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Last week Savingforcollege.com launched its new and improved 5-Cap Ratings system for 529 plans, an effort that has taken yours truly over a year to develop and implement. The 5-Cap Ratings are now more detailed, more objective, and more transparent, thus fulfilling a promise I had made to many in the 529 industry (recognizing, of course, that there is still more tweaking to do.)
Like our old system, each 529 plan is awarded two separate 5-Cap Ratings, one for residents of the state that sponsors the plan, and another for nonresidents. But we now also display number scores for the following five subcategories that are used to compute the final 5-Cap Ratings: Performance, Costs, Features, Reliability, and In-state Upgrades.
Some will wonder why advisor-sold 529 savings plans hold up so well in the ratings compared to direct-sold plans, when advisor-sold plans are generally so much more expensive. The reason is because we do not punish a 529 plan for charging an industry-standard sales load. Our intention is that the 5-Cap Ratings not be biased either for or against advisor-sold 529 plans, and our premise is that the value to an investor of using a financial advisor is equivalent to the sales load.
But this premise begs the question of any financial advisor selling 529 plans: Are you really worth your commissions? Do you provide enough extra value to your clients to justify the sales load?
I have met many commissioned-based FAs who I am sure do deliver this extra value to their clients. They are knowledgeable on the rules surrounding 529 plans; they are familiar with the underlying investments and experienced in the selection and monitoring of a 529 plan; they are expert at integrating college planning with retirement and estate planning; and they are associated with a broker-dealer that encourages and supports 529 sales and makes additional resources available to its reps.
At the same time, I am fairly certain that a fair number of financial advisors do not have the level of expertise that our 5-Cap Ratings presume. While they may not come right out and admit as much, a statement like ďI donít really like 529 plansĒ is often a strong clue.
Or I might hear a financial advisor say something like "I just send my clients to the direct-sold 529 plan. I donít get paid, but I view it as a relationship value-add." Unless the advisor intends to keep close tabs on the direct-sold 529 plan in the future, however, I question whether the "selling away" is truly in the clientís best interest. (Fee-based financial planners, by the way, are in a different boat. But I will save that topic for a future article.)
Donít shortchange yourself. If you feel justified in selling your client the A share of a mutual fund, why shy away when it comes to 529 plans? That is, of course, assuming youíve done your 529 homework.