fidelity charitable gift fund

Schwab Charitable, the Fidelity Charitable Gift Fund, and several others linked to financial services firms have developed a service—a charitable service—that has accomplished more than simply making it easier to get increased amounts of money out of donors’ pockets to operating charities. It’s led to a fundamental change in investors’ mindsets and their conceptual approaches to charitable giving.

The year 2012 was great for donor-advised funds, notably the DAFs managed by the Fidelity Charitable Gift Fund, affiliated with financial behemoth Fidelity Investments, and the Schwab Charitable Fund, linked to the Charles Schwab Corporation. They’re linked by origins and service agreements, but Fidelity Charitable and Schwab Charitable are separate 501(c)(3) charitable entities. That doesn’t stop some people from focusing on their corporate sponsors, both mammoth financial services companies, and on the founders of their DAF management entities, Ned Johnson and Charles Schwab.

Let’s face the truth. If Ned Johnson or Charles Schwab—or some of the donors to their companies’ affiliated donor-advised funds—were to pop up offering charitable gifts, few nonprofits struggling to raise money, particularly among so-called “major individual donors,” would turn them away, especially if the gifts were without controlling strings and the givers weren’t tied to particularly odious industries. Nonprofits of all political stripes are in many cases eager to solicit grants from wealthy donors, whether they are behind donor-advised funds or sitting at the helms of private foundations, regardless of their political persuasions. It’s not as though the heads of major financial institutions and the founders of large foundations made their millions and billions as socialists. But nonprofits want access to them all the same.

Foundations typically spend as grants five percent or less of their assets annually (remember that a portion of their “qualifying distributions” or “payout” includes administrative costs). Community foundations pay out at much higher levels, but neither compares to the across-the-board payout levels of the commercially affiliated DAFs. Donor-advised funds have brought change to the world of charitable donations (we think for the better) by altering the ways that wealthy but not necessarily super-wealthy donors conceive of their charitable activities.

Corporate Philanthropy Politics

The time has long passed since community foundations, themselves sponsors and managers of donor-advised funds, fought against the IRS’s approval of 501(c)(3)s affiliated with Fidelity and Schwab and, it should be added, Vanguard, which came, a little later than the other two, under the direction of John Brennan, the successor to legendary Vanguard Group founder John Bogle. The DAF programs affiliated with these and other corporate entities are by now well established, still rapidly growing on the cash side of the charitable sector, and increasingly seen by many donors, particularly those of less wealth than the moguls who establish private foundations, as attractive mechanisms and platforms for managing their charitable contributions.

Nonetheless, some observers criticize them as warehouses where the wealthy can tuck their assets away while collecting the benefits of charitable tax deductions. That critique may be deepened for some by the charitable funds’ corporate linkages, harkening back to the original challenges raised by critics in the early 1990s who wondered how the IRS could accord these arms of Fidelity, Schwab, and Vanguard public charity status. It’s even possible that a little of the critique goes to the political interests of the founders; most have leaned Republican, though Bogle, a registered Republican, makes no bones about his having voted for Bill Clinton and Barack Obama.


{loadmodule mod_banners,Ads for Advertisers 5}


But the Fidelity and Schwab charitable programs are not philanthropic arms of the corporations and their founders. The Johnson family is full of billionaires with a family foundation, the Edward C. Johnson Fund, with over $300 million in assets and roughly $29 to $30 million in annual giving, and a relatively similarly sized corporate foundation, the Fidelity Foundation, both with strong track records in giving to the arts. At Schwab, the major corporate giving arm is the Charles Schwab Foundation, and the family’s philanthropy goes largely through the Charles and Helen Schwab Foundation, with assets around $161 million and distributions that go to a variety of community-based service providers largely in California. The Schwab and Fidelity managers of donor-advised funds are neither family foundations of the corporate executives or corporate philanthropic arms of the two corporations.

