The shrinking asset base among some funds has led to talk of consolidation in an industry accustomed to growth in recent years. "People are responding with concern and pause, and that's what they should be doing," says Heisman of the National Philanthropic Trust. "The larger companies are in it for the long haul. I think some of the smaller programs will likely be rolled into others. It takes a lot of time and education to market this product to the financial advisor community, and some of these newer programs didn't market their products enough."

A New Look For Foundations

For donors who want more hands-on control over their philanthropic activities and don't want their ultimate decisions approved by an outside board such as with donor-advised funds, then foundations are an attractive option.

Foundations come in two flavors: private and public. Public foundations have similar tax breaks and organizational structures as private foundations, but must get their funding from public sources. Community foundations, which generally funnel money to charities in a local area and are prime recipients of donor-advised funds, are a good example.

Private foundations are divided into three classifications; the vast majority fall into the private non-operating foundation category. These typically consist of individuals or families who focus on making grants to charities or individuals, and are often referred to as family foundations. They have their own trustees and board of directors, which often include family members.

Family involvement and the opportunity to create a family legacy, along with tax breaks and the chance to have a direct influence on a charitable cause, are among the chief selling points of private foundations. The drawbacks include the need for full-time staff to oversee grant distribution, handle accounting that includes excise taxes and the complicated 990-PF federal tax form, and to make sure the foundation fulfills requirements to distribute at least 5% of its assets annually. Accountants and attorneys are needed to get things up and running; it may cost more than $10,000 to set up a private foundation. Maintenance fees can reach 5% of assets. Generally, it isn't cost-effective to establish a private foundation unless a donor has at least a few million dollars in assets.

These kinds of headaches and expenses soured some high-net-worth people on private foundations, moving them to donor-advised funds or other philanthropic options. Into this void two years ago stepped Foundation Source, a Norwalk, Conn.-based outfit that aims to streamline the process of setting up and running private foundations. With a comprehensive Web site and on-call staff, the company provides a range of services that includes back-office administration, grant management, advice on foundation rules and access to research on more than 750,000 charities.

Foundation Source works with accountants and attorneys to help them establish private foundations, and it has forged relationships with financial institutions such as National Advisors Trust and Bank One to make this product available to their advisors. An initial investment of $100,000 is all that's required in many cases (some partners, such as Bank One, require a $250,000 minimum, with start up costs not exceeding $5,000 and total annual maintenance fees of 2% or less.) The company recently had 63 foundations under its wing, with another 100 or so in the pipeline. It expects to have assets under administration of $350 million by year-end.

Foundation Source's early success wasn't lost on Fidelity, which last year launched its own private foundation program with many of the same streamlined services of Foundation Source. However, it recommends an initial investment of $750,000 to justify the costs of creating and maintaining a foundation. "We saw a tremendous opportunity here because the awareness of giving vehicles, including private foundations, is very low," says Andrew Tappe, senior vice president for Fidelity Charitable Services. "We figure only about 15% of high-net-worth households in the U.S. use or are aware of charitable giving programs. I think that awareness level is similar to the awareness level of retirement vehicles in the early 1980s."

Will Fidelity's private foundation product spur other mutual fund companies to enter the fray much like its donor-advised product did in the early '90s? "We're talking to some of those companies now about forming partnerships," says Foundation Source CEO Doug Mellinger. "For the most part I don't think fund companies are set up for the private foundation world as they were for the donor-advised world. They don't have as much of a direct relationship with high-net-worth individuals. Private banking organizations, wealth management brokers, high-end financial advisors, attorneys and others have been the traditional conduits for private foundations."

None of that will matter much if New York state Attorney General Elliot Spitzer has his way. In addition to his well-publicized campaign to clean up abuses on Wall Street, Spitzer is proposing changes that would affect some charitable giving and put the clamps on the formation of small private foundations of $20 million or less.