By Todd Cohen
Two big financial-services firms have begun marketing a new product that lets wealthy clients set up and run their own foundations.
Created by Foundation Source, a philanthropic-services firm in Norwalk, Conn., the product is being offered to clients both by Chicago-based Bank One and by professional advisers served by TD Waterhouse Institutional Services, a division of online Wall Street brokerage TD Waterhouse Group that provides back-office services for independent financial advisers.
Foundation Source features both a Web-based “application service provider,” or ASP, that offers a full range of accounting, processing and compliance functions a foundation board and staff would need, as well as back-office administration and philanthropic consulting, says Doug Mellinger, chairman and CEO of Foundation Source.
“High-net-worth people get an efficient platform for new foundations, and focus their efforts on philanthropy, not administration,” says Mellinger, an entrepreneur and venture capitalist who has launched a number of technology and financial-services firms.
“And the financial institutions are able to give a very highly value-added product to high-net-worth customers that is a total turn-key solution, and to manage their assets,” he says.
Bank One, for example, is offering the new product, which it brands as its “private client foundation,” through private bankers, trust officers and investment specialists in its private client services unit, says Bill Brownson, managing director of philanthropic services in Columbus, Ohio, for Bank One.
“Until now, private foundations have been for the limited few who had both substantial means to create them and means to take care of them going forward,” he says.
The new product, he says, will help “democratize the private foundations, and we can make it available to a much broader audience than had had access to it until now, not just on the basis of means, but also on the basis of efficiencies that people expect in their financial solutions today.”
Bank One introduced the product internally in the first quarter of 2002, and already has used it to help two new clients create private foundations.
The bank, which is targeting households with a net worth of $1 million or more for the new product, administers $20 billion in charitable assets, including $3 billion it also manages through its private client services division for 1,000 charitable trusts, 700 private foundations and relationships with more than 50 community foundations, Brownson says.
While Bank One offers Foundation Source directly to its wealthy clients, TD Waterhouse makes the product available to its network of 2,000 independent investment advisers who have $16 billion in client assets under custody at the brokerage, says Tom Bradley, the firm’s president.
A client opting to create a foundation could use Foundation Source to run it and would open a brokerage account with TD Waterhouse, with the adviser managing the assets using TD Waterhouse’s internal back-office system, Bradley said.
“From the advisers’ and clients’ standpoints, the real key here is they maintain control of how the assets are invested,” he says.
Foundation Source spent two years developing the product, mainly the back-office technology to handle functions such as assigning grantmaking authority to board members, making grants, writing checks, processing regulatory compliance forms, reconciling all financial transactions, preparing tax forms and paying excise taxes.
“All transactions inbound and outbound happen electronically,” says Mellinger, who adds that lawyers, accountants and others on his staff conduct “quality-control” reviews of all documents a foundation generates using the software system.
Foundation Source, which expects to have 10 major firms as clients by September, has raised $3 million and is completing another $3 million to $4 million in financing, says Mellinger.
Software code-writers in the former Soviet republic of Uzbekistan, working for roughly one-fifteenth the pay of code-writers in the United States, have done the equivalent of $5 million to $6 million of work for Foundation Source, which has used its technology office in New York to design and manage the development of its software, Mellinger says.
The firm’s staff of 23 will roughly double by the end of the year, he says.
To help foundation clients conduct research, Foundation Source has developed and organized a database of more than 700,000 charities drawn from the Internal Revenue Service database. And the firm has signed a deal to include in its own database tax and financial data from the GuideStar database on nonprofits.
The firm also is developing philanthropic content for its clients and a network of philanthropic experts to advise them.
The underlying idea, says Mellinger, is to provide the back-office tools and staff to run the foundation, as well as the research, resources and experts to help people learn about and practice philanthropy.