Learn Pros, Cons of Using a Financial Advisor for College Savings
A client who walks into Maureen and Dan Crimmins' wealth management firm won't get the hard sell to purchase a college savings plan from their office.
In fact, the Crimmins say their clients won't get any sell at all. Instead, the couple, who operate a fee-only financial advisory firm in New Jersey, like to direct clients to investment vehicles they can purchase and manage on their own.
College savers looking to open tax-advantaged accounts known as 529 plans have two choices: direct-sold plans, where they open the plan themselves and choose their own investment options, and advisor-sold plans, distributed through financial advisors.
"We usually really stress the self-directed 529 plans that the states offer," says Maureen Crimmins. "There's so many to choose from and there are really good products out there that have low fees. You kind of set it up and leave it alone and have it grow."
[Ask these four questions before opening a 529 plan.]
Yet many investors choose to work with financial advisors. Advisor-sold plans make up about 48 percent of the market share, according to a recent report from investment research firm Morningstar . Here are some pros and cons to using an advisor.
Pro: An advisor can help complete the financial picture. A financial advisor can help an investor with college savings, retirement accounts, estate planning and other goals, says Crimmins. In addition, 529 plans aren't the only option for college savings, and an advisor could direct a client to a lesser-known vehicle such as a Coverdell Education Savings Account or Uniform Transfer to Minors Act account.
"No client is the same," says Crimmins. "Everyone is different. Everyone has a different financial picture that we try to get a good grasp of. There are different vehicles. There are different ways to make sure they're doing the best they can."
[Discover three myths about college savings plans sold by brokers.]
Still, that doesn't mean a college saver needs to purchase a plan from that advisor. Fee-only financial planners are required to act in the best interest of a client, and are not driven by a specific product.
Con: Advisor-sold plans are more expensive. The average advisor-sold plan costs investors 1.36 percent a year, compared with 0.43 percent for direct-sold plans, according to Morningstar.
Those additional fees can eat away at returns and negate any advantages that a financial advisor might bring, says Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a website with information about paying for college.
"The key here is to avoid those higher fees," he says. "Maybe your gross return isn't as good (with direct-sold plans), but your net return will be better. And that's what fundamentally matters."
[Learn how to minimize four potential drawbacks of 529 plans.]
He recommends investing in funds where the fees are less than 1 percent.
Some advisors who earn a commission may also recommend plans that will pay them the most, not necessarily those in the college saver's best financial interest.
"You don't want your investment advisor to be steering you to the plans that benefit him as opposed to benefiting you," Kantrowitz says.
Pro: Advisor-sold plans offer more options for investors. According to Morningstar, plans sold by advisors typically provide about double the "static" options, meaning portfolios that do not automatically change their mix of stocks, bonds and other assets as the beneficiary ages.
The idea is that a professional advisor could customize the plan, making investment choices that take into account the investor's total portfolio, not just what's going into the 529, says Leo Acheson, analyst at Morningstar.
However, investors should keep in mind that the IRS only allows them to make changes to their 529 investment holdings twice a year.
Con: It's not "rocket science." Over a 17- or 18-year time period for college savings, active management is not necessary, Kantrowitz says, and may not be advantageous. Being in an age-based plan -- which typically starts out with a more aggressive mix of assets and becomes more conservative over time -- can be more beneficial in the long run, he says.
"Most investment advisors will not beat consistently, year in and year out, broad stock market indices," he says. "You may have an investment advisor beating averages for a couple years, but you're not going to do it for 17 years consistently."
Investment advisors can be good for coordinating an entire portfolio of investments and for meeting goals, but opening a direct-sold 529 plan "isn't rocket science," he says.
Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.
Deborah Ziff is a Chicago area-based freelance education reporter for U.S. News, covering college savings and 529 plans. You can follow her on Twitter.
