A fund raiser at a Philadelphia cancer organization has roiled the charity world as he campaigns against what he calls “blatantly unethical” fees paid to financial advisers who set up donor-advised funds.
Bruce Makous, a major gifts and planned-giving officer at the American Association for Cancer Research, says that many stockbrokers, money managers, and other financial advisers have a conflict of interest because they earn fees by steering donors to the funds, particularly those managed by commercial investment firms, and helping donors invest assets in the funds. As a result, he says, advisers don’t always present donors with the full range of giving options available -- some of which might make more sense for them financially and produce more money for charity.
“Donors’ rights are being violated,” says Mr. Makous. “They have the right to have fully independent advisers giving them unbiased recommendations. There are many options available to potential donors for establishing a donor-advised fund, but this practice establishes a definite bias to a specific fund.”
Few fund-raising or financial experts agree with Mr. Makous’s contentions. But his views have attracted attention, in part because they come at a time when donor-advised funds, which hold more than $13-billion in assets according to a Chronicle study, are under scrutiny in Washington.
Donor-advised funds are like charity checking accounts; the donor puts money into the account, gets a tax break, and then gets to earmark the money for particular groups. While community foundations have offered the funds since the 1930s, they became especially popular in the early 1990s when financial companies like Fidelity Investments and Charles Schwab & Company started offering them.
The Senate Finance Committee and the Internal Revenue Service have been looking into how the funds are run, and lawmakers expect to propose legislation soon to regulate the funds. Senate aides say they are concerned about conflicts of interest surrounding the creation and distribution of money in donor-advised funds. Today, few regulations or laws specifically apply to them.
Fund-raising experts and officials at financial institutions that work with charities and donors say Mr. Makous is calling attention to problems that do not exist. They note that ethical codes of major fund-raising associations say it is acceptable for professional financial advisers to be compensated through the percentage of assets they manage, as long as they are not charging unreasonable amounts compared with other advisers.
Financial advisers “don’t wake up in the morning and say, ‘I know I can get rich by getting all my clients to transfer their assets into our donor-advised fund.’ That’s just not how it works,” says Eric Swerdlin, chief executive officer of ChesterCAP, a Cedar Knolls, N.J., planned-giving consulting company that is developing software to help charities and financial advisers set up donor-advised funds more easily.
Going Public
Mr. Makous says he first became aware of potential ethical problems with donor-advised funds when an educational organization he worked for in the 1990s was considering creating such a fund with a commercial investment firm, and he examined funds offered by several companies.
That experience led Mr. Makous to approach the Association of Fundraising Professionals and the National Committee on Planned Giving about three years ago with his arguments.
Although leaders of both groups have discussed the concerns he has raised, he says, “neither is moving fast enough” to adopt new guidelines or take other steps he thinks could help prevent ethical abuses. As a result, Mr. Makous says, he decided to air his arguments in other public forums.
Last month, Trusts & Estates magazine, a publication widely read by lawyers and advisers to donors, published an article by Mr. Makous outlining his arguments.
In the seven-page article, Mr. Makous urged people who shared his concerns to join a group of donors, fund raisers, financial advisers, and others who want to educate donors about their rights and call attention to unethical practices.
He also sent a news release to at least two dozen major newspapers and magazines summarizing the article. And Mr. Makous sent many reporters a packet of follow-up materials, including a glossy photograph of himself and promotional materials about a mystery novel he wrote that he says is related to his fund-raising career.
In the Trusts & Estates article, Mr. Makous wrote that financial advisers who set up donor-advised funds are in essence serving as charitable solicitors, and should have to follow the same ethical and legal rules as fund raisers. He says that when advisers receive annual fees based on the percentage in a donor’s account, the fees are sometimes higher than can be justified. That money, he says, should instead go to charity.
What Mr. Makous calls “most outrageous” is when advisers receive a fee simply for bringing money into a donor-advised fund. Those fees, he said, should be regarded as finder’s fees, which are forbidden by ethics codes that govern fund raisers. Fund raisers say they do not want donors to think a solicitor has a financial interest in steering money to one cause over another.
Mr. Makous says that as many as one-third of the more than 80,000 donor-advised accounts in the United States raise ethical concerns because of the types of fees paid, but he declines to name any companies that he believes have violated ethical standards. He says that he fears he could be sued if he singles any companies out.
He recommends possible ways to prevent problems, including requiring financial advisers to register in states that demand that charitable solicitors do so; limiting upfront and management fees for commercial advisers; and ensuring that donor-advised funds are not managed by the same people who handle the donors’ personal assets.
