Fees Vary Greatly at Organizations That Operate Donor-Advised Funds

Mutual funds have long been closely connected to donor-advised funds, with the investment behemoths Fidelity Investments, the Vanguard Group, and Charles Schwab running three of the largest donor-advised funds.

The two industries also have something in common when it comes to fees: Just as the cost of mutual funds ranges widely, so do the administrative fees charged by donor-advised funds.

When buying a mutual fund, an investor can select a fund that simply tries to match the performance of a broad stock-market index for a fee of about one-tenth of 1 percent of assets every year. Or an investor can pay 2 percent of assets — roughly 20 times as much — to a fund headed by a hotshot manager.

Among donor-advised funds, the variance is even more extreme. A few organizations, usually operating charities that hope to receive grants from the donor-advised fund they house, will charge no administrative fees. Commercial providers, which often have large numbers of funds and rarely provide specific grant-making advice, tend to be on the low end of the cost spectrum. Fidelity and Vanguard each charge about six-tenths of 1 percent of assets.

Community foundations, which look to recover some of their costs related to bringing groups together to discuss issues and identifying promising charities, typically charge an administrative fee of 1 percent of assets or more. Specialized organizations, like Rockefeller Philanthropy Advisors, which says it is willing to handle international transactions and other complex donations that some other donor-advised funds won’t touch, are near the high end of the fee scale. Rockefeller charges 1 percent of assets per year, plus a fee of 3 to 7 percent on every grant it processes.

Many funds charge on a sliding scale, assessing lower fees on balances in excess of, say, $1-million.

Understanding Costs

In advertising its mutual funds, Vanguard emphasizes its low-cost funds and how much the average investor will save over 10 or 20 years. So it’s no surprise that Benjamin Pierce, executive director of the Vanguard Charitable Endowment Program, in Boston, is one of the more outspoken advocates for greater disclosure of fees charged to donor-advised funds.

Mr. Pierce doesn’t hold up Vanguard Charitable as the lowest-cost provider, although it does charge lower fees than most donor-advised funds in The Chronicle‘s survey. He simply says that donors should get better information to fully understand how much they are paying — and he doesn’t believe the industry as a whole does a good job of making fee information accessible.

“It’s really important that people understand what some of the underlying costs are,” he says. “I’ve looked around at the different Web sites for donor-advised fund providers, and it’s hard to find what the actual costs are.”

Administrative fees are only part of the fee structure at donor-advised funds. The funds also pass along investment fees charged by the mutual-fund or brokerage company that handles donors’ money. And some funds charge one-time fees for unusual gifts that require a significant amount of work.

Mr. Pierce notes that far more money would go to charity if donor-advised funds could slice just half of 1 percent off the cost of giving each year.

Added Value

But just as mutual-fund managers say they will add value by picking winning stocks, the higher-priced providers of donor-advised funds believe that they add value by helping donors become better informed.

Last November, the Community Foundation Serving Richmond and Central Virginia used $1-million in reserves to start a safety-net fund, to help local charities that provide basic services like food and shelter survive the economic crisis. The foundation challenged owners of donor-advised funds to match the gift. The donor-advised funds and other community donors put in another $830,000, and the money quickly ended up in the hands of local human-service organizations.

“A Richmond donor using Vanguard would have been oblivious to all that,” says Robert L. Thalhimer, the foundation’s senior vice president for advancement. “He may have very much wanted to help the community and yet not known how to do so.”

The Seattle Foundation charges one of the higher fees among the community foundations in The Chronicle‘s survey. The fee is 1.5 percent on the first $500,000, and drops from there. The foundation also charges a minimum fee of $1,500 per year, which means that a donor with a fund worth just $25,000 would pay an annual administrative fee totaling 6 percent of the account.

Molly Stearns, a senior vice president at the foundation who oversees donor relations, says the organization is not trying to discourage donors from setting up smaller funds. She maintains that donors are “getting a higher level of service” than they would at a commercial fund — and the minimum fee insures that the foundation can continue to provide worthwhile advice and take a leadership role in the community.

Donors to the Seattle Foundation can call a donor-service officer who has been assigned to their fund, Ms. Stearns says, and get advice, for example, on how a large family can structure a fund for generational turnover, or — thanks to the foundation’s deep knowledge of the community — on which local groups are most worth supporting.

“We’re all operating off of a business model that’s really difficult to manage, especially when markets tank like they have in the past year,” she says. “We don’t want to lose donors because of a high fee — the donors are our lifeblood. But we want them to know that part of what they’re paying for here is to subsidize the deeper role we’re playing in the community.”

The Baltimore Community Foundation has the same problem, but a different solution. It charges 1.5 percent of assets, and a minimum fee of just $375 per year. That isn’t enough to cover the costs of much of the foundation’s work, so the group started a Civic Leadership Fund, which it describes simply as sustaining “all the work that we do.”

The fund raises about $1.1-million per year. Private foundations contribute about $700,000 per year, board members donate $200,000, and grants from donor-advised funds add another $200,000.

“I think some donors would find a $1,500 fee imposing,” says Thomas Wilcox, the Baltimore foundation’s president. “Donors feel better about giving us a voluntary contribution than they would about, in effect, being taxed.”

Highs and Lows

Some donors clearly are happy to pay large sums for philanthropic advice. Rockefeller has $30.5-million in assets, despite its hefty levy of 3 to 7 percent on any disbursements.

Many donor-advised funds are unable to process international grants, but Rockefeller has plenty of experience with such work.

Its donors made grants to groups in 20 countries besides the United States last year, says Melissa Berman, Rockefeller’s president.

The organization also handles mission-related investments, such as helping a donor this year provide a low-interest loan to a charity seeking to develop low-income housing in Texas.

“We do more here than just look and see if there’s a 501(c)(3),” Ms. Berman says, referring to the section of the federal tax code under which charities are registered. “We are often providing strategic advisory services along with the traditional transaction processing.”

The Jewish Federation/Jewish United Fund of Metropolitan Chicago is at the opposite end of the spectrum — it charges no fee. David Rosen, the federation’s senior vice-president of legacies and endowments, views the free service as a “development cost.”

The federation has $129-million in donor-advised funds, and each year more than half of the grants from the funds go to support the federation’s annual campaign. Mr. Rosen also gets the opportunity to talk to holders of the funds about leaving the federation an unrestricted bequest.

Even so, the federation occasionally evaluates the cost of providing the free service — and such thoughts ran through Mr. Rosen’s mind more frequently when the markets were plummeting.

“There are days,” he says, “when I sit in my office and I have to ask myself, ‘Why are we not charging a fee?’”

HOW TO TAP INTO DONOR-ADVISED FUNDS

• Keep track of which checks from donors come from donor-advised funds. Chances are the donor has more to give.

• Read community foundations’ annual reports. Such reports usually list their donor-advised funds.

• Get on the local community foundation’s radar. Make sure your charity is listed in the organization’s database for donors.

• Do research on the Web sites of commercial donor-advised funds.

• Tell the charity’s story well online. Make it easy for donors and the people who advise them to find the organization and learn about its work.