Picking a donor-advised fund provider

(Reuters) - Charitably-inclined clients can give to their favorite causes and reap big tax benefits if they are introduced to the world of donor-advised funds. And advisers who make that introduction - and help their clients decide where and how to set up their funds - will broaden their appeal to clients.

A donor-advised fund is a personal charitable account set up within a charity. Account holders can give their fund a name, like the Smith Family Fund and they get a tax deduction when they contribute to it. They then can let the money accumulate and grow (for years, if they want) while they decide where to donate. The donor advises the fund about where to make the grants (hence the name) and then the fund sends the gift off to the charity of choice.

Pinpointing the best place to house the fund can be a challenge, and that is where advisers can help.


One popular route is to set up a fund through one of the nation’s three biggest providers of donor advised accounts - Fidelity Charitable, Schwab Charitable and Vanguard Charitable, affiliated respectively with the investment firms Fidelity Investments, Charles Schwab Corp and Vanguard Group.

The trio together handle over $18 billion in investments and all reported increases in assets under management last year. They have low administrative fees and can typically set up accounts in a day.

The second common option is to go through a local community foundation, a non-profit that has an endowment and make grants for the support of a region. There are about 750 of these groups in the country and they vary widely: some are shoestring operations, while others manage billions of dollars.

Because community foundations work directly with local charities, they can help donors choose organizations that will use their gifts effectively. Their fees tend to be higher, but many donors don’t mind because they know that money is supporting a local group.

“What differentiates the community foundations is that they’re by and about the people of their region,” said Fraser Nelson, director of the Community Foundation of Utah.


Advisers can help their clients decide where to establish their funds by asking providers these key questions:

1. What is the minimum account size and grant size?

Fidelity Charitable and Schwab Charitable allow accounts to be set up for as little as $5,000; the smallest grant allowed out is $50. Vanguard Charitable’s minimum new account size is $25,000 and minimum grant out is $500. Community foundations vary on minimums, but they’re generally higher than at Fidelity and Schwab.

2. What type of assets do you accept?

When donors make their contributions in the form of appreciated assets neither the donor nor the charity have to pay capital gains taxes on the amount the asset earned.

Fund providers typically are comfortable accepting donations in the form of company stock or mutual fund shares. But if clients have more complex assets, such as private company stock, advisers should either go with one of the big three national providers or check to make sure the local community foundation can handle it. Community foundations are increasingly accepting complex assets, said Ken Nopar, a Chicago-based philanthropic consultant to wealth advisers.

3. What are your fees?

The national providers all have a maximum administrative fee of 0.6 percent, which is on top of the investments’ management fees.

Expect to pay more at a community foundation. The Boston Foundation, for instance, has a maximum administrative fee of 1 percent and an investment oversight and accounting fee of 0.15 percent. But notes Kate Guedj, vice president of development and donor services for the foundation, that money is going to a group “whose sole purpose is to improve greater Boston.”

4. What are your investing options?

One of the advantages of this type of giving is that donors can grow sums that could turn into large gifts like recurring scholarships. That leaves it for advisers to vet providers’ investment offerings. For instance, at Fidelity Charitable, the basic investment options for its donor-advised accounts are limited to Fidelity Investment funds - though it also allows actively managed accounts to go much wider.

Fidelity and Schwab allow financial advisers to actively manage accounts over $250,000 and lets them charge the account holder a maximum of 1 percent for that service, which is in addition to the administrative fee.

Schwab Charitable only allows advisers who work at a firm that custodies its assets with Charles Schwab to actively manage a donor-advised fund account.

Vanguard doesn’t allow for active management. Community foundations are increasingly allowing for active management, with a wide range of minimums, roughly between $25,000 to $1 million, said Nopar, the consultant.

There is a compromise for clients who want the low fees and investment choices of big providers. They can always set up their account with one of the big three, and then use their funds to donate to their community foundation.

Reporting By Jennifer Hoyt Cummings; Editing by Linda Stern and Tim Dobbyn