Executive Summary
Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that the SEC this week fined 4 RIAs for violations of its marketing rule related to their claims that they offered 'conflict-free' financial advice. Which means that while many fee-only RIAs use the reduced conflicts that come with the fee-only model (as opposed to firms that receive compensation from commissions and other sources) as a key marketing talking point, the fact remains that being truly 'conflict free' is nearly impossible and such claims (which are hard to substantiate) appear to be a step too far when it comes to advertising under the SEC's marketing rule.
Also in industry news this week:
- A CFP Board study indicates that financial planners with the certification earn 10% more than other advisors and show very high levels of career satisfaction
- A Morningstar study has identified 4 main areas where investors find value from their financial advisors, which might not match an advisor's own list of top ways they add value for their clients
From there, we have several articles on behavioral finance:
- The behavioral biases that can lead retired clients to over- or underspend and how advisors can support clients in each of these positions
- Why feelings of "disempowerment" could lead retired clients to spend well below their means, and how advisors can help them have more fulfilling retirements
- Why many seemingly wealthy retirees can sometimes have a hard time spending money, from the 'money scripts' they learned as a child to previous bouts of acute poverty they experienced earlier in life
We also have a number of articles on practice management:
- Why creating clear lines of communication among management, compliance officers, and firm staff is an important step to ensure employees understand their compliance responsibilities while not feeling overly restricted by compliance requirements
- The key traits of an effective chief compliance officer, from the knowledge needed to identify potential compliance concerns to the communication skills needed to train employees and effectively deal with potential violations
- How (solo) advisory firms can use an annual compliance calendar to organize the many compliance responsibilities they face throughout the year
We wrap up with three final articles, all about college planning:
- 5 common college planning mistakes and how advisors can help clients avoid them
- While they offer a range of tax benefits and, recently, more flexibility, 529 plans continue to only be used by a limited number of Americans, creating an opportunity for financial advisors to discuss their benefits and create a savings plan with clients
- Why a 4-year college degree remains a good deal for many students, with the benefits not necessarily accruing only to those who go to the priciest schools, but rather to those students who make the most of their college experience
Enjoy the 'light' reading!
SEC Fines RIAs Under Marketing Rule For Claiming To Be 'Conflict-Free'
(Sam Bojarski | CitywireRIA)
The Securities and Exchange Commission's (SEC's) marketing rule, which went into force in late 2022, presented RIAs with the opportunity to greatly expand their marketing efforts with new options, from client testimonials to promoting the reviews they've received on third-party websites, to provide prospective clients with evidence of the quality of their service. However, alongside these opportunities came compliance responsibilities to ensure, among other things, that the content of testimonials and advertisements did not violate the rule (which goes hand-in-hand with the longstanding requirement that RIAs already have to not misrepresent themselves or their services in their advertising and promotions to prospective clients).
For many fee-only RIAs, a commonly cited point of differentiation with other firm types (particularly commission-based product salespeople) is having fewer conflicts of interests with their clients given that they don't have a direct financial incentive to recommend one investment or insurance product over another. However, since fee-only RIAs can have other potential conflicts of interest (e.g., an advisor might have an incentive to recommend that a client keep assets in accounts that can be charged an AUM fee versus using these funds to pay down debt), advisors still have to build trust with prospects and clients (and stay on the right side of regulatory scrutiny) by being transparent about these conflicts and explain how they plan to mitigate them. Not to mention that many advisory firms disclose conflicts of interest related to their external providers and partners – including with respect to RIA custodians, from whom RIAs typically receive 'free' custody and clearing services, in exchange for placing client assets into their cash sweep, funds, and other products, and may receive additional soft dollar benefits as well. Thus why there is an entire section on "Conflict of Interest Disclosures" in the Form ADV Part 2 of every registered investment adviser.
Nonetheless, the SEC announced this week that 4 RIAs settled charges related to advertisements that claimed to provide conflict-free advisory services, which the firms were unable to substantiate. For instance, the regulator highlighted that one of these firms ran an ad stating that it had eliminated conflicts of interest, despite disclosing conflicts of interest in its Form ADV Part 2A brochures. So while these firms might have been able to claim that they were "commission-free" with respect to their RIA services (and, by inference, free of the conflicts that come with that form of compensation), claiming to be free of all conflicts is a significantly higher (if not impossible) threshold to defend, violating the marketing rule's goal of improving the accuracy of advisory firm advertisements (which extends beyond conflicts of interest to also include performance advertising, third-party ratings, and client testimonials, among other marketing communications). And notably, in one case, the firm actually was receiving insurance commissions as well, not to their RIA but to a subsidiary entity owned by the RIA; in another case, the firm's advisors were similarly also registered representatives of a commission-paying broker-dealer, and the firm disclosed the receipt of soft dollars as well!
