BOSTON — The Schwab Charitable Fund is nipping at the heels of the Vanguard Charitable Endowment Program as the nation’s second-largest donor-advised fund.
The roughly eight-year-old fund, an independent public charity founded by The
Charles Schwab Corp. of San Francisco, had assets of $1.54 billion as of last Monday. The Vanguard Charitable Endowment Program, a similar charity started in 1997 by
The Vanguard Group Inc. of Malvern, Pa., meanwhile, totaled $1.63 billion.
Both funds significantly lag the 16-year-old Fidelity Charitable Gift Fund, which was founded by Boston-based
Fidelity Investments and has more than $4 billion in assets.
From 2000 to 2006, the Schwab Charitable Fund had a compounded annual growth rate of 59.7%, according to its president, Kim Wright-Violich. On a fiscal-year basis from June 30, 2000, through June 30, 2006, the compounded annual growth rate for the Vanguard Charitable Endowment Program was 38.53%.
Helping to fuel the Schwab Charitable Fund’s growth is a program implemented three and a half years ago that allows clients to recommend investment advisers to manage the money they have donated to their donor-advised account at the fund, Ms. Wright-Violich said.
“We were the first national donor-advised fund to allow investment advisers to manage assets in a donor-advised-fund account,” said Ms. Wright-Violich, who noted that while donor-advised funds in general are growing rapidly, “we have had a disproportionate amount of growth because of that piece of it.”
New versus old
Historically, the model for donor-advised funds has been to give clients a family of mutual funds from which to choose, and allow them to recommend that their contributions be invested in one or more of those funds. Now — particularly with higher-balance accounts — people want more choices, Ms. Wright-Violich said.
“If you have a $1 million or less in your donor-advised fund, maybe having the option of a variety of mutual funds in your donor-advised fund is fine,” she said. “But if you have $50 million in your donor-advised fund, you probably want to have a more customized approach to investing.”
While a client can recommend an adviser, the Schwab Charitable Fund must approve the recommendation, Ms. Wright-Violich said.
“We’ve got investment guidelines that an adviser must adhere to,” she said, adding that the fund monitors investment performance and that the contract is between it and the adviser, not the donor and the adviser.
“So if the adviser for any reason doesn’t perform well, then we actually have the authority to fire them,” Ms. Wright-Violich said.
The Schwab Charitable Fund sets the fees investment advisers can charge to manage the money, and it maintains a 1-percentage-point cap on those fees. Most advisers charge “significantly less,” Ms. Wright-Violich said.
The Vanguard Charitable Endowment Program does “a beautiful job,” she said.
While Ms. Wright-Violich doesn’t want to “make too big a deal” out of the possibility of claiming the No. 2 spot, she is proud of her fund, given that it is difficult to bypass competitors, she said.
“The reason it’s very hard to go from third or fourth or fifth to first or second is because the base of donors that you already have gives new money every year,” she said. “It’s very hard to catch up and outgrow somebody.”
For example, Fidelity brought in nearly $1.3 billion of new donations last year, but just $300 million of that came from first-time donors, Ms. Wright-Violich said.
The Fidelity Gift Fund doesn’t publicly disclose a breakdown of assets for new and existing donors, Fidelity spokesman Steve Austin said. The Schwab Charitable Fund brought in about $700 million last year, and $300 million came from new donors, Ms. Wright-Violich said.
Last June, Fidelity introduced its Charitable Investment Advisor Program, which allows independent investment advisers to provide discretionary investment management to the Fidelity Charitable Gift Fund for contributions made by the advisers’ clients.
The Vanguard Charitable Endowment Program, meanwhile, doesn’t allow advisers to continue managing money contributed by their clients and has no plans to change that rule, said its executive director, Ben Pierce.
If advisers are being paid fees to manage assets, questions could arise about whether the adviser has an incentive to retain those assets — and boost their fees — thus delaying the donation’s deployment to charity, he said. In addition, laws exist that require state registration for those who solicit charitable money, and it is possible that advisers could be deemed to be soliciting.
There is also fee transparency, Mr. Pierce said, adding that questions could arise surrounding the fee structure in place between the charity and the adviser.
“It potentially sets up just a murky situation,” he said.
Ms. Wright-Violich said that the Schwab Charitable Fund modeled its adviser program after the way other large charities such as colleges and universities run endowments.
“They hire independent investment advisers to manage those assets,” she said. “That is overseen by an investment oversight committee which monitors investment performance.”
