3 Myths About College Savings Plans Sold by Brokers
There are a few key things that families need to know about 529 plans, the tax-advantaged investment accounts aimed at helping families pay for education. Plans are approved by individual states, but the accounts still include investments that families can gain or lose money on.
There are two types of 529 plans: prepaid tuition plans and investment accounts that are similar to an investment account held with a financial professional.
With a prepaid tuition plan, families buy future tuition at today's prices directly from a state plan. The first prepaid plans were launched in 1988 in Michigan and Florida, says Betty Lochner, chairwoman for the College Savings Plans Network, while the investment-style accounts started in Kentucky in 1990.
The other type of account is essentially an investment account, similar to what would be held in a traditional investment account, with a mix of stock- and bond-based investments and cash, which could be saved in money market and savings accounts, for example. The main difference between a traditional investment account and a 529 plan is families can't buy individual stocks or bonds. They have to purchase stock or bond mutual funds instead.
[Weigh 529 plan ratings when choosing a college savings account.]
To invest in a 529 plan that isn't a prepaid tuition plan, families will either go directly through the plan or go to a financial advisor. Plans that are only sold through advisors or brokers generally have more flexibility in the individual mutual funds an account owner can choose, versus packages of mutual funds. Direct plans may offer an age-based option, for example, where the investments chosen gradually get more conservative as children get closer to college age.
If families select an advisor-sold plan, brokers or advisors could possibly receive a commission on individual transactions, such as a mutual fund purchase.
Families who choose to work with an advisor or a broker will need to know the truth behind these three myths.
Myth 1: There's a big difference between a "broker" and an "advisor."
False. Either a broker or an advisor can function as a financial manager. When choosing someone to work with, the decision shouldn't be based on which of these two titles he or she uses. It should be based on a number of questions and specific certifications, says Leonard Wright, a California-based certified public accountant and personal financial specialist.
Certifications come with ethics guidelines that go beyond what's required to be a broker or an investment advisor, says David Foreman, an Alabama-based certified financial planner. Examples of certifications that are helpful are certified public accountant, for families seeking tax advice related to college planning, and personal financial specialist or certified financial planner, for financial advice.
Myth 2: Everyone charges the same fees.
Mostly false. Wright's firm either charges a commission on transactions or doesn't charge anything, he says. Firms may not charge a fee to clients who are already investing other resources through the firm, he says.
Advisors who are recommending direct-sold plans to their clients in particular may not charge a fee. These plans are generally sold directly by the state and don't have a structure for charging commission, he says.
Some advisors will charge an asset management fee based on a percentage. However, others will charge commissions on a plan purchase as well as charging for buying and selling investments chosen, says Foreman.
[Learn about how parents are billed for 529 plans.]
Myth 3: There isn't a financial incentive for a broker or advisor to choose one plan over another.
False. There is a financial incentive for a broker to choose a plan with higher fees for opening or maintaining a plan, Foreman says. Before choosing whether to manage a plan yourself or to use a broker, think about whether you can choose investments on your own, he says. Often, this is easy to do because 529 plans offer investments in packages, such as age-based plans.
If you're paying anyone commission, it's important the broker or advisor is adding value, he says. The value added may be aligning the 529 plan with overall financial planning, choosing investments based on individual needs or continually monitoring the plan to make sure the investments align with the family's savings goals, he says.
[Take these steps before opening a 529 plan.]
Families should ask any financial professional they are considering working with whether he or she is getting a financial incentive, what the financial incentive is and what value is being added in return, Foreman says. Working with a broker or advisor who has a financial incentive to choose a 529 plan or make investment choices within a 529 plan is OK as long as the family is comfortable decisions are being made in their best interests, experts say.
It's also important to note that families can change brokers or advisors later on if they aren't happy with their service. Before choosing any plan a financial professional recommends, they can research plans at collegesavings.org.
Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.
Reyna Gobel is a freelance education reporter for U.S. News, covering college savings. You can follow her on Twitter or email her at reyna@graduationdebt.org.
