Families saving for college may choose to invest in an advisor-sold 529 plan or a direct-sold 529 plan. Direct-sold 529 plans typically have lower fees, but advisor-sold 529 plans offer unique advantages that may be worth the extra cost to some investors.
Advisor-sold 529 plans are available only through licensed financial advisors, such as broker dealers or registered investment advisors (RIAs). According to a 2018 study from Fidelity, 64% of families said their financial advisor keeps them on track to meet college savings goals.
Here are some ways a financial advisor can add value to your college saving strategy.
Financial advisors who offer comprehensive financial planning typically include college funding as part of their services. College is one of the biggest expenses a family will face, and the amount invested in a 529 plan can have an impact on an overall financial plan. If a financial advisor is managing a family’s retirement or brokerage accounts, it may make sense for the advisor to also handle the family’s college savings.
As a child grows, there may be opportunities for a family to increase contributions to their 529 plan. A financial advisor can give a nudge to make sure the family starts to save more, when appropriate. For example, funds to pay for diapers or day care can be redirected to a 529 plan when the child moves on to the next stage.
During a market downturn, families may start to panic and consider pulling their 529 plan investments, essentially locking in their losses. A financial advisor can reassure families that the best option is likely to stay the course and take advantage of dollar-cost averaging.
Long-term investors benefit from dollar-cost averaging by purchasing fewer shares per dollar when markets are up and purchasing more shares when markets are down and prices are lower.
Access to professional investment advice
With so many 529 plans and investment options to choose from, many parents prefer a hand-holding approach to guide their decisions. Financial advisors can help create a college savings strategy and evaluate investment strategies designed to meet a family’s individual needs. An advisor may also serve as an objective third party during the college selection process.
Advisor-sold 529 plans generally have more investment options available than direct-sold 529 plans. Most direct-sold 529 plans offer age-based asset allocation strategies, target portfolios or individual fund portfolios. However, a financial advisor can select a combination of index funds and alternative asset classes to design a unique 529 plan portfolio that would not likely be available through direct-sold 529 plan.
Actively managed investments
Many advisor-sold 529 plans offer actively managed mutual funds as investment options. Actively managed funds have greater return potential since the fund’s investment manager aims to outperform the index. However, actively managed funds charge higher fees than passively managed funds. Direct-sold 529 plans typically offer passive index funds to keep costs down and stay competitive.
It’s important for families to understand their 529 plan’s fee structure, since in some cases advisor-sold 529 plan fees can be reduced. For example, financial advisors may offer reduced pricing when a family’s total amount invested (including college savings, retirement, brokerage, etc.) with a certain fund manager (such as American Funds or John Hancock) reaches certain breakpoints.
Also, advisor-sold 529 plans purchased through a broker-dealer charge a commission on Class A shares, but some 529 plan managers will waive the commission if the 529 plan is purchased through a fee-only financial planner, such as an RIA.
Decide what’s best for your family
Minimizing costs within a 529 plan is the key to maximizing net returns. Families who feel comfortable selecting their own investments or simply want to invest in an age-based asset allocation may want to consider a lower-cost direct-sold 529 plan. You can enroll in a direct-sold 529 plan by completing an application on the 529 plan’s website.