Advisers recommending direct 529s — and foregoing commissions

Lower fees, tax bennies are top reasons, new survey finds

Feb 11, 2013 @ 9:18 am

By Liz Skinner

Most financial advisers recommend that their clients invest in direct-sold 529 college savings plans — even though they don't earn a commission as they would by putting clients into adviser-sold accounts.

About 60% of all financial advisers and 84% of those who are registered investment advisers send clients to direct-sold plans, according to survey results released Monday by Financial Research Corp. The survey of 293 advisers is the first to quantify how advisers are contributing to an increase in assets flowing into direct-sold plans.

“It's not just fee-based advisers sending clients to direct plans; it's a wider issue than people may have originally thought,” said Paul Curley, director of FRC's college savings plan research. “Advisers are having more influence on the whole 529 market.”

About $83.3 billion sits in direct-sold 529 plans, compared with $80.3 billion in adviser-sold accounts. And the percentage of funds flowing into direct-sold plans has been outpacing the adviser channel since the third quarter of 2010.

Lower fees and in-state tax incentives are the top reasons advisers offered for why they chose to recommend direct-sold plans. About 22% also said the compensation of adviser-sold plans doesn't match the amount of work and time involved.

Of the 37% of the advisers who said they never recommend direct-sold plans, almost half said it is because there are no commission trails on those products and about a third said it's because adviser-sold plans usually have better investment choices, the survey said.

Nearly two-thirds of the respondents said that more than 20% of their 529 clients open other accounts, such as rollovers.

Financial adviser Deborah Fox, founder of Fox College Funding, said she believes the direct-sold plans are the best choice for investors. Specifically, she often recommends Utah's Educational Savings Plan because of its low fees, the funds it offers from The Vanguard Group Inc. and its flexibility of allowing particular investment changes within the portfolios.

“It's very attractive because right now we feel bonds should be underweighted because of risk in the near future,” she said. “We usually start with a Vanguard portfolio then tweak it to our liking.”

Advisers didn't comment on performance expectations but direct-sold plans came out slightly ahead in an FRC review of which plans performed better over one year, three years and five years. Last year, adviser-sold plans returned an average of 9.5%, compared with an average of 9.7% for direct-sold plans.

Other products that financial advisers recommend for college savings include trusts, mutual funds or exchange-traded funds, prepaid 529 plans, insurance products with a cash value, cash, or other banking products. Advisers crafting an overall plan to pay for college typically use three products, according to the survey.


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