The Charity Sweepstakes

A battle is raging between three forms of planned giving: private foundations, community foundations, and commercial donor-advised funds

by Daniel M. Schley

It is a strange thing, really, that in the nonprofit sector, which is defined by giving, generosity, and selfless devotion to others, that there should exist an undercurrent of competition, and intense competition at that. Few people would equate the notion of charity with the very fundamentals of direct competition, yet charities do compete, much like any for-profit business.

They struggle for identity and to promote their brands. They develop and market products and services. They work tirelessly to differentiate themselves in a crowded marketplace. And they compete for capital. The nation's charities require an endless and ever-increasing supply of capital to support their infrastructure and charitable programs. Thankfully, those needs are supplied by the generosity of the American public, to the tune of $260 billion last year, according to the Foundation Center. That generosity ensures that the nation's million-plus 501(c)(3) public charities are able to operate, survive, and in many cases, thrive.

While it may be intriguing to think about white-glove competition among charities for funding, it is even more intriguing to contemplate the competitive battle that is quietly raging among the three major forms of planned giving: private foundations, community foundations, and commercial donor-advised funds. To anyone who questions whether there is real competition, I would answer: "Most definitely yes."

LONG HISTORY.

Private foundations—also known as private, non-operating, or "family" foundations—are our nation's oldest and most enduring form of organized philanthropy, with a 100-year history of giving. Today, there are approximately 70,000 private foundations in the U.S., representing approximately $425 billion in foundation assets. Private family foundations gave away nearly $25 billion last year to the nation's charities. It is rare, indeed, that private foundations compete with one another—even though it might appear they do so for top billing on the masthead of Masterpiece Theatre.

Community foundations have been in existence nearly as long, going back to the establishment of the Cleveland Foundation in 1914. These public charities serve as an efficient resource for gathering and distributing charitable funds within a specific geographic community and have in-depth knowledge of both local issues and the nonprofits serving the community. Today, there are some 700 community foundations in the U.S., representing $38.8 billion in assets. Last year, they gave away $3.2 billion. A common offering of virtually every community foundation is a donor-advised fund, which allows donors to set up individual " giving accounts" that are administered by the charity.

A much more recent creation are the "commercial" donor-advised funds, created by financial institutions, which typically custody the assets. Industry giant Fidelity Investments created the first commercial donor-advised fund in 1991. Today, Fidelity's Charitable Gift Fund remains the largest commercial donor-advised fund by far, with more than $5 billion in assets. And with philanthropy becoming a more common component of financial planning, most large financial institutions offer a donor-advised fund option.

HEFTY FEE.

Why do these various forms of "organized philanthropy" compete? The answer may be as simple as it is obvious: investable assets. Commercial donor-advised funds charge a hefty fee, generally in the range of 1%-2% of assets, for investment management and distribution services. Spread across $7 billion in commercial donor-advised fund assets, this management fee becomes a very significant source of income for the many financial services companies that are serving the public good while concurrently serving the interests of their shareholders to generate a profit. It should come as no surprise, therefore, that the competition within the financial community to acquire and manage charitable assets is fierce.

For community foundations, the motivation is surely not to generate a profit.