Donor-advised funds still continue to attract money from people who want to give to charity-but not as much as they did before the market downturn.

The funds, offered by many financial institutions, are individual charity accounts that enable investors to realize tax benefits while creating their own philanthropic legacy with as little as $10,000. Investors have found them very appealing. For example, the National Philanthropic Trust, an organization that administers charitable grants from donor-advised funds at several brokerage firms, grew 53.3% from 2000 to 2001, according to The Chronicle of Philanthropy. The Schwab Fund For Charitable Giving grew 125.5%.

But since most donor-advised funds are created with appreciated stock, the stock market downturn has put a damper on the value in these funds, says Ken Ziesenheim, president of Thornburg Securities Corp., which runs the National Charitable Gift Trust.

"We weren't in the market a year ago, but I've talked to a lot of my competitors and friends, and they all tell me the cash flowing into their respective charities has slowed down significantly," he says. "I think it's a natural inclination. When people's assets are going down instead of up, there's a reluctance to give them up."

Ziesenheim says the ultra-wealthy will always be philanthropic, regardless of the market environment. It's the mass affluent who were opening these funds in a big way in the late 1990s, and it's the mass affluent who were likely the most hurt by the market downturn, he says.

But Cynthia Egan, president of the Fidelity Charitable Gift Fund, disagrees that demand for the product has ebbed. The popularity of the funds has remained the same, with the number of new funds being created remaining stable, she says. The actual dollar amount of those funds, however, has shrunk, and more people are opening accounts with cash rather than appreciated securities, she says. The average fund three years ago was opened with $100,000. Today, it is $75,000. And where 75% of the new funds last year were opened with appreciated securities, that number is now about 50%, she says.

"Donor-advised funds are really a model whose time has come and will continue to grow," Egan says. "But we recognize that the pace, in terms of dollar amount, will see more of a slowdown."

The funds work like this: Individuals set aside cash or appreciated securities, put them into a fund, and the individual can grant the money over time to his or her favorite charities. In the meantime, the funds are held in investment accounts that usually are pooled together with the assets of other individuals who have established donor-advised funds, and the assets accrue in value. The investor cannot access the funds or investment returns once the account is created.

The product has been around for decades. But it wasn't until Fidelity Investments unveiled its program 10 years ago that Wall Street took notice. Today, there are more than $12 billion in assets sitting in these funds, according to The Chronicle of Philanthropy, and banks, brokerages and mutual fund firms are launching new programs every year. Even organizations like Rotary International, the association for rotary clubs, began selling donor-advised funds in April. It has already amassed $500,000 in assets.

"We wanted to help Rotarians achieve their charitable goals. We knew if we didn't help them do that, they would go to other institutions," says Eric Schmelling, planned giving supervisor for Rotary International.

Among the mutual fund companies offering donor-advised funds are The Vanguard Group, Eaton Vance Corp., T. Rowe Price Associates and Franklin Templeton Investments. Most of the major Wall Street brokerages now offer them, though Credit Suisse First Boston, Legg Mason, J.P. Morgan Private Bank, American Express Co. and Morgan Stanley have partnered with GivingCapital to offer them. GivingCapital has a public charity called the National Philanthropic Trust, which is registered under section 501c(3) of the federal tax code and administers the grants. GivingCapital handles the funds' technology, accounting and record-keeping.

But Fidelity's program is the granddaddy of them all, housing some $2.6 billion in assets. The Fidelity Charitable Gift Fund is the second-largest charity in the country after the Salvation Army.

"We've been at it for 10 years, but it's really been in the last five years that the enormous growth has happened and the product has caught the interest of other organizations," says Egan of Fidelity. "For us, it appeared to be the perfect marriage of technology, the mutual fund concept of pooling, and charitable giving."

Donor-advised funds are like the gift that keeps on giving. Financial institutions that offer them receive fees of 1.25% to 1.5% for investing an individual's assets until they are donated. That's no small number, given that typically only 10% to 20% of a donor-advised fund is invested each year. In fact, most funds have a shelf life of about 12 years. That's long, in Wall Street years. The average holding for a mutual fund, for instance, is about three years.

"The product is attractive to asset management firms. They get $100,000, on average, and those assets stick around for a time," says Christopher Blunt, GivingCapital's CEO.

