advised funds. The organization also hired an additional staff member to work on developing relationships with advisers. As a result, the foundation opened 57 new accounts last year with new donors, up from 12 new accounts in 2004.

Financial advisers have been receptive, he says, because many advisers are doing more to help their clients not just with their financial plans, but also their giving strategies.

When advisers meet with their clients “there’s been a shift toward values-based planning” Mr. Nicholson says, “instead of the traditional ‘let’s lower taxes’ approach.”

Other funds have already found success with this approach. The Denver Foundation, whose assets increased more than 25 percent last year, established an award two years ago for financial advisers who refer their clients to the foundation. Betsy Mangone, vice president of philanthropic services at the foundation, says the award does not cost much — advisers receive public attention and an engraved clock — but it has worked well as an incentive.

Ms. Mangone estimates that about 80 to 90 percent of new donor-advised funds come from the foundation’s efforts to work with advisers.

She says the foundation will continue to strengthen its ties to advisers since donors who are referred by financial professionals are already willing and able to make charitable gifts.

“When a donor is referred by a professional, there’s a real satisfaction that the gift is right for the donor,” she says.

The Denver Foundation also runs a free program to teach financial advisers about donor-advised funds.

Advisers who participate can earn credits toward continuing-education certification. Ms. Mangone says about 200 advisers attended the last event.

Alliances Formed

Aside from working with financial professionals, many donor-advised funds are forming new partnerships they hope will make their organizations stand out to donors.

One group, the Renaissance Charitable Foundation, in Indianapolis, last summer hired Franklin Templeton Investments to manage the assets in its donor-advised funds.

In addition, financial planners who work for Templeton steer clients to Renaissance.

Last year, the number of accounts created at Renaissance grew to 490, from 106 the previous year. And the organization’s assets increased from $16.3-million in 2004 to $51.5-million last year.

Gregory W. Baker, president of the foundation, says Renaissance has already received three contributions of $1-million to existing accounts about four months into the foundation’s current fiscal year.

“I would’ve been surprised to receive one at this time last year,” says Mr. Baker.

Other new alliances include the Domini Global Giving Fund, in New York, which began in December. The fund is sponsored by Domini Social Investments, an organization that helps investors choose stocks based on companies’ social or environmental policies, and is designed to support the United Nations Foundation, in Washington.

Donors are allowed to earmark money solely to benefit one of the U.N. Foundation’s programs, like Adopt-a-Minefield or the Global Fund to Fight Against AIDS, Tuberculosis, and Malaria, says Jean Moon, director of the fund.

Additionally, the U.N. Foundation will match grants made to its programs. Donors who give up to $100,000 from an account will have their gifts matched by the U.N. Foundation.

Hurricane Relief

Since donor-advised funds came to prominence in the mid-1990s, new ways to use them have emerged, such as setting them up to serve as temporary grant makers following disasters, establishing them as a way for donors’ children to carry on a family’s charitable legacy, or using them to pool donations for collective gifts.

After Hurricane Katrina, the Greater Houston Community Foundation received a big influx of money into donor-advised funds as companies and individuals looked for ways to help the storm victims. The fund’s donor-advised funds were worth $109-million by the end of 2005, compared with $39-million in 2004.

Many corporations created donor-advised funds to get money to their displaced employees. Though tax laws usually prohibit grants to individuals from donor-advised funds, the government makes exceptions to allow modest sums to go to victims when it declares a disaster area, says Stephen D. Maislin, president of the foundation.

The foundation collected funds for the Bush-Clinton Katrina Fund until that organization had official charity status.

Twelve corporations also set up funds through the Houston community foundation to administer aid following the hurricane, as did a Houston-area restaurateur: The New Orleans Hospitality Relief Fund raised more than $1-million.

Mr. Maislin says that the donor-advised funds were “a terrific vehicle for the employer,” who would contribute a large sum and then allow other employees to contribute, as well.

“It does seem to be a good vehicle to provide that short-term relief after the Red Cross and the Salvation Army are finished with their efforts,” says Mr. Maislin. “It just helps a little bit.”

All of the funds remain open, says Mr. Maislin, with the idea that companies will be able to start actively using the funds again if another hurricane strikes.

Family Philanthropy

In addition to the kind of collaboration that occurred after the hurricanes, some organizations are trying to find ways to encourage people with donor-advised funds to work together to further their philanthropic goals.

The Tides Foundation, in San Francisco, urges people who have created donor-advised funds at the organization to pool their donations so more money will go to groups working on specific causes — such as economic justice or AIDS awareness.

Christopher Herrera, a spokesman for the foundation, says Tides sometimes brings companies and foundations together with their account holders, with the goal that donors will earmark money from the funds for the same causes the grant makers are supporting.

Families are also using the funds to nurture a spirit of giving.

Mr. Maislin says that after Thanksgiving, the foundation usually sees a spurt in requests from people who have decided what causes they want to support. “Families are using them more like private-foundation alternatives,” says Mr. Maislin.

At the Greater Miami Jewish Federation, fund officials sit down with donors to talk about family philanthropy and how to get younger family members involved in the grant making.

“We’re making a very conscious effort to get the younger generation of those donors and potential donors involved,” says Stephen Schwartz, chief financial officer at the federation.

Mr. Nicholson, of the East Bay Community Foundation, says that even with all the competition, a vast untapped audience for donor-advised funds is available.

“I just continue to run into highly educated professionals that don’t know that much about the tool,” he says. “One of the most commonly articulated phrases is, ‘Wow, it sounds too good to be true.’ For me, that shows there’s a lot more potential out there.”

Noelle Barton and Candie Jones contributed to this article.