Rather, Schwab Charitable and Fidelity Charitable Gift Fund are instruments serving the interests of the donors setting up donor advised funds, not the corporations’ or their founders’ personal priorities. Donations to either of these 501(c)(3) entities to set up donor-advised funds are “irrevocable gifts,” which is to say that technically the donor does not direct or control Schwab or Fidelity in their disbursements, but merely advises. In practical terms, that means that the DAFs are the charitable giving mechanisms of the donors, with Schwab and Fidelity serving as intermediaries and platforms to facilitate the donors’ intended distributions, especially donations based on appreciated assets. Typically, a donor with an appreciated stock would be hard-pressed to find some of his or her favorite charities able to deal with the asset, sell it, and convert it to cash. With these charitable funds, the hugely valuable service they provide for donors and donees is the conversion of appreciated assets, among other kinds of assets, so that the cash value can be donated to a charity. With increasing numbers of Americans with investments in the stock market through publicly traded stocks, investments in mutual funds, and ownership of private stock such as C corporation and S corporation stock, DAF managers such as these—and other commercial competitors and the community foundations as well—are in the business of converting the assets of affluent people into forms in which they can be easily disbursed to charities.

As distinct from Schwab and Johnson family and corporate giving instruments, the Fidelity Charitable Gift Fund and the Schwab Charitable Fund are distinct 501(c)(3)s—established and capitalized by their corporate sponsors, certainly, but operating with the two financial services firms through service agreements, not as philanthropic arms of the firms. An observer might be wont to examine and criticize the corporations’ philanthropic strategies in the two companies’ foundations, just as one might examine the giving of the Wal-Mart Foundation or the Microsoft Foundation to see what their grantmaking says about the priorities of the corporations they serve, but the giving of Fidelity Charitable and Schwab Charitable reflects the priorities of the donors through their donor advised funds, not the corporations. In fact, their low-cost, low-overhead operating models mean that in general, the two charitable funds really avoid spending staff time influencing or directing the donors’ choices. Were they to start using DAF assets for corporate strategic priorities, the relocation of donors to other DAF managers would be rapid.

Here’s the corporate strategy question that does make some people suspicious: Isn’t it to the advantage of Fidelity and Schwab to have donors keep their assets in funds as long as possible—that is, to make their charitable distributions as slowly as possible—to maximize their abilities to invest the funds and earn income from those investments? And it would be…except for a couple of factors. Remember that the charitable funds managing the DAFs are independent 501(c)(3) entities. If Fidelity or Schwab were caught influencing donors not to make distributions in order to maximize Fidelity or Schwab profits, that would be a red flag attracting the attention of critics—and the IRS. Second, it might seem like there is lots of money to be made for Schwab and Fidelity in DAF management, and presumably, they are making enough for the charitable funds to pay back their sponsors’ initial capital investments and generate profits, but despite the amounts of money in the charitable funds, those dollars are small potatoes compared to the size of the financial firms themselves. For example, at the end January, Schwab Charitable had $6 billion in assets while Charles Schwab Corporation’s are more than $2.2 trillion.

More importantly, the Schwab and Fidelity charitable platforms are designed to make the process of charitable giving easy for the donors. If the instrument exists to make charitable giving from one’s investment accounts to charities as simple as a couple of clicks of a mouse, the idea that the charitable funds are playing with these DAF accounts to serve corporate purposes simply doesn’t work. As a result, the annual “payout” rates of the Schwab and Fidelity charitable funds generally hover over 20 percent, hardly consistent with the notion of “warehousing” and a heck of a lot better than the payouts of private foundations or the spending rates of endowed colleges and universities. And for individual DAF accounts that show little or no activity over time, the policies of both of these commercial DAF managers call for notifying them that they have to kick up their spending rates and goosing them if they prove to be recalcitrant.

Charity Politics

Both Schwab Charitable and Fidelity Charitable had phenomenal activity in 2012, prompted by concerns about the fiscal cliff and the prospect of changes in the charitable tax deduction, but both reported a continuation of that activity into 2013 even after Congress found the temerity of rappelling over the cliff. Amy Danforth, a senior vice president with Fidelity Charitable, told NPQ that they really hadn’t expected 2013 to be quite as strong as it was because of the strength of 2012 with the cliff-generated giving.

Some of that 2013 activity can be attributed to a record-setting stock market. Donors whose income is in stocks are going to find instruments and platforms that can convert those assets to cash attractive. That has to be some of what happened. Also, in 2012, with the charitable deduction up for debate, there was much public discussion about donor-advised funds themselves, particularly as charitable investment vehicles for people whose wealth didn’t rise to the level of creating private foundations. That level of interest in the utility of DAFs may explain some of the continuing levels of capital flows into DAFs in 2013, what Danforth described for NPQ as a “momentum of awareness,” noting that 2013 was particularly strong for Fidelity in donations of C corporation and S corporation stock and real estate.

