Hiring adviser may increase 529 expense

07/28/2008

QUESTION:
Dr Joe,

Why is the Scholars Choice 529 plan frequently rated among the top plans even though its fees are so high? I pay, on average, a 3.5 percent front load for class A shares.

I don't feel my adviser was clear about it. Would I not be better off with the Utah Educational Savings Plan?

I realize there are many factors, but is Scholars Choice so good that I should pay a fee for it?

-- David

ANSWER:
When you enrolled in Colorado's Scholars Choice College Savings Program, you did so upon the recommendation of your financial adviser.

Many 529 plans are sold through financial advisers and the adviser is compensated for his or her services through the initial sales charge and the ongoing annual fees charged against your 529 account.

Front-end sales charges, or "loads," in adviser-sold 529 plans go as high as 5.75 percent. The Scholars Choice plan, with a 3.5 percent maximum sales charge, has fees that are actually low relative to many others.

Your adviser should have been clear about the cost of enrolling in the plan. In fact, you should have been required to sign a statement indicating your understanding of, and agreement with, the sales charges.

If this was not the case, you may want to take it up with your adviser's broker-dealer firm and/or the Financial Industry Regulatory Authority, which regulates investment brokers.

If you want to save on costs, there are many direct-sold 529 plans available to you. Utah's 529 plan is just one example of a low-cost, direct-sold 529 plan. Savingforcollege allows you to view a summary of every 529 plan's expenses. Lower costs do not guarantee higher net returns, but they are an important factor.

If you invest with a direct-sold 529 plan, don't expect your financial adviser to go out of his or her way to help you.

Unless they work on a fee basis, rather than commissions, there is no reason for advisers to investigate direct-sold 529 plans on behalf of their customers. In fact, securities laws prevent financial advisers from recommending investments that have not been approved by their broker-dealer firms.

Many investors decide to use advisers and incur the extra costs because they want help not only in selecting a 529 plan, but also in planning for retirement and the estate tax along with college.

Whenever you see ratings or rankings of 529 plans, keep in mind that you should first decide if you want to use a financial adviser and enroll in an adviser-sold plan. Your alternative is to enroll on your own in a direct-sold 529 plan. Once you've made that decision, the rankings will make more sense.

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