“The active solicitation of these gifts is what is making me uncomfortable,” says Mr. Makous. “What you have here is a sweetheart deal among brokers to steer assets into their own gift funds. Donors should have an option, and their adviser should give them a list of funds to choose from. At the very least, the donor’s adviser should not be managing the same money before and after the gift is made.”
In many arrangements, advisers who manage clients’ personal assets continue to earn a percentage of any assets those clients move into a donor-advised fund.
The fees paid by financial institutions vary. At Fidelity Investments, which has $3.1-billion in donor-advised-fund assets -- more than any other charity or company -- advisers who help clients set up a Fidelity donor-advised fund annually receive 0.25 percent of the amount in a donor’s account.
At Eaton Vance Managed Investments, financial advisers who work for the company receive an annual “fund-raising fee’’ of 0.2 percent of the amount in a donor’s account. They also get 1 percent of the amount in the funds annually for the work they put into helping donors with their charitable accounts.
Some charitable institutions also pay what some regard as finder’s fees. Professional advisers who steer funds to the National Heritage Foundation, a Falls Church, Va., charity, are paid a one-time fee of 1.25 percent of the amount contributed to a donor-advised fund. Officials affiliated with the organization defend those fees.
“Financial professionals have provided bona fide services such as assisting clients in understanding contributions, tax-advantaged ways to give, and the most appropriate vehicles,” says Mackenzie Canter, a Washington lawyerwho represents the foundation. “They are compensated modestly.”
The IRS, he notes, has held that as long as compensation is reasonable, it is not illegal for advisers and fund raisers to accept finder’s fees, even if they are regarded as unethical by some organizations.
Representatives of financial companies say Mr. Makous has unfairly criticized them.
“As long as advisers are disclosing the fees and not making their fund sound like the only solution, I think it is fine for the adviser to offer a particular fund or program,” says David Ratcliffe, who oversees marketing at Merrill Lynch, which holds $467-million in donor-advised funds, “You cannot fault an adviser for offering a limited number of options if it meets the client’s objectives.” Merrill Lynch pays its advisers 0.5 percent of the assets in a donor-advised fund during its first year of operation and 0.3 percent of the assets in each year after that.
‘Lot of Hyberbole’
Others involved in fund raising and the creation of donor-advised funds also say Mr. Makous concerns are unjustified. Not only are abuses rare, they say, but financial advisers should be applauded for helping to channel more money into charitable funds.
“It’s hard to see what he’s going after,” says Tom Cullinan, an Omaha, Neb., planned-giving consultant who has advised many community foundations on donor-advised funds. He describes Mr. Makous’s article as “a lot of hyperbole and unsubstantiated allegations.” He adds: “The only point I can agree with is a potential for abuse -- where the charitable arm of a financial firm puts advisers in the unethical position of asking for a donor-advised fund deposit that is inappropriately large or too early in the donor’s life, given that person’s financial circumstances. But I haven’t seen any abuse.”
Professional Associations
Officials at the professional fund-raising organizations that Mr. Makous has pressed to take action also say they have seen little evidence of abuse.
“He raises some legitimate concerns about how this could be abused, but portrays it as more of a problem than it is,” says Frank Minton, a Seattle planned-giving consultant who serves on the ethics committee of the National Committee on Planned Giving.
The Association of Fundraising Professionals three years ago asked Mr. Makous to gather fund raisers and other experts to look into the issue. Association officials say that the organization may decide to investigate the matter further, but they question whether their association, which represents fund raisers who work for charities, not companies, could help curb abuse by commercial advisers -- even if abuse were found.
“Most of the people who would be involved in the unethical practices he alleges are not members, and we have no jurisdiction over them,” says Eugene R. Tempel, executive director of the Center on Philanthropy at Indiana University and chairman of the association’s ethics committee.
Mr. Makous says that his interest in and commitment to preventing abuses with donor-advised funds remains high, although he left the association’s group of experts two years ago to finish his novel, which was published last year.
Meanwhile, those who disagree with Mr. Makous continue to hold the belief that his contentions about donor-advised funds are as fictional as his book. The murder mystery, Riding the Brand, was inspired by Mr. Makous’s efforts to raise money from entrepreneurs and draws connections between the venture-capital loans they receive and organized crime.
Mr. Makous’s article in Trusts & Estates is available to subscribers of the magazine at its Web site (http://www.trustsandestates.com). Mr. Makous has also posted the article on his personal Web site (http://www.brucemakous.com).