Donor-advised funds run by huge money management firms are exploding.
Fidelity Charitable runs the second-ranked charity in the United States, according to the Chronicle of Philanthropy, behind United Way Worldwide. Charles Schwab’s is fourth and Vanguard’s is 10th.
People aren’t literally giving to these companies. They are setting up accounts at these firms and then disbursing the money, advising on which charities get how much.
The idea of the funds was to make it easier for individuals to give to charity. People could drop money into the account during flush times, and donate as they see fit, not in a panicked rush to meet the Dec. 31 deadline for contributions.
So far, this has turned out to be a bad deal for society.
For about 40 years, charitable giving held steady at about 2 percent of gross domestic product, while donations from individuals have stayed at around 2 percent of disposable personal income, according to Ray D. Madoff, a Boston College law professor and frequent critic of donor-advised funds.
Over the last few years, the donor-advised funds have grabbed significant market share. The total amount of assets under management at donor-advised funds rose to $54 billion in 2013, up 20 percent from $45 billion a year earlier. Fidelity’s alone have skyrocketed to $13.2 billion.
Contributions to donor-advised funds rose 24 percent in 2013, compared with the previous year, to $17 billion. They only gave out less than $10 billion, so money is building up in them. And the amount paid out each year declined in each of the last three years through 2013, according to Alan Cantor, who runs a philanthropy consultancy and is a frequent critic of donor-advised funds.
This has given rise to several concerns. The money in donor-advised accounts doesn’t have to go out right away. Private foundations have to disburse an average of 5 percent each year. But donor-advised funds have no legal obligation to spend down their money — ever. True, donors cannot get their money back. But they could designate their children as the advisers to the money. And their children could pass that responsibility on to their children.
So people can get their taxable deduction all in one year, but society doesn’t get the benefit of the money right away.
And there’s a tax game. Investors who had a particularly good year can make a big donation to a donor-advised fund and lower their taxes. But charities might have to wait while the money sits in the account for years.
Another significant issue is that the interests of the donor-advised funds and donors may diverge. Fidelity, Schwab and Vanguard all charge fees on the money put into their charitable funds. The charities are notionally independent, but they actually plow money into mutual funds run by the same companies.
There are layers of fees charged on that money. Of the $13.2 billion in Fidelity Charitable, $8.5 billion of it goes into Fidelity mutual funds. Those Fidelity funds also charge fees. And investment advisers can charge fees on some portion of the rest of the money.
Cantor estimates Fidelity makes 0.75 percent in total on its funds, but that’s really just a shot in the dark because Fidelity doesn’t clearly disclose the fees.