Ultimately, the key point is that while the SEC's marketing rule presents RIAs with new opportunities to expand their marketing messages, the regulator has signaled that it is keeping a close eye on whether advertisements, advisor websites, and other media include misleading or untrue claims, including by those who market and highlight their fiduciary obligation to clients in particular. Which means that while a fee-only RIA might view itself as having fewer conflicts of interest than counterparts in the product sales industry, and could perhaps market itself as "no-commission" (assuming it really doesn't receive commissions, directly or indirectly), these latest fines suggest that claiming that they are completely "conflict free" is a bridge too far given that potential conflicts can and often do exist, simply by nature of the advisory business itself, for even the most dedicated fee-only fiduciary advisor (and perhaps suggests that some firms might also consider whether their current conflict of interest disclosures in their ADVs reflect the range of potential conflicts they face?).
CFP Board Study Indicates Its Planners Earn 10% More Than Those Without The Marks
(Financial Advisor)
While the share of advisors with the CFP marks has risen steadily over time, and now numbers more than 100,000 CFP certificants today, relative to an estimated 300,000 total financial advisors, the reality is that about 2/3 of financial advisors still are not CFP professionals. This means that, for most advisors, the decision to obtain this designation remains an open one. A crucial factor in an advisor's decision to prepare for the CFP exam – often requiring them to sacrifice evenings and weekends to complete the requisite coursework (which can take more than a year) and spending many thousands of dollars – is whether they will actually earn more as a result of doing so.
According to a survey conducted by CFP Board of 1,455 financial planners, including both CFP certificants and those without the marks, respondents who are CFP professionals earn 10% more than other financial planners after controlling for a variety of factors (e.g., type of firm and years of experience). The study found that while financial planners surveyed reported median total compensation of $192,000, this can vary significantly based on experience, with those with less than 5 years of experience having median compensation of $103,000 and those with more than 20 years of experience reporting $325,000 of compensation. Compensation also varied based on business channel as well, with planners in the wirehouse (a median of $230,500) and independent broker-dealer ($225,000) channels reporting greater compensation than those in RIAs ($161,700), though this could reflect the compensation upside available to planners who 'survive' the first few years at wirehouses and broker-dealers (which are known for having higher attrition rates than RIAs, effectively eliminating all of their more modest-income advisors through survivorship bias). The CFP Board even launched a "salary calculator" for advisors to estimate (or benchmark) their own earning potential based on the various parameters that CFP Board tracked.
CFP Board's study also highlights broad satisfaction among financial planners with their careers, with 85% of CFP professionals indicating either "very high" or "somewhat high" personal fulfillment in their careers. Further, 89% of CFP professionals plan to stay at their current company for (at least) the next 2 years, with 67% of those who are planning to leave expecting to stay in the financial planning profession (indicating that very few CFP professionals are planning to leave the field entirely in the near future). In terms of specific job attributes, 88% of CFP professionals said the stability that comes with their job was either "good" or "excellent", with 82% saying the same for work/life balance, 79% for career advancement, and 74% for compensation.
Altogether, this study reflects similar findings from Kitces Research on Advisor Productivity (which showed that advisors with the CFP marks earn more than their counterparts without them, with a particularly strong effect for service advisors with the certification, who earned a whopping 77% boost in income per hour!) and Kitces Research on Advisor Wellbeing (which found that "thriving" advisors had a greater tendency to be CFP professionals), suggesting that while CFP certification requires an investment of time (and also money, though a number of scholarships are available to defray the cost of educational programs, CFP exam review programs, and the exam itself!), this commitment can pay off for interested advisors both professionally and financially!
Morningstar Analysis Identifies 4 Main Areas Investors Value In Advisors
(Danielle Labotka | Morningstar)
While it is easy for financial advisors to recognize the many ways they add value for clients, clients themselves might have different priorities for the relationship with their advisor than what the advisor emphasizes. Because each client will come to the table with a unique set of circumstances and goals, it can be valuable for advisors to understand what clients (and prospects) value most from working with an advisor, which could inform how advisors communicate the value they provide.
