Fidelity Charitable courts advisor business -- and competes with Schwab -- by making alternative assets OK in its donor-advised fund

Brooke’s Note: The two main interviews for this article were with Sarah Libbey and Kim Wright-Violich, the heads of the donor advised funds at Fidelity and Schwab. They both said polite things about each other’s programs. But this article is about the intensive competitive spirit that is rising up between them. I consider it a good sign. It means that that there is something worth competing for and that bodes well for RIAs and these custodians as they delve deeper into this market.

In a move to fuel more growth in its donor-advised fund – and keep pace with Charles Schwab & Co. — Fidelity Investments is now making it possible for financial advisors using the fund to invest in alternative investments, including hedge funds, hedge fund of funds and private equity funds.

Donors must have a giving account of $250,000 or more to be eligible for this form of investment.

The Boston-based financial giant runs the Charitable Investment Advisor Program as part of The Fidelity Charitable Gift Fund, the nation’s largest donor-advised fund program. About a third of the $4.7 billion of assets from 50,000 donors in the gift fund are managed or referred by financial advisors.

“Adding alternative investments to the Charitable Investment Advisor Program allows advisors to diversify and potentially increase investment returns in their clients’ charitable portfolios, ultimately enabling donors to grant more to the causes they care about,” said Sarah C. Libbey, president of the Fidelity Charitable Gift Fund.

Following Schwab’s lead

The move follows the lead of Schwab Charitable, which first allowed advisors to manage charitable accounts in its donor funds using alternative assets in 2006. Advisors using this Schwab program manage about $300 million of alternative assets.

Kim Wright-Violich, president of Schwab Charitable, which has about $2.6 billion of assets, says Schwab is the clear leader in this realm of the donor-advised world, she says.

“We have as many alternative assets [managed by advisors] than Fidelity has assets [managed by advisors] in their entire program,” she says.

Kim Wright-Violich: Schwab Charitable has been
the leader in the advisor space.

She adds: “Fidelity has been the leader in the retail space and Schwab Charitable has been the leader in the advisor space.” Schwab works with about 650 advisors including ones who manage assets through the program and ones who refer assets and help clients with guidance.

Teri Ginsburg, a spokeswoman for Fidelity, says that Fidelity has always been a strong force with advisors since it entered the charitable fund business in 1991.

5,000 advisors

A rising tide of conversions from private foundations to donor funds is lifting both the Schwab and Fidelity philanthropic vehicles, according to Libbey and Wright-Violich.

The reason that Schwab and Fidelity are speaking out about their donor-advised funds is that these once sleepy backwaters of the investment landscape are becoming an area of potential growth for RIAs.

“It’s really an untapped opportunity for advisors,” Ginsburg says. “As people become more sophisticated, they’re turning to advisors for assistance in what assets to give away, what vehicle to use and how to manage their charitable dollars.”

A donor fund allows donors to give their money to the funds set up by Fidelity, Schwab or others, receiving an immediate tax break on the entire gift. Fidelity and Schwab then take care of giving out the money according to the donor’s wishes. If the money is given out over time, as is common, an advisor may oversee the investment strategies for it while it remains in the donor-advised fund. Fidelity’s donor advised fund charges a .6% administration fee on the first $500,000 of assets, .3% on the next $500,000, .2% on next $1.5 million and .15% on the next $2.5 million. There are no other fees, according to Ginsburg.

Schwab’s pricing is virtually the same but it also charges professionally managed accounts with less than $1 million of assets an investment oversight fee of $250 per quarter.

Drawbacks

In addition, more advisors and donors are seeing donor funds as an attractive alternative to foundations. Potential drawbacks of foundations include the need for audits and tax returns, as well as fiduciary concerns.

Foundations can cost four times as much to run, according to Libbey. Taxes are another issue. A charitable gift fund allows a deduction of up to 50% versus just 30% for a foundation, she adds.

Wright-Violich acknowledged, however, that someone who wants to give internationally may prefer to do so through a foundation. Foundations also appeal to donors who want a staff and/or a board of directors.

Fast growth

Wright-Violich says her company’s edge with advisors makes Schwab the fastest-growing donor-advised fund.

As of Sep. 30, contributions for 2010 were $610 million, up 274% from the same period in 2009 and up 90% from the same period in 2008. Grants to charities from the Schwab fund totaled $262 million for the same period, up 15% from 2009 and up 3% from the previous all-time high in 2008.

As of Sept. 30, Fidelity had received $741 million of donations – up 13% from the previous year.

Both Wright-Violich and Ginsburg stressed the sense of collegiality that goes along with the natural competiton that occurs between their two programs. Both believe that charitable giving is a nascent aspect of wealth management for financial advisors.

Michael R. Durbin, president, Fidelity Institutional Wealth Services, the company’s custody platform for more than 3,000 independent advisors, says in a release that Fidelity Charitable Gift Fund is an important resource for advisors.

Turnkey

“With so many available resources, financial advisors do not have to be experts in giving strategies and vehicles in order to incorporate charitable planning into their practices,” he said. “By incorporating charitable planning discussions as part of their overall wealth management services, advisors have the opportunity to deepen client relationships, which can lead to asset consolidation as well as access to multiple generations.”