George Schott of Legg Mason is excited about the changing tide in the 529 college-savings universe. With the recent news of a surge in usage by investors, Schott believes that opportunities are plentiful for high-net-worth advisors to build their business by unlocking the hidden potential of 529 college-savings plans.
Case in point: Schott, the director of College Savings at Legg Mason, tells the story of a landscape architect client of one of the financial advisors on the firm's Scholar's Choice College Savings program platform. Theclient sought assistance from his advisor in opening a $40,000 college savings account for his nephew. In the process of meeting with the client and opening the account, the advisor learned the client had plans of his own: He wanted to go into golf course management. The financial advisor explained that the architect could fund his own education and recommended a golf course management program at North Carolina State at Raleigh, which qualified for 529 funds. At the end of the visit, the client not only opened an account for his nephew, but also opened another $40,000 account to pursue his dream.
This scenario marks a change in how financial advisors view the flexibility of 529 college savings plans. And, this new approach comes after 529 assets saw a significant dip in 2008 to $88 billion. That's all changed however. In a May 2011 report — 529 Plans and Distribution Analysis — by the Financial Research Corporation (FRC), 529 accounts nationwide now hold a record $146 billion in assets. That's up 66% from the low watermark days in 2008. And, those assets are expected to grow to approximately $237 billion by the end of 2015.
Since the market crisis of 2008, saving for college is now a priority, with net flows into 529 College Saving Plans increasing 75% in the last two years. "When we look at the net sales for the entire industry, ending this first quarter in 2011, they were up 7%, compared to the same quarter a year ago," Schott says. "If we look at first quarter comparisons, it's the best sales performance that the total industry has seen since 2007," he adds. "The industry has certainly regained its momentum."
This surge promises to provide a unique opportunity for advisors to build on their book of business, Schott says. "What's important here is that advisors have a tremendous opportunity to help their clients understand how 529s are the best way to achieve one of their most important financial goals, which is paying for college," Schott says. "To the extent that advisors seize on that opportunity — and many of them do — the future is very bright."
Yet, getting to that bright future also requires advisors to take a closer look at some of the overlooked opportunities that 529 plans offer. "Successful advisors in their total practice think differently about 529s," Schott says, adding that Legg Mason offers special techniques — five secrets of success — to uncover hidden potential. "What we really want to do is share best practices with advisors," he says. "We like to think about 529s, not just as a product, but as a way to help advisors and their clients achieve this most important goal."
And those secrets — embracing the complexity of 529s; connecting college funding to other financial needs; reaching out to other family members; expanding the definition of college age; and aligning one's business with related financial professionals — have led to success for many of the advisors on the Scholar's Choice platform.
For Schott, the landscape architect client represents expanding the definition of college age. Career expansion, re-entering the workforce, advanced degrees and active retirements all spell new ways to use 529 plans.
UBS advisor, Montague "Cosmo" Boyd, took two of those routes to 529 plan success — embracing complexity and connecting college funding to other financial needs. Boyd had clients-a very wealthy, childless couple — come to his Atlanta office for a visit. The husband, 62, and his wife, 52, wanted to discuss their estate planning needs. "If you're an FA, you live in the land of horror stories, and your goal is to make sure none of those horror stories happen to any of your clients," he says. The potential horror story for this client, however, was dying and leaving a wife that was 10 years his junior to grapple with his siblings and 15 nieces and nephews over his estate. "None of them are entitled to that money. But when people die, something clicks in their brains and they feel more entitled because they are blood relatives," Boyd says. His solution for the couple was to place funds for the family members into 529 accounts.
"You'll [also] quit paying taxes on it," Boyd says. "It's going to whomever you name as the contingent owner. The will won't control it, so everyone won't see what everyone else is getting; and since it's outside of the will, it's a lot harder for someone to say: 'He really meant to make me the contingent on that 529 account,'" Boyd says. "That's a way I would use [529s] on someone, who has enough money that people might argue about at his death. This makes it harder for them to argue."
This is long range planning at its best, Schott says. "This is goal setting and when you engage in that goal setting — when your children and grandchildren going to school — it has a direct relationship to that other very important financial goal, saving for retirement," Schott says. "In thinking about the two in tandem and thinking about the behaviors together it allows the advisor to say: 'If we get college savings right and if we plan for it, it means that we're not going to have to potentially go into your 401(k), IRA or incur penalties. We're not going to have to start doing anything that may damage that retirement plan.' And so those two goals work closely together."
Schott adds that another step toward building a 529 business includes reaching out to other family members. "Get introduced to grandparents and extended family while helping with 529 plans," he says. "An advisor was talking to a grandparent directly and sharing with him how 529s can work. It so happened that this individual had 21 grandchildren. So taking advantage of the gift tax exemption, five-year forward gift tax provision, they opened up accounts for each of the 21 grandchildren for $70,000."
The final component — working with other financial professionals such as accountants and lawyers — is essential to expanding an advisor's 529 business.
Consider the approach of Micah Lang, managing director of Wealth Strategy Partners, based in Denver, Colo. "When the 2001 tax bill was signed I knew the demand for 529 plans was going to grow exponentially," Lang says. So his firm started working with certified public accountants and estate planning attorneys in Colorado. "This led to their clients becoming mutual clients of ours," he says. "We still do lots of work with those same CPAs and attorneys on 529 plans and other investment, financial and wealth planning situations."
Schott adds that several advisors saw the chance to position themselves as experts and meet with these professionals in groups and build a strong network of contacts that refer clients back to them.
"Very often a client is not going to make a final decision on a 529 without first talking to their attorney or CPA, and very often, these professionals don't know quite as much about 529s," Schott says.
The Advisor-Sold Arena
According to FRC's data, advisor-sold 529 business dipped to 51%, from 59% in 2007. However, Schott believes this is still advantageous for advisors. "You have to look at that decline and recognize it is being driven to a large degree by the rise of direct-sold plans that have lower asset based fees," he says. He adds that annual asset-based fees — for all plans in general — have been on a steady decline. The FRC report shows that fees, as of March 2011, were down to approximately 80 basis points, compared to the 100 basis point average going back to October 2009. "When we look at advisor-sold Class A averages, they were about 120 basis points," says Schott, adding that the most recent data for March 2011 showed a drop to 115 basis points. Legg Mason administers and distributes the Scholar's Choice Program offered by the state of Colorado.
Legg Mason has had a successful history of helping advisors on its Colorado Scholar's Choice Program platform meet the varying needs of clients. The program was ranked as the second best advisor-sold 529 plan for investment performance for the period March 31, 2011, by Savingforcollege.com, a private company which tracks 529 plans. Scholar's Choice has ranked in the top two programs for more than two calendar years.
"What's also important to note is that we are in the early stages of broker-dealer [firms] looking at how 529 plans can be treated in the same way that mutual funds are treated on their platforms so that all of the important account information and systems are integrated into their systems," Schott says. Since all information would be integrated into client statements, he says that financial advisors would now also have an opportunity to look at 529s as part of a client's total plan. "This is so important because it has come up repeatedly in research and discussions," he adds. "It has been a barrier for advisors to do 529 business, and now that this is beginning to happen, it is going to remove that key barrier and open the way to future growth in the industry."