In a new report, Morningstar examined how investors value different capabilities of advisors using 3 different measurements (ranking, willingness to pay, and open text) across 4 studies and identified 5 major themes that reflect what investors are looking for in their advisors. The theme receiving the most weight was "advice I can rely on", which encompasses areas such as having expertise the client doesn't have themselves and the skills to resolve the client's specific financial needs. Second, investors value advisors who can "help me achieve my financial goals", including helping them brainstorm goals, support them through financial planning, and ultimately help the client achieve these goals. Third, clients look for an advisor who "keeps me on track" through behavioral coaching (though, notably, investors don't necessarily like the "behavioral coaching" label specifically, but rather recognize the value in having an advisor to whom they can float ideas for feedback). Finally, investors looked for advisors who could "maximize my returns", though this factor received less weighting than the other 3 (suggesting that while investors are focused on returns, having their goals met and worries allayed are often higher priorities).
With these factors in mind, Labotka recommends a few potential actions that could help clients and prospects better understand the value an advisor provides. To start, showing clients how the advisor incorporated the client's unique characteristics (e.g., risk tolerance and timelines for financial goals) can demonstrate that the planning process accounted for the client as an individual (and wasn't just a cookie-cutter approach). Next, putting goals at the forefront when discussing planning topics (e.g., why a certain asset allocation can help them achieve their goals) can help clients see how the work the advisor is putting in (whether in investment management, tax planning, or other areas) is helping them achieve their ultimate goals. Also, given that clients value the idea of behavioral coaching (even if they don't want to be told they're being 'coached'), advisors who offer themselves as a 'sounding board' for client ideas or concerns could show their value in helping clients make better decisions without making them feel judged. Finally, putting investment returns into context (e.g., comparing them to the benchmark return needed to achieve their goals) can help clients see how the advisor is helping them meet their financial objectives rather than focusing primarily on market benchmarks (that might not be appropriate for their needs).
In sum, helping clients understand the value that an advisor provides is not necessarily a matter of listing out the range of services the advisor provides, but rather a function of how the advisor is able to reassure clients that they have the expertise and services needed to help clients gain peace of mind around their finances and ultimately achieve their unique financial goals!
Tips To Help Clients Spend Less (Or More) In Retirement
(Samantha Lamas | Morningstar)
Some clients might have no problem spending in retirement, taking advantage of their extra time to travel or pursue hobbies they've long been interested in (though going overboard with spending, particularly in the early years of retirement, can potentially reduce the probability that their assets will support them throughout what could be a multi-decade retirement). Others, though, find it hard to spend in retirement (even though their assets could support a higher level of spending), perhaps because they are afraid that a market downturn could lead to a reduced standard of living in their later years.
Notably, individuals who find themselves over- or underspending in retirement might be basing these decisions on one or more behavioral biases. For example, clients who overspend early in retirement might be engaging in "temporal discounting", discounting future needs in place of present-day needs and desires. This can occur when an individual feels 'disconnected' from their future selves and prioritize their current needs and wants over saving (or, in the case of a retiree restricting their spending). To support clients experiencing this phenomenon, financial advisors can help them picture their future selves, either literally (e.g., using an age-progression app that shows them what they might look like in the future) or figuratively (e.g., by having them write down what they imagine what their life will be like at age 70, 80, etc.).
On the other end of the spectrum, an individual having a hard time spending as much money as they would otherwise like could be experiencing pessimism bias (i.e., overestimating the likelihood of negative events like extreme market losses) or loss aversion (i.e., that the negative feelings that come with losses are larger than the positive feelings experienced from equivalent gains), which can lead to zero-risk bias, or the desire to take as little risk as possible (e.g., with a budget or asset allocation). Some potential ways advisors could help clients in these situations include creating additional sources of guaranteed income (e.g., delaying social security benefits or purchasing an annuity) to reduce market risk or to have the advisor create 'paychecks' using portfolio income and assets to restore the feeling of having regular income that they had during their working years.
Altogether, while many retired clients will find it easy to spend within (and up to) their means in retirement, others might either go too far (risking the sustainability of their plan in their later years) or might deprive themselves from making spending choices they would otherwise like to pursue based on behavioral biases. And while financial advisors might not want to name them directly (as the client might bristle at the notion that they're experiencing a 'negative' bias in some way), advisors can add significant value by identifying clients in this situation and exploring ways to help them overcome these potential biases.
