Finra's 529 push targets use of high-fee share classes

Regulators have been concerned about expensive 529 plans for some time, executives say

Jan 29, 2019 @ 4:26 pm

By Bruce Kelly

Brokers who gin up costs by favoring more expensive mutual fund share classes when selling 529 plans are at the heart of the ongoing concerns the Financial Industry Regulatory Authority Inc. has had about the plans, according to brokerage executives.

On Monday, Finra said it was targeting suitability violations centered on the types of 529 plans recommended to customers and asserted that brokers may be pushing high-fee share classes that don't fit clients' investment objectives.

Finra officials have been concerned about expensive 529 plans for quite some time, said the executives, who were speaking in New Orleans on an industry panel for the Financial Services Institute's annual OneVoice meeting.

"This has been on Finra's radar now for years; four years ago is when it first came up," said Katharine Michaels, vice president at Raymond James Financial Services Inc. Finra is targeting brokers' selection of mutual fund share classes, she added.

"We started beefing up our supervisory process around this," said Ms. Michaels. "We don't allow for C shares to be purchased if the beneficiary is 12 years or younger.Under the new tax change, you can now use 529 plans for primary education."

A 529 plan is a municipal security that allows tax-free savings for the future educational expenses of a beneficiary. Families have been using them for years to save for college tuition for their children. Last January, the IRS expanded their use to K-12 expenses.

The plans can be sold as Class A shares, which have a front-end sales charge but lower annual fees. They also come in Class C shares that do not have front-end sales charges but incur higher annual fees.

Thrivent Financial "strongly discourages" brokers from selling C shares in 529 plans, said Christopher Osborne, vice president and head of supervision at Thrivent. "In terms of C shares in 529 plans, we have very little of that, thankfully."

When a broker does make such a transaction, "we will stop [it] or follow up with the adviser to see what's going on and generally bust the trade in those situations," Mr. Osborne said.

It would take a "special circumstance" for a broker to sell a 529 plan using mutual fund C shares, he added.

(More: 7 best adviser-sold college savings plans ranked by Morningstar)


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