It seems, however, that there’s an impact being had on the psyche of the donors as a result of the platforms and technology devised by Schwab and Fidelity, and perhaps others as well. Kim Laughton, the president of Schwab Charitable, makes the point of how technology has so “migrated into our lives” that people increasingly want to transact their investment and charitable activities through technological interfaces that were obscure not long ago and unavailable not many years before that. Now, she says, investors and investment advisors at Schwab see a picture of their investment accounts and their charitable donor-advised fund accounts together. In other words, investors with a series of Schwab investments or Fidelity investments also see their Schwab or Fidelity charitable account as part of their overall investment portfolio. Charitable giving isn’t a separate add-on for donors, brought to mind when they get a charitable solicitation in the mail or advice from an advisor or a reminder from their CPA during tax time. It is part of the comprehensive picture of their investments, a part of their picture of themselves.

Danforth makes a similar point, noting that the vision of the founder of Fidelity Charitable was that clients of the investment firm were encouraged to have goals about retirement and education, and he thought that they should have the same ability to plan thoughtfully and strategically about their charitable or philanthropic priorities. She notes, as we have heard many times before, that as donors shift from checkbook giving to the kind of “planful”—the term she uses—giving they can do from donor-advised funds, around two-thirds of donors say that they end up giving more rather than less.

Putting charitable investments into the composite picture of overall investment assets for affluent investors changes the investor-donors’ mindsets. To think of charitable giving as a core, natural component of one’s investment portfolio, as opposed to being an off-again, on-again extra consideration, requires a different conception of oneself.

Part of that new conception is occurring in the dynamic between donors and nonprofit grant recipients. A big misconception exists about one aspect of the donors: that they are establishing donor-advised funds in order to be or maintain their anonymity. In reality, Danforth reports that 95 percent of Fidelity Charitable Gift Fund grants go out with the name of the donor or the donor’s fund identified. Laughton says the proportion expecting to be named and acknowledged is about 97 percent at Schwab. The days of charities receiving money from anonymous donor-advised funds are no longer. Charities are beginning to know who is giving them money from DAFs at Schwab and Fidelity.

Slowly, charities are catching up with the concept of Schwab Charitable and Fidelity Charitable and making themselves attractive to donors with DAFs. Think of the typical charitable appeal cards sent out by nonprofits, offering donation options of cash, check, or corporate match. They would be so much better served by including the option of donor-advised fund. Fidelity Charitable’s “DAF Direct” widget, which nonprofits can download and put onto their websites as a charitable giving option for potential donors, opens up a potential new array of donors who might not respond to a button that asks for one’s Visa or American Express card. Danforth says that at least one charity a day downloads and installs the DAF Direct widget.

More money is flowing through these funds. At Fidelity, the outflow of grants to charities was nearly $2.1 billion in 2013, a 29 percent increase over 2012 (and, notably, the average size of grants rose to $4,000). Distributions were up 36 percent at Schwab, which reports that since Schwab Charitable’s inception, 44 percent of what has gone into Schwab charitable accounts has been granted out to charities.

Not every prospective charitable donor is a billionaire with a foundation. Increasingly, charities have to find individual donors of moderate wealth; they don’t have their own foundations, but they still have assets that could be donated to support causes. The technology of these commercial charitable gift funds, unique at their outset but increasingly seen as the model for DAFs managed by community foundations and others, makes charitable giving more “planful,” so to speak, for these moderately wealthy investors. It makes charitable investment part of their self-image, so that when these investors consider moving funds and assets from one investment account to another, they can also see the option right there on their computer screen or mobile device to move resources into a charitable account or to make distributions from that account to any number of charities that fit the investors’ values and priorities.

Forget about Chuck Schwab and Ned Johnson and what they believe politically or, as billionaires, are worth personally. The instruments that they have created in the form of the Schwab Charitable Fund and the Fidelity Charitable Gift Fund have made it easier for moderately wealthy people to think of themselves—organically—as charitable investors and function with charitable giving as a part of their investment mindsets. Fight all you want about whether DAFs pay out enough or not. Their impact is in making charitable giving for moderately wealthy people easier, more strategic, and more natural. For charities interested in reaching individual donors, getting comfortable with donors who give through donor-advised funds has to be a top priority in the new world of fundraising.

This article has been altered from its original form to update the assets held by Charles Schwab and Schwab Charitable, the growth in 2012 by Fidelity Charitable, and to correct the position held by Kim Laughton.