Scared To Spend: Overcoming The Retirement Cycle Of Fear
(Tim Maurer | Forbes)
While retirement is often described as one's 'golden years', the transition from working to retirement can be stressful for many individuals, both financially (as they must find a way to support their lifestyle needs without a regular paycheck coming in) and emotionally (as they adjust to life without a day-to-day job). Maurer describes these challenges as "disempowerment", as financially, a retired individual will no longer be providing for their needs based on their own work (perhaps making them reluctant to spend down their assets), while professionally, they will no longer have the sense of purpose and esteem that can come from employment.
Luckily, though, retirees (and those nearing retirement age) have several options to combat feelings of disempowerment (many of which can be supported with the help of a financial advisor). To start, a 'phased' retirement (e.g., gradually reducing the number of hours worked) can help a pre-retiree gradually adjust to life away from work to avoid the shock of a sudden full retirement. Another option is to continue working after 'retiring' from a full-time job, as a part-time job (in their area of expertise or something totally new) can contribute to a sense of purpose and bring in extra cash (which might make it easier for them to spend on travel or other 'wants' in retirement). Looking specifically at investments, positioning a portfolio to meet a retiree's psychological needs and income goals (rather than maximizing return, which might have been a primary goal during their working years) can potentially ameliorate feelings of disempowerment, perhaps by creating 'buckets' that set aside money to 'protect' (savings that can provide peace of mind), 'live' (funding lifestyle needs by creating a 'retirement paycheck' with stabler assets), 'grow' (keeping some money in growth assets to outpace inflation and fund longer-term or legacy goals), and 'give' (consciously giving to individuals and causes important to the retiree).
In the end, while retirement can be one of the most enjoyable periods in an individual's life, it is not without stress, particularly in the early years. Which suggests that financial advisors can play an important role for their pre-retiree and retired clients by checking in to see whether they feel empowered to make the most of their retirement and supporting them in making financial and/or lifestyle adjustments that can help them do so!
The Well-Off People Who Can't Spend Money
(Olga Khazan | The Atlantic)
At some point in their career, a financial advisor is likely to encounter a retired client who has more than enough money to meet their lifestyle needs for the rest of their lifetimes yet has a hard time spending beyond the basics. Which might be better than the alternative (a client who spends in an unsustainable manner) but could leave the client with a retirement that is less fulfilling than it could otherwise be.
In a research paper, Scott Rick, Cynthia Cryder, and George Loewenstein call these individuals who experience a significant amount of 'pain' when spending money "tightwads" (while their counterparts, "spendthrifts" experience too little 'pain' when it comes to spending. For some individuals, being thrifty is part of their identity; for instance, an individual who saved diligently throughout their working years might find it hard to reverse the flow and start drawing down their accounts in retirement. Other individuals might have experienced acute poverty at some point in their life and might assume that while they might be financially stable today, such prosperity can be fleeting and that a negative turn of events could lead them back to deprivation. Still others might have "tightwad" tendencies based on how they were raised. For example, an individual with parents (or grandparents) who made it through the Great Depression might have picked up the 'money script' (i.e., messages and lessons learned about money while growing up) of "money vigilance", that spending on oneself is extravagant.
Ultimately, the key point is that even the wealthiest clients might have a hard time spending on themselves, particularly when it comes to drawing down their assets in retirement. Which presents an opportunity for advisors to both help clients explore the underlying contributors to their "tightwad" tendencies and to find ways to help them spend more (e.g., buying 'time' rather than things or gifting to charities and loved ones while still alive) and have as fulfilling a retirement as possible.
How Firms Can Achieve Both Their Growth And Compliance Goals
(Courtney Haddad | Advisor Perspectives)
While financial advisors have an interest in staying on the right side of regulatory authorities, dealing with their firm's Chief Compliance Officer (CCO) or (for larger firms) compliance team can sometimes be a frustrating experience, particularly when requests (e.g., to use a new marketing tactic) are rejected on compliance grounds and particularly so when the answer is a simple "no", without explanation (or flexibility given). At the same time, the CCO (or team) might have a lot on their plate already (especially if the CCO has other operational or advisory responsibilities as well) and lack the time to have a back-and-forth with every advisor who makes a request.
Nonetheless, given advisory firms' interest in achieving client growth while remaining compliant with relevant regulations and keeping their advisors happy, finding a way to implement a compliance program that meets all of these interests might be a top priority. At the organizational level, firms can start by creating and disseminating clear core values (so that current and future advisors know what will be expected of them) and well-defined roles and responsibilities so that each member of the team knows their part in operating compliantly. In addition, firms that are able to establish feedback mechanisms can help avoid advisors feeling isolated or unheard when their ideas are denied by the compliance team. Depending