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COLLEGE SAVINGS 101

Annual College Savings Survey results: Direct- or advisor-sold 529 plan?
http://www.savingforcollege.com/articles/529-plans-direct-or-advisor-sold

Posted: 2014-03-20

by Kathryn Flynn

Looking to open a 529 savings plan but donít know where to start? 529 plans can be opened directly through the plan manager or through a financial advisor. According to our Annual College Savings Survey, many of our readers feel comfortable selecting their own investments and would choose a direct-sold plan. The right choice depends on your personal situation, but here are some key questions to ask yourself:

Could you use some help?

With more than 100 options available, itís no surprise that many families have a difficult time choosing the right 529 plan. Our Survey revealed that a large percentage of those who do not have 529 plans havenít even started saving for college. When asked why they have been putting it off, 53 percent claimed that they have not had enough time to research and understand all of the different plans available. If you fall into this category, you may want to consider working with a financial advisor who can recommend a suitable investment for your family.

529 plans are sold through registered investment advisors (RIA) as well as broker-dealers. RIAs typically charge a flat fee based on a percentage of assets for their services, and broker-dealers earn a commission on certain products they sell. Both are licensed professionals who are able to provide assistance based on your financial goals. Advisors can also provide information on whether or not your stateís plan offers additional tax benefits or financial aid incentives for residents. Most importantly, reaching out to an advisor is a simple first step toward opening a 529 plan. If procrastination is holding you back, give yourself a little nudge!

Find a 529 plan expert in your area!

Concerned about fees?

If so, you are not alone. According to the Annual College Savings Survey, the most common reasons for not wanting to work with an advisor have to do with paying fees and commissions. In most cases, you will indeed pay a premium for an advisorís services. To start, your plan will incur up-front commissions anywhere from 1%-5.75% of the amount invested. Annual asset-based expenses are generally higher as well. According to the Wall Street Journal, in the fourth quarter of 2013, the average advisor-sold plan charged 1.09%, compared to 0.54% for direct-sold plans.

Fortunately, there are ways to take advantage of the knowledge and guidance of a professional without the hefty price tag:

  • 529 plans are sold as different share classes, each with a different expense structure. An advisor can recommend the most appropriate share class for you depending on the amount you are investing and your time horizon.
  • If you have other investments such as a brokerage account or IRA you may be eligible for a reduced sales charge if your total amount invested in a particular fund family reaches certain breakpoints.
  • A fee-based financial planner may have access to fee-waived share classes.

On the other hand, fees for direct-sold plans are at all-time lows. This is largely because of the recent competition between investment managers to win state bids for contracts. Direct-sold plans also tend to use less expensive investment models. If price is your main concern, Savingforcollege.com features easy-to-use tools to uncover the lowest cost options.

Find out which direct-sold 529 plans have the lowest fees.

Looking for active management?

So why would anyone agree to pay more for a similar product? Advisors tend to sell more actively managed funds, which typically have higher expense ratios than index-fund based portfolios. In an actively managed fund, the investment manager invests in certain stocks with the intention of outperforming a benchmark. This type of investment can be risky, but offers potential for greater returns. Most direct-sold plans invest in passively managed funds, which attempt to mirror an index. Since they are not buying and selling stocks to try and beat the market, these plans are often much less expensive than their active counterparts.

Many who choose to work with a professional do so because of an existing relationship with an advisor they trust. If you already have someone managing your retirement account and other investments, it may make sense to let them handle your college savings as well.



Don't miss the other posts in this series!

Looking to open a 529 savings plan but donít know where to start? 529 plans can be opened directly through the plan manager or through a financial advisor. According to our Annual College Savings Survey, many of our readers feel comfortable selecting their own investments and would choose a direct-sold plan. The right choice depends on your personal situation, but here are some key questions to ask yourself:

Could you use some help?

With more than 100 options available, itís no surprise that many families have a difficult time choosing the right 529 plan. Our Survey revealed that a large percentage of those who do not have 529 plans havenít even started saving for college. When asked why they have been putting it off, 53 percent claimed that they have not had enough time to research and understand all of the different plans available. If you fall into this category, you may want to consider working with a financial advisor who can recommend a suitable investment for your family.

529 plans are sold through registered investment advisors (RIA) as well as broker-dealers. RIAs typically charge a flat fee based on a percentage of assets for their services, and broker-dealers earn a commission on certain products they sell. Both are licensed professionals who are able to provide assistance based on your financial goals. Advisors can also provide information on whether or not your stateís plan offers additional tax benefits or financial aid incentives for residents. Most importantly, reaching out to an advisor is a simple first step toward opening a 529 plan. If procrastination is holding you back, give yourself a little nudge!

Find a 529 plan expert in your area!

Concerned about fees?

If so, you are not alone. According to the Annual College Savings Survey, the most common reasons for not wanting to work with an advisor have to do with paying fees and commissions. In most cases, you will indeed pay a premium for an advisorís services. To start, your plan will incur up-front commissions anywhere from 1%-5.75% of the amount invested. Annual asset-based expenses are generally higher as well. According to the Wall Street Journal, in the fourth quarter of 2013, the average advisor-sold plan charged 1.09%, compared to 0.54% for direct-sold plans.

Fortunately, there are ways to take advantage of the knowledge and guidance of a professional without the hefty price tag:

  • 529 plans are sold as different share classes, each with a different expense structure. An advisor can recommend the most appropriate share class for you depending on the amount you are investing and your time horizon.
  • If you have other investments such as a brokerage account or IRA you may be eligible for a reduced sales charge if your total amount invested in a particular fund family reaches certain breakpoints.
  • A fee-based financial planner may have access to fee-waived share classes.

On the other hand, fees for direct-sold plans are at all-time lows. This is largely because of the recent competition between investment managers to win state bids for contracts. Direct-sold plans also tend to use less expensive investment models. If price is your main concern, Savingforcollege.com features easy-to-use tools to uncover the lowest cost options.

Find out which direct-sold 529 plans have the lowest fees.

Looking for active management?

So why would anyone agree to pay more for a similar product? Advisors tend to sell more actively managed funds, which typically have higher expense ratios than index-fund based portfolios. In an actively managed fund, the investment manager invests in certain stocks with the intention of outperforming a benchmark. This type of investment can be risky, but offers potential for greater returns. Most direct-sold plans invest in passively managed funds, which attempt to mirror an index. Since they are not buying and selling stocks to try and beat the market, these plans are often much less expensive than their active counterparts.

Many who choose to work with a professional do so because of an existing relationship with an advisor they trust. If you already have someone managing your retirement account and other investments, it may make sense to let them handle your college savings as well.



Don't miss the other posts in this series!

 
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