TRUST COMPANY TRYING HARDBALL WAY TO DO WELL BY DOING GOOD: AMERICAN GUARANTY CHALLENGING FUND GIANTS BY MARKETING TAX SHELTERS THROUGH ADVISERS

Forget warm and fuzzy. American Guaranty and Trust Co. is making a hard-nosed bid to compete with giants like Fidelity and Vanguard in its quest to manage more charitable contributions.

The Wilmington, Del.-based trust company — whose bread and butter has been the charitable remainder trust (CRT) business for high-net-worth clients — is awaiting a decision from the Internal Revenue Service on its application to establish a tax-exempt public charity that would accept donations as low as $5,000 and pay hefty fees to advisers who steer contributions to the charity. In fact, that’s what will distinguish its program from those of the big players.

The company recently struck a deal with LPL Financial Services to offer trust services to reps handling the Boston-based firm’s $7.5 billion wrap account business. It also serves as trustee for $150 million from clients of PaineWebber Group.

American Guaranty is the latest player to throw its hat into the profitable business of providing tax shelters to middle-income Americans. In fact, the business is growing so fast that leaders of some of the nation’s top charities are crying foul and are pushing for legislation restricting the ability of money managers to establish public charities.

Marketing efforts have emphasized that potential donors — especially those holding appreciated stock — can avoid capital gains and potential estate taxes by making gifts to the charities. Donors get an immediate dollar-for-dollar tax deduction but unlike in CRTs, they cannot collect income for life. Depending on investment results, charities ultimately receive more than the original contribution.

Unlike the program at Fidelity, which is marketed directly to the public, the proposed American Guaranty program would be marketed through intermediaries and would enable them to keep earning fees on monies contributed, long the sole province of banks and trust companies.

Fidelity Investments touched off an effort to target middle America in 1991 by establishing a public charity that has a minimum contribution of $10,000. The Boston-based fund giant’s Charitable Gift Fund, like its competitors, is essentially an endowment program that gives money to other public charities such as the American Red Cross — wooing donors by offering the chance to practice philanthropy and get some nice tax breaks in the process.

Since Fidelity introduced its program, such players as PNC Bank Corp., Barnett Banks (recently acquired by NationsBank), Pitcairn Trust Co. and the Vanguard Group have followed suit. Valley Forge, Pa.-based Vanguard got IRS approval in December; its program has a $25,000 minimum contribution.

“There is this huge pool of money that will end up in charitable hands,” says Michael Stolper of San Diego-based Stolper & Co., a consulting firm for high-net-worth clients. “The financial intermediaries want to make sure they collect fees for as long as they can by stepping into that role.”

Money contributed to the charities is typically managed by the for-profit money managers, banks and trust companies that establish them. Some managers create investment pools that invest in their own mutual funds. Donors decide when to give and which charity will benefit.

Some companies are already spending generously to market their programs.

Fidelity, for instance, reportedly dished out about $3.4 million last year on marketing and related expenses for its Charitable Gift Fund. It’s now one of the fastest-growing charities in America, ranking with the likes of the Salvation Army in dollars collected per year. More than 11,500 donors have contributed in excess of $1.5 billion to the fund.

But some worry consumers may get caught up in the hype surrounding the tax savings and overlook the potential pitfalls.

“Sometimes people get overly focused on the immediate tax benefits, and fail to understand they are surrendering principal,” says Mr. Stolper.

Of course, charity begins at home. Money managers aren’t exactly volunteering their services.

Fidelity’s Gift Fund, for instance, has a yearly administrative fee of 1% of assets under management, plus the operating expenses for the mutual funds.

Vanguard has brought its low-cost advantage to the market, charging a yearly administrative fee of 0.45%, plus mutual fund charges.

sticking with advisers

But American Guaranty, which oversees $600 million in personal trust assets, is sticking with its traditional distribution venue, financial advisers. Consequently, the company — which filed its IRS application in January 1997 — charges a lot more.

American Guaranty isn’t shy about touting the commissions it plans to offer to advisers who bring in donations to its proposed American Gift Fund: a 1% upfront commission and a 0.75% yearly fee, which represents half of the fund’s 1.5% investment management fee. Donations will also be subject to a 1% yearly administrative fee. Contributions will be invested in the firm’s common trust funds.

workman worthy of his hire

The commission “pays a lot of bills, doesn’t it?” says Jeffrey Lauterbach, chief executive officer of American Guaranty & Trust, which is part of the Sentinel Cos. — a joint venture between National Life of Vermont, Provident Mutual Life and Penn Mutual Life. “Advisers deserve to be compensated for their services,” adds Mr. Lauterbach.

Still, some competitors, such as the old-line Pitcairn Trust Co., are put off by the idea of advisers collecting commissions on charitable contributions.

“We are here to increase philanthropy, not to shunt off (commissions),” says Paul Irwin, a vice president at the Jenkintown, Pa.-based money manager, which launched its National Philanthropic Trust in late 1996.

Mr. Irwin says that unlike other such charities, Pitcairn’s isn’t intended as a vehicle for hoarding assets. It allows donors to earmark outside money managers to run their contributions, although Pitcairn currently manages almost all of the $13 million in the program.

Maybe that’s because it has set the bar a bit higher than competitors, requiring $100,000 minimum donations.