Advisers recommend direct 529s, forgoing commissions

About 60% of all advisers and 84% of those who are registered investment advisers send clients to direct-sold plans

Feb 17, 2013 @ 12:01 am

By Liz Skinner

Most financial advisers recommend that their clients invest in direct-sold Section 529 college savings plans, even though they don't earn a commission.

About 60% of all advisers and 84% of those who are registered investment advisers send clients to direct-sold plans, according to survey results released last 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.

“Advisers are having more influence on the whole 529 market,” said Paul Curley, director of the FRC's college savings plan research.

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 that advisers offered for why they choose to recommend direct-sold plans. About 22% also said that the compensation of adviser-sold plans doesn't match the amount of work and time involved.

BETTER CHOICES

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

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, thinks that 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,” Ms. Fox said.

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 advisers recommend for college savings include trusts, mutual funds and exchange-traded funds, prepaid 529 plans, insurance products with a cash value, cash, and other banking products.

Advisers crafting an overall plan to pay for college typically use three products, according to the survey.

lskinner@investmentnews.com Twitter: @skinnerliz

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