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Merrill Lynch Launches Separately Managed Charity Fund


The Cleveland Foundation, the nation's second-largest charitable foundation with $1.5 billion under management, didn't waste any time joining the three-month-old Merrill Lynch Community Charitable Fund.

Merrill's new separately managed product is designed to compete with Fidelity's Charitable Gift Fund, which has more than $2 billion in assets. However, unlike the Fidelity fund, Merrill's donor-advised fund does not create a proprietary gift fund. Instead, it uses its network of brokers and strengths of existing community foundations.

With a donor-advised fund, an individual makes an irrevocable contribution of assets to a nonprofit organization that administers the fund. The assets are then liquidated and invested. The financial service firm is the custodian of the donor-advised fund assets and manages them on behalf of the nonprofit organization.

Donors get an income tax deduction for charitable contributions, estate and gift tax exclusions and tax-free growth of assets.

Open-end mutual funds now manage almost $4 billion in their charitable fund programs, according to Morningstar of Chicago. Besides Fidelity, Vanguard, T. Rowe Price and Charles Schwab are among those that offer no-load charitable gift fund mutual fund programs. Under the programs, investors make charitable contributions into a stable of funds with low expense ratios. Since the funds are no-load and low cost, the total return on the investments is higher than broker-sold products.

Although the mutual fund programs are popular, Caprice Bragg, director of planned giving for the Cleveland Foundation, said that separately managed donor-advised funds have several advantages over mutual fund programs.

"There is a great difference between Merrill Lynch's donor advised program and Fidelity's program," she said "The Cleveland Foundation acts as a resource that matches up charities with donors. We provide donors with the [due diligence] information they need to make decisions about donations and grants. You can't get that kind of expertise from mutual funds." Merrill Lynch began talking with community foundations about eight months ago. Since then, it has co-branded with 21 community foundations. The minimum initial donation into the donor advised fund is $25,000.

"We created the Merrill Lynch Community Fund because the needs of donors have changed," said H. King McGlaughon, director of Merrill's Center for Philanthropy and Nonprofit Management. "By bridging the gap between philanthropists and community foundations, the Community Charitable Fund helps clients meet their philanthropic goals in a customized and collaborative way."

With the Merrill Lynch Community Charitable Fund, clients can donate cash, stock or other assets to the host community foundation. The client recommends how the assets are distributed over time and chooses a geographic destination. The brokerage firm's financial adviser works with clients to choose and manage investments. The service includes a sophisticated investment component to achieve high-risk-adjusted rates of returns on the investments. Donors have a choice of investment styles and they can choose to make donations anonymously. The annual fee for the program is 210 basis points.

Bragg says that the new program will let Merrill Lynch's clients in the Cleveland area best match their philanthropic goals with the charitable needs of the community. In the past, many community foundations have had problems marketing themselves to donors. By joining hands with Merrill Lynch, charitable foundations now have access to the national market.

"Merrill Lynch has a large number of affluent clients in the area," Bragg said. "They could be a good source of new donations. This is a co-branded product and we work together. The service provides a Web portal that lets Merrill Lynch's financial advisors research and create donor-advised funds on behalf of their clients."

Donor-advised funds are one of the fastest-growing vehicles for charitable giving. According to a report in the Chronicle of Philanthropy, assets of donor-advised funds grew 17.2% to $12.15 billion in over the past two years ending in 2002. The number of individuals who set up donor-advised funds increased 20%, and that trend was expected to continue. The publication also reported that the number of donor-advised gifts grew 12% to 70,066 in 2002 from 62,245 in the previous year.

Alicia Philipp, president of the Community Foundation for Greater Atlanta, said that Merrill Lynch's presence in the marketplace is an indication that donor-advised funds are becoming a mainstream product.

"The creation of the Community Charitable Fund acknowledges that only with the open dialogue, informed counsel and fiduciary due diligence that community foundations provide, will a client's philanthropic experience be truly positive and valuable."

There is a lot of competition for affluent individuals' charity dollars. The Columbus Foundation of Ohio reported that nationwide, community foundations are worth over $31 billion. That included $3.5 billion in new gifts to foundations last year.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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