The charitable trust, the most important component in the donor-advised-fund food chain, receives administrative fees of anywhere from .75% to 1.25% for handling the grants. And the charities themselves receive philanthropic dollars from investors who might not have been so generous before.

As for the investor, if the fund was created with stocks or bonds that have appreciated in value, the investor does not have to pay capital gains on those securities, provided they have been held for more than a year. Investors are also able to deduct the full value of those securities from their gross adjusted income, provided they don't account for more than 30% of that income. Investors who contribute cash can take a tax deduction of up to 50% of their gross adjusted income. Contributions in excess of the allowable yearly deduction can be carried forward for five years.

"That's a big part of the appeal," Blunt says. "Not only do they get the charity deduction but they get the capital gains avoidance."

Investors also can use the fund in novel ways to reduce their estate and thus reduce the amount of estate taxes their heirs will have to pay. Kim Wright-Voilich, president of The Schwab Fund For Charitable Giving, says Schwab had a client who was terminally ill and wanted to reduce the size of his estate very quickly so that his heirs could avoid paying a lot of estate taxes. He started up a donor-advised fund using his IRA. By getting the IRA out of his estate, he reduced the dollar value of the assets being transferred and thus lowered the rate at which the whole estate was taxed.

"Advisors have to look for much more strategic and unusual ways to offset their client's tax situation and their estate-planning strategies," says Wright-Voilich, noting the firm also has opened up donor-advised funds with life insurance, charitable remainder trusts and restricted stock. "We're seeing more of an influx of unusual contributions. That's been one of our niches."

For the advisors who help investors create these accounts, donor-advised funds serve as a relationship-builder. That's because philanthropic decisions are personal ones, potentially taking the dialogue between advisor and client to a new level. It also gives advisors something to discuss with their clients other than the markets-a welcome diversion in today's environment.

"You can't get into a discussion about this without getting into a discussion about values, and that deepens the relationship," says Wright-Voilich.

Even more compelling for advisors is that many clients name their children as executors of the fund after they die, creating a bond between the advisor and the client's children. Advisors are always looking for ways to cultivate that next generation.

Blunt of GivingCapital says he has a donor-advised fund and already uses his two children, ages 6 and 7, as advisors. He says the family uses Thanksgiving as a time to think about giving, and he solicits suggestions from his children about where the money should be spent.

"They usually suggest charities like the Pokemon Relief Fund," Blunt says. "We hope over time the suggestions will get more creative."

Financial firms usually offer investors a handful of options in which to park their money before it is distributed to charities, from money market funds to growth funds and index funds. The investment pools are sometimes a mixture of several funds, like American Express' Diversified Value pool, which invests 33% of the pool in the firm's AXP Equity Value Fund, 33% in the AXP Partners Fundamental Value Fund and 33% in the AXP Partners Value Fund.

But like most stock funds these days, returns have not been great. Credit Suisse's Capital Appreciation Fund, for instance, returned -24.7% in the first half, according to the Jewish Communal Fund, a New York-based donor-advised fund that offers the Credit Suisse fund as an investment option. Neuberger Berman's Focus Fund lost 18.1%, and Merrill Lynch's Fundamental Growth Fund lost 17.6% in the same time period.

FJC, a New York-based foundation of donor-advised funds, offers an unusual option: a loan fund. The fund, which currently has about $30 million, lends money to nonprofit organizations that either can't get credit or are waiting on financing. Repayment of the loans are guaranteed by a pool of U.S. Treasuries, which would be sold if the creditor defaulted. Among the creditors have been the Folksbiene Yiddish Theater, the oldest Yiddish theater in the country, and the John A. Reisenbach Charter School in Harlem, named for a 33-year old advertising executive who was murdered in 1990 while speaking on a public phone in Greenwich Village.

"There are a lot of charities that can't get loans. If our donors choose, they can invest a portion or all of their money in this fund," says Betsy Seidman, executive director of FJC.

But Seidman says most donors these days are keeping their funds in cash, as they are leery of the stock market right now.

With all the advantages donor-advised funds provide, it's not surprising the financial services industry wanted in-nor is it surprising that the product has largely been supply-driven. That is, it was not created because of a hue and cry from investors. Rather, financial institutions are launching these programs on this theory: If they build it, investors will come. So far, they have.