Inside Wealth: Philanthropy

Why naming rights for wealthy donors can be more than just bragging rights

Ric Edelman, chairman and CEO of Edelman Financial Services.
Heidi Gutman | CNBC

Among wealthy donors, gifting large sums to charitable organizations is widely considered a virtue that helps institutions thrive, and fulfills the adage of not being able to take it with you. So why do an increasing number of those gifts come with strings—or rather names—attached to them?

As it happens, according to some donors and institutions, naming rights are actually a great way for big donations to beget even bigger donations. Similar to the dynamic that prompts major brands to pay celebrities and athletes millions for endorsements, philanthropic naming rights can be lucrative for the institutions on the receiving end of that cash.

Charitable giving from individuals, foundations and businesses totals more than $350 billion a year, according to the latest data from the National Center for Charitable Statistics, and that public charities hold more than $3 trillion in assets. It underscores how donations to colleges, charities and cultural institutions are attracting vast sums from wealthy investors who expect the money to be used wisely—and sometimes expect top billing for the privilege.

All of which is just fine with the recipients, at least in most cases.

"You'll find those in the charitable world argue that naming rights help them raise money. This is why (big brands) are willing to get a celebrity for an endorsement deal," said Ric Edelman, founder of Edelman Financial Services, with $16 billion in assets, told CNBC in an interview. "At the end of the day, philanthropy is a big business."

Earlier this week, Edelman and his wife Jean announced a $25 million donation to a fossil park at Rowan University, the couple's alma mater. The gift was the second-largest donation in the school's history, and a record for an alumni donation. Edelman explained that in his view, giving a specific pledge for research and education was far more effective than funding an endowment.

"We've never understood why so many billionaires donate hundreds of millions of dollars to university endowments that already have tens of billions in them," he said. "I really don't know if Harvard, with $35 billion in its endowment, needs another $500 million in its kitty."

Still, countless numbers of charities "are trying to convince wealthy donors to contribute to them," Edelman said. "All philanthropies are going after a relatively small pool of donors. That's their form of currency."

Given that there may be some limitations based on the type of charity, or the funds they can accept, "they do the next best thing which is naming rights," he added.

A legacy to consider

Fundraisers have learned it is easier to raise money in the name of a donor and easier to raise money when others see that you have raised large gifts.
Ric Edelman
Founder, Edelman Financial Services
Sandy and Joan Weill
Ron Adar | Getty Images

Emblazoning the name of a big donor on a funding campaign comes with an undeniable amount of prestige, but it can also come with its share of controversies. Prominent figures like David Geffen—who donated $100 million to Lincoln Center to re-christen Avery Hall after himself—and Sandy Weill have stoked furious debates about the propriety of large gifts.

Last year, Sandy and Joan Weill found themselves embroiled in controversy after pledging $20 million to Paul Smith College in upstate New York in exchange for renaming the college after Joan Weill. After objections erupted from former students—and a lawsuit got filed—the couple decided not to move forward with the donation, sparking even more criticism.

Yet experts say that for rich individuals, big donations are sometimes a combination of vanity and legacy—with an emphasis on the latter.

Wealthy families want to "envision and put into place what their legacy is and what they want to do, and how to pass it to the next generation, and how that generation feels about that responsibility," said Paulina Mejia, a managing director at Atlantic Trust's wealth strategy group, with nearly $29 billion in assets under management.

"Philanthropy is a part of that legacy, and it incorporates various views into one overarching legacy," she added.

As a result, most want to ensure their funds are devoted to legitimate purposes, demanding that money comes with the appropriate strings attached. Wealthy families "don't want you renovating the dining hall" with the money, Mejia explained. "They want to see it's done some good, that it had an impact and was used for good purposes."

'A lot of good to be done'

Odilon Dimier | PhotoAlto | Getty Images

For his part, Edelman said he and his wife's thoughts were informed by exposing more children to science and technology. They were deeply resistant to the idea of affixing their name to a project—despite the fact the school already has a planetarium named after them.

However, Rowan University insisted on doing so. A university spokesperson confirmed Edelman's account to CNBC, calling the couple "very humble about those type of things" while insisting naming rights were helpful to the school's overall fundraising objectives.

"Fundraisers have learned it is easier to raise money in the name of a donor and easier to raise money when others see that you have raised large gifts," Edelman said. For that reason, organizations don't like anonymous gifts, because it doesn't highlight the generosity of individuals and may hamper the ability to raise more money, he added.

"Naming creates a peer pressure," said Elizabeth Boris, an Urban Institute fellow at Georgetown University's McCourt School of Public Policy. "The rationale behind a giving pledge like Bill and Melinda Gates is that wealthy folks had to be talked into giving, but its fulfilling," she said, also citing the Clinton Foundation as an example.

"You can do a lot of good, because there's a lot of good that needs to be done," Boris added.

--The Associated Press contributed to this article.