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Charity Funds May Be Fund Industry Boon

While the staple of GivingCapital's business, donor-advised funds, are nothing new, they could be poised to give a dramatic boost to a mutual fund industry seeking new ways to raise assets.

The investments, designed for the purpose of donating to charity, have been around since 1969. But they seem new, said GivingCapital's co-founder Eric Lee Smith, because virtually no one knows about them.

The products offer too many advantages to be ignored for long, Smith said. He plans to bring the investment vehicle, once thought of as only for the super-rich, to the masses.

Last week, GivingCapital announced a merger with Giving Systems, a smaller, San Francisco firm that had been developing similar products. Now, the newly merged company, which will operate under the GivingCapital name, plans to open a New York sales office and provide a new training program that teaches clients about donor-advised funds and the software GivingCapital designed to manage them.

The company has five clients, including JP Morgan Chase Private Bank, Credit Suisse Asset Management and Legg Mason Trust. Deals with the other two firms are so recent, Smith will not say who they are.

If Smith is right, it could be good news for mutual fund companies that have seen assets dip precipitously--and have been screaming because of the declines. Donor-advised funds provide a new quiver of products for fund companies and broker-dealers, Smith said. And, in cases where clients want to donate some of their gains to nonprofits, companies that provide the philanthropy products will keep those assets from going out the door by continuing to manage them.

"From a brokerage firm's perspective, it's a new product, a new revenue source. From a financial advisor's perspective, it's a win-win product," he said. "You'll be talking about something that will be massively adopted."

The Philadelphia-based company provides technology and other infrastructure to help financial service firms offer the donor-advised funds. Through a deal the company struck last year with a nonprofit organization that offers the product, and the development of easy-to-use software, Smith said his company makes it much easier for companies to set up the charity accounts.

The result, he hopes, is a domino effect. As the funds become easier to establish, they will become more common, and minimum investments, which currently hover at $25,000, could drop as low as $3,000. With lower minimums, more investors of average income will open donor-advised funds, he said; nonprofit organizations will see more donations; fund companies and broker-dealers will reap profits.

Ready to Fly

"We're really in a take-off stage right now," Smith said. "It's really only in the last 24 months that they've gotten traction out there in the marketplace."

The system for investing in the funds, and then donating assets to charity, works like this: A client of, for example, Credit Suisse can invest a minimum of $25,000 in a donor-advised fund that will be handled by Credit Suisse portfolio managers. Most take the form of mutual funds, but some are managed as separate accounts, Smith said.

The account will be maintained using GivingCapital's Web-based software. Giv-ingCapital's nonprofit partner, the Nat-ional Philanthropic Trust, will then use that software to monitor the investments. And, when an investor wants to donate some of the assets--from principal or earnings--to a specific nonprofit group, the NPT will research whether the group is a legitimately registered nonprofit and approve and execute the transaction. Because the NPT, an IRS-approved nonprofit, is involved in the deal, the investor can take a $25,000 tax deduction on the investment. Credit Suisse, meanwhile, would earn revenue from fees, just as it would on any other investment product.

The system is complex enough, that few large fund companies have taken the initiative to set them up on their own, says Eileen Heisman, president of GivingCapital's nonprofit partner, NPT. Fidelity Investments drew attention to the charity accounts when it started its own--with great success--in 1992, she said.