Getting Big Tickets on 529 Plans

Financial advisors have long complained that 529 college savings plans aren’t profitable products for them to fuss with: The average account size is too small, the account opening process is too time consuming and, until recently, there was no guarantee that they’d even be around in four years. But advisors may want to revisit the 529 plan: The passage of key legislation in Congress and the softening of proposed rules on suitability and disclosure have eased some of those concerns at both the advisor and firm level. Advisors may now find them more attractive.

Financial advisors have long complained that 529 college savings plans aren’t profitable products for them to fuss with: The average account size is too small, the account opening process is too time consuming and, until recently, there was no guarantee that they’d even be around in four years. But advisors may want to revisit the 529 plan: The passage of key legislation in Congress and the softening of proposed rules on suitability and disclosure have eased some of those concerns at both the advisor and firm level. Advisors may now find them more attractive.

On Aug. 17, 2006, President Bush signed the Pension Protection Act, which effectively made the plan’s tax breaks permanent. Previously, the exemptions for contributions to 529 plans were due to expire in 2010. Not surprisingly, many advisors were reluctant to recommend the product to their clients for fear that the perks were going to disappear, putting the advisor in an awkward position. Now, however, money managers and state sponsors should have an easier time selling 529 plans through intermediaries. “Some advisors who were on the fence are going to come down,” says Joe Hurley, founder of SavingforCollege.com.

In addition, the Municipal Securities Rulemaking Board (MSRB), which oversees the state-sponsored plans, filed amendments to its advertising and supervision rules to bring them more in-line with those of the SEC and NASD and to make it easier for dealers to publish generic advertisements for 529 plans. The new rules require advisors to do an “active suitability analysis” of recommended plans and disclose when clients are forfeiting a tax break by selecting an out-of-state plan. Initially, MSRB issued proposed rules requiring brokers to do a “comparative suitability analysis” of 529 plans when recommending them to clients. But, in the face of a widespread industry uproar, the board backed off and issued a watered-down version of the proposal.

The debate over proposed rules and a prudent approach to investor protection was “paralyzing the process,” Hurley says. But with that squared away, 529s should once again pique brokerage firms interest. “It will encourage broker/dealer firms to go forward with promoting 529 programs with their reps,” Hurley says.

But account size is still an issue for many reps who only want to work with high-net-worth individuals. “The average total account size for intermediary-sold 529 programs was approximately $7,256,” says Brian Boswell, a 529 analyst at Financial Research Corp. in Boston. “That’s quite small for a broker used to handling $1 million accounts for clients.”

Although he points out that individual investors may open multiple accounts with their reps (for example, a client might have $500 in three accounts for three beneficiaries, but actually control $1,500 in assets). The average amount per account-holder, or unique account size, for intermediary-sold 529 savings plans at the end of third quarter was approximately $18,733, Boswell says.

But some advisors have figured out how to make it worth their while. Bradley Pace, president of Pace Capital Management, a private boutique wealth-management firm in New York, says his average account size for a 529 plan is $48,000, more than four times the industry average. “Estate planning is probably the best way to get bigger accounts,” says “Wealthy investors, particularly grandparents, looking for tax loopholes can transfer hundreds of thousands of dollars into a 529 plan, thereby reducing their gross taxable estate.”

Advisors who think that 529s can’t get them big accounts may need to rethink their strategy. People who have the ability to contribute large sums of money to 529s can front load five years of gifts in the first year. Each parent or grandparent can contribute $12,000 per year, per child, so a couple with two kids can contribute $240,000 into their children’s college savings coffers in the first year. “For the broker, that’s a big ticket,” says Elaine Sullivan, director of educational savings at Putnam Investments. “The contribution comes out of the client’s gross taxable estate on day one and the client gets the compounding growth effect. And, the broker gets paid on day one.” Sullivan and Pace agree that focusing on the grandparents is a tremendous opportunity. Indeed, less than 20 percent of 529 plans are owned by grandparents, according to Cerulli Associates. And grandparents spend $15 billion a year on their grandchildren, Sullivan says.

Another way to get a bigger ticket on a 529 plan is to target individuals that have a trust fund set aside for education. The client can create a tax-free trust by naming the trust as the owner of the 529 plan. They would simply need to identify a trustee to actually execute any transactions as it relates to the 529. “It effectively turns a taxable vehicle into a tax-free vehicle,” Sullivan says. The benefit of putting the money into a 529 plan is that the money that is earmarked for education grows tax-free and can be withdrawn on a tax-free basis as long as the trust dictates that money is used for higher education purposes.

Prospecting 501c3 organizations is another strategy that will reap bigger 529 accounts, Sullivan says. By targeting people already on their books who work for hospitals and government organizations, advisors can generate new business. And since they’re already working with these people in their community and doing a lot of that networking, it makes sense to discuss 529 plans. “Advisors are always looking for ways to move upmarket,” Sullivan says. “[529 plans are] the perfect entrée for them to market to these people because it’s not an obvious place for them to be prospecting.” “People on scholarship boards are people that you’d want to have as clients,” Sullivan adds.

While opening accounts is still a pain for a lot of advisors, because it’s not automated like it is with mutual funds, many of the barriers have been lifted. Now it’s time for reps to let go of their hang-ups and include 529 plans in their conversations with clients. If they look in the right places, the big tickets will come.

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