The rep told the employees in the audience how wonderful 529 plans are and how his 529 plan in particular was first rate. I have no doubt that some of the parents ended up enrolling in this plan. The guy was that convincing.
What I found disturbing about the presentation was what remained unsaid. The speaker never mentioned that Michigan parents who invested with his plan, which was offered through another Midwestern state, would forfeit a valuable state tax deduction. Michigan
only awards a tax break for educational contributions that residents make to its own state plan.
What’s more, the sales rep never once mentioned how much the 529 plan would cost (gouge) the parents. I knew that the plan was outrageously expensive, but I doubt anybody else in the room appreciated that except the guy at the podium. I looked at the handouts to see whether costs were mentioned, but naturally they weren’t.
If you ever cross paths with someone who is eager to help you finance a college education, you need to be leery. Although there are many excellent financial planners and Certified Public Accountants who can help you, the niche contains financial pretenders who are primarily interested in lining their own pockets.
529 Plan Assistance
If you’ve ever been approached by someone selling 529 plans, you might have walked away believing that a 529 savings plan is a magic elixir. Listen to the salesman long enough and you might assume that the 529 is the Easter bunny, Santa, and tooth fairy all rolled up in one investment product.
The hyperbole is understandable when you consider that 529 plans are just about all that many investment professionals recommend to families who are freaking out about college costs. Most parents who invest in a 529 plan have heard the sales spiel. In fact, the vast majority of families who invest in 529 plans do so through
stockbrokers and other professionals.
The 529 plan can be a wonderful tool, but rarely do families get a glimpse behind the curtain to see how the investment really works—much less how it’s marketed.
Here are some of the things you won’t hear: The brokers and planners who peddle 529 plans largely depend on commissions for their livelihood. Consequently, the articulate and seemingly sincere salesperson who has gained your trust could be steering you to a mediocre 529 plan saddled with high costs because, hey, he or she can pocket a fat commission.
A study conducted by researchers at the universities of Kansas and Tennessee suggested that salespeople hawking 529 plans are, in fact, steering people to pricey 529 versions. The study revealed that the 529
plans with high fees are more popular than the state plans that offer tax deductions.
The greed factor also explains another common practice. Brokers and others who live off commissions have too often failed to tell clients that they could be forfeiting a state tax break if they choose a 529 outside their own state. That’s what I witnessed in Michigan. While a state’s plan might not be the best choice, every parent should at least know up front whether their state 529 provides a tax break.
Here’s something else that rarely—if ever—gets discussed: The folks peddling 529 plans are often just salespersons. The typical stockbroker is not a financial planner, rather his job is to process financial
transactions such as trading stocks or buying municipal bonds for you. If you think the guy providing you with college advice isn’t a stockbroker, keep this in mind: Titles are misleading. No one calls themselves stockbrokers anymore. The preferred titles include financial consultant, wealth manager, and adviser.
Whether you should invest in a 529, an educational alternative, or, more likely, a combination of investments isn’t something that these salespersons are qualified to discuss. It’s simpler for them to take the position that everybody needs a 529. What few parents also realize is that brokers are often wearing blinders. Every state offers 529 plans, but many brokerage firms only permit their brokers to sell one or two plans. Are those going to be the best ones out there? I think you already know that answer.
Financial Planners and Education Advice
The hard part isn’t picking a 529. That’s easy. The tough part is knowing how to mix and match a 529 plan with the bewildering number of options for parents who want to save for college. In addition to 529 plans, the possibilities include the Coverdell Education Savings Account, Individual Retirement Accounts, custodial accounts, taxable accounts, and that favorite gift for newborns—savings bonds. Once teenagers are ready for college, it’s equally challenging to figure out what assets should be tapped to pay for college, which loans are most appropriate, and how the financial aid process works.
Rather than muddle through the process alone, some families may want to seek professional help. If you ultimately decide to look for outside help, first and foremost you should find an advisor who is a fiduciary. A fiduciary is someone who must act in good faith when advising his or her clients. A fiduciary must recommend investments that are in the client’s best interest. It’s only natural to assume that any financial professional should be abiding by those simple guidelines, but they aren’t. Only registered investment advisors must, by law, put the interests of their customers first.
In contrast, many stockbrokers do not have to behave as fiduciaries. In fact, their first allegiance is to their brokerage firms. Rather than recommend only the best investments for their clients, they get to observe a lower standard. Their investment recommendations only have to be “suitable.” That might not sound bad, but the consequences can kill your wallet. Brokers, for instance, are free to recommend 529 plans that are engorged with fees because even a Porky Pig 529 can be considered “suitable.”
Before hiring a financial expert, make sure the advisor will sign in writing that he or she is a fiduciary. Many stockbrokers cannot sign that kind of statement. If you stick with a registered investment advisor, who by law must be a fiduciary, examine his or her ADV-Form, which is filed annually with the U.S. Securities and Exchange Commission.
The form, which you should be able to obtain from the advisor, contains such information as the advisor’s background, fees, and any regulatory troubles.
One excellent place to look for qualified college experts is the National Institute of Certified College Planners, which provides training and certification for investment professionals. You can hunt for experts who have earned a designation called the Certified College Planning Specialist (CCPS) on the institute’s Web site at www.niccp.com. Since the institute was founded in 2002, hundreds of professionals have been certified. Many of the graduates are Certified Financial Planners and Certified Public Accountants, but the ranks also include stockbrokers and insurance agents. When searching for someone with a CCPS designation, you don’t have to confine your search to your own city or state. Many college experts work with families across the country.
Many college planners specialize in helping affluent families who won’t qualify for need-based financial aid. Planners steer these families to a variety of legitimate tax write-offs and deductions that can significantly reduce their financial burden. Others work mostly with middle-class families who have a shot at getting financial aid.
When seeking outside advice, watch out for the piranha. Some insurance agents and brokers have dived into this niche as a way to sell life insurance and variable annuities to unsuspecting parents. Life insurance is an expensive and unnecessary way to invest for college, as are variable annuities.
Some of these sharks who are angling for big commissions encourage parents to transfer their home equity into insurance products so the money will escape the notice of financial aid formulas. What these ethically challenged salesmen don’t tell people is that the vast majority of schools don’t even examine the value of a home. If someone suggests cashing in your home equity for an annuity or life insurance, run.
Action Plan
There are a lot of sharks out there who are only pretending to be college experts. Stick with reputable experts who have impressive financial credentials.
Source: Grading Financial Advisers
