COLLEGE SAVINGS 101

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Does a financial advisor deserve their 529 commission?
http://www.savingforcollege.com/articles/does-a-financial-advisor-deserve-their-529-commission-1002

Posted: 2016-11-17

by Brian Boswell

Financial Professional Content

There is an old story about a boilermaker hired to repair a steamship boiler. He comes into the ship, asks some questions and listens to the broken boiler. He takes out his hammer, taps the boiler, and everything starts working again perfectly. The bill is exorbitant at the time at $1,000, and when questioned on the price the boilermaker breaks it out:

   Tapping the boiler: $0.50

   Knowing where to tap: $999.50

It might be hard to believe, but some advisors don't recommend 529 college savings plans to their clients. They often feel that the excess paperwork, logistical challenges and limited allocation control make these plans more trouble than they're worth. And, of those advisors that do talk about 529 plans with their clients, as many as 65% send them to a direct-sold plan, per a recent survey by Strategic Insight.

But the reason most frequently cited in conversations with advisors is, "I can't justify the fee."

On one hand, this is a good thing. This demonstrates that advisors take their role as a financial advisor as one of a fiduciary, even though college savings do not (yet) fall under the same guidelines imposed by the Department of Labor. Like the old artist adage, some advisors are their own worst critics. On the other, the advisor is viewing their compensable role in a very limited capacity.

It's true that 529 plans currently restrict their participants to twice per year reallocations. But a financial advisor does much, much more than simply allocate their clients to suitable investments in the appropriate asset allocations. "Holistic" investment advice was a term coined nearly two decades ago to move broker-dealers from a transaction-oriented, sales mindset into a wealth management framework. Now, what once was a marketing gimmick has become a prophecy fulfilled. A 2012 survey from John Hancock found that investors found their financial advisor more trustworthy than their doctor.

RELATED: Think twice before sending clients to a direct-sold 529 plan

The point is that an advisor is more than an asset allocation machine, and does more to justify their commission than they give themselves credit for. When it comes to 529 savings plans, an advisor:

  • Is often the person that introduces their client to what a 529 is in the first place
  • Guides their client through…
    • The plan selection process, including in-state vs. out-of-state plan comparisons, or multi-plan investment strategies to maximize tax benefits
    • The account opening process
    • The investment selection process
  • Knows where college savings fits in their client's overall financial picture, and how much should be allocated towards that goal
  • Monitors and provides updates and guidance on contributions, tax implications, and strategies related to college savings and 529 plans specifically
  • Additional services outside investments that many advisors perform such as financial aid assistance and college planning, which is not always otherwise captured

To come back to the story of the boilermaker, an advisor is compensated not for selling their client a 529 plan, but for knowing that their client needs one in the first place. Without a financial advisor, many account owners would miss out on getting valuable tax deductions and credits prior to year-end. Or, would have inadvertently withdrawn too much or too little if not for the counsel of their advisor.

Financial advisors need to stop shortchanging themselves on 529 savings plans. These are complicated investment plans that have unique federal and state tax implications, fee structures, investment lineups, and they are constantly changing. The educated advisor is not providing a 529 product to their client, but a college savings service whereby they receive compensation via commission. This may change as the financial services industry gravitates toward fee-based planning, but in today advisors with their client's best interests at heart should have 529 plans in their arsenal of wealth management products, and they deserve to be compensated for their time and advice.

This article was inspired by an earlier article from Joe Hurley titled, "Are you worth your commissions?"

Financial Professional Content

There is an old story about a boilermaker hired to repair a steamship boiler. He comes into the ship, asks some questions and listens to the broken boiler. He takes out his hammer, taps the boiler, and everything starts working again perfectly. The bill is exorbitant at the time at $1,000, and when questioned on the price the boilermaker breaks it out:

   Tapping the boiler: $0.50

   Knowing where to tap: $999.50

It might be hard to believe, but some advisors don't recommend 529 college savings plans to their clients. They often feel that the excess paperwork, logistical challenges and limited allocation control make these plans more trouble than they're worth. And, of those advisors that do talk about 529 plans with their clients, as many as 65% send them to a direct-sold plan, per a recent survey by Strategic Insight.

But the reason most frequently cited in conversations with advisors is, "I can't justify the fee."

On one hand, this is a good thing. This demonstrates that advisors take their role as a financial advisor as one of a fiduciary, even though college savings do not (yet) fall under the same guidelines imposed by the Department of Labor. Like the old artist adage, some advisors are their own worst critics. On the other, the advisor is viewing their compensable role in a very limited capacity.

It's true that 529 plans currently restrict their participants to twice per year reallocations. But a financial advisor does much, much more than simply allocate their clients to suitable investments in the appropriate asset allocations. "Holistic" investment advice was a term coined nearly two decades ago to move broker-dealers from a transaction-oriented, sales mindset into a wealth management framework. Now, what once was a marketing gimmick has become a prophecy fulfilled. A 2012 survey from John Hancock found that investors found their financial advisor more trustworthy than their doctor.

RELATED: Think twice before sending clients to a direct-sold 529 plan

The point is that an advisor is more than an asset allocation machine, and does more to justify their commission than they give themselves credit for. When it comes to 529 savings plans, an advisor:

  • Is often the person that introduces their client to what a 529 is in the first place
  • Guides their client through…
    • The plan selection process, including in-state vs. out-of-state plan comparisons, or multi-plan investment strategies to maximize tax benefits
    • The account opening process
    • The investment selection process
  • Knows where college savings fits in their client's overall financial picture, and how much should be allocated towards that goal
  • Monitors and provides updates and guidance on contributions, tax implications, and strategies related to college savings and 529 plans specifically
  • Additional services outside investments that many advisors perform such as financial aid assistance and college planning, which is not always otherwise captured

To come back to the story of the boilermaker, an advisor is compensated not for selling their client a 529 plan, but for knowing that their client needs one in the first place. Without a financial advisor, many account owners would miss out on getting valuable tax deductions and credits prior to year-end. Or, would have inadvertently withdrawn too much or too little if not for the counsel of their advisor.

Financial advisors need to stop shortchanging themselves on 529 savings plans. These are complicated investment plans that have unique federal and state tax implications, fee structures, investment lineups, and they are constantly changing. The educated advisor is not providing a 529 product to their client, but a college savings service whereby they receive compensation via commission. This may change as the financial services industry gravitates toward fee-based planning, but in today advisors with their client's best interests at heart should have 529 plans in their arsenal of wealth management products, and they deserve to be compensated for their time and advice.

This article was inspired by an earlier article from Joe Hurley titled, "Are you worth your commissions?"

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