Fidelity fund becomes pace setter in charity
Fidelity Investments, best known for mutual funds and retirement plans, now oversees more in charitable contributions than much better-known philanthrophic organizations such as the Salvation Army and the American Red Cross, and it is on the verge of surpassing the United Way.
The Boston financial giant entered the world of philanthropy through a nonprofit it established to manage charitable donations and provide tax shelters for its investors. Last year, the nonprofit, Fidelity Charitable, brought in $3.7 billion from clients, placing it second on The Chronicle of Philanthropy’s rankings of the country’s largest charities, just behind United Way.
The nonprofit offers what are known as donor-advised funds, which allow investors to place money into the accounts, take full deductions as if giving directly to nonprofits fighting such problems as cancer or homelessness, and dole out the money over the course of years, or even generations. Critics, though, say the money doesn’t get to charities fast enough.
Fidelity’s nonprofit is poised to become the nation’s biggest charity in 2014, according to the Chronicle of Philanthropy. It matched United Way’s 2013 total of $3.9 billion in the just first nine months of the year.
“To move so fast to the top, that’s unheard of,” said Stacy Palmer, editor of the trade journal.
Donor-advised funds have been around since the 1930s and were a cornerstone of community foundations, which helped wealthy donors direct their gifts to local causes. In 1991, Fidelity received IRS approval to create its public charity to manage these funds, and it has used its size, reach, and access to clients to bring donor-advised funds to the forefront of charitable giving.
Other investment firms followed with similar funds, including Charles Schwab Corp. of San Francisco and Vanguard Group of Valley Forge, Pa.
All donor-advised funds held $45 billion in assets in 2012, a nearly 55 percent increase since 2009, according to the National Philanthropic Trust, a nonprofit adviser and fund manager.
This growth is reshaping philanthropy, leading charities, including the United Way, to establish their own donor-advised funds not only to strengthen ties to contributors but also generate income from management fees. But critics argue these funds trap needed resources and delay financing to charities helping the poor, feeding the hungry, or researching cures for diseases.
Once an investor gets the deduction, there’s no incentive to distribute the money to charities since tax rules don’t set a time frame for doing so, critics say. The money is “ just sitting there,” said Ray Madoff, a law professor at Boston College.
Between 2011 and 2012, contributions to donor-advised funds in the United States jumped 35 percent; charitable donations from these funds increased 7 percent.
Fidelity said it has about 64,000 donor accounts with total assets of $10.2 billion, according to its latest tax filing. The average annual grant is $4,000, and about 500,000 grants were awarded last year, totaling more than $2 billion.
“Our mission is grant-making, to see that the money in the end goes to charities,” said Amy Danforth, the president of Fidelity Charitable.
Donor-advised funds are popular with wealthy investors such as Facebook founder Mark Zuckerberg and professional athletes. But accounts can be opened with just a few thousand dollars and grow without limit, although the money must eventually be distributed to a nonprofit.
Fidelity’s ascent to the top of the Chronicle of Philanthropy’s list has come as the stock market recovered from the financial crisis and the wealthy and well-off bypassed traditional methods of giving, such as establishing trusts or sending personal checks to favorite causes. The fees generated by the charitable accounts — typically 1 percent of the assets under management — represent a minuscule part of Fidelity’s revenues but help the company build relationships with investors who use other services.
Donor-advised funds are becoming as much a part of a family’s financial planning as college and retirement saving accounts, Danforth said.
What makes these accounts popular is their simplicity, Danforth said. Investors can set aside the money and go online to direct money to their favorite causes. And they don’t have to deal with tax paperwork from each charity since they receive the tax write-off when they put money into the account.
Steve Segal, 54, of Newton, said it can be difficult for people who want to make donations and manage tax liabilities in a given year to quickly decide which charities to support. Segal opened a donor-advised fund with Fidelity in 1992 when he earned a windfall from the closing of a deal by his private equity firm and faced a tax hit.
The donor fund allowed him to claim the deduction while providing flexibility to determine when and to which groups he would contribute. It also allowed him and his wife to give consistently to favorite charities, including cancer research, colleges, and high schools, and even make larger contributions, thanks to returns earned on the fund’s investments.
The couple more recently opened another donor-advised account with Combined Jewish Philanthropies, which they use more frequently. That account is more closely aligned with his religious values, Segal said, and management fees help support the charity.
“I wanted to be philanthropic, but I didn’t want to do it in one fell swoop,” Segal said. “Every gift we make comes out of the donor-advised fund.”
Charities increasingly target donors with these accounts. Local nonprofits, from the Pan-Mass Challenge, which hosts an annual bike ride to support cancer research, to the homeless shelter Pine Street Inn include online tools on their websites to accept donor-advised funds. Fidelity has taken a lead role in developing technology that makes it easier for charities to accept these funds.
“You have to keep moving with the way people are comfortable with paying for things,” said Michele Sommer, director of finance and administration at the Pan-Mass Challenge. “You still have to embrace it; there’s too much money there.”
John Feudo, chief development officer at United Way of Massachusetts Bay and Merrimack Valley, agreed that donor-advised funds represent an important source of support for charities. But since investment companies cut the checks and send them on behalf of donors, it makes it harder to cultivate deeper relationships with philanthropists, tap them for volunteer opportunities, or get access to their circle of other potential donors.
“It adds a layer,” Feudo said. “Although it facilitates fund-raising for some organizations, it prohibits some people who are being generous from seeing the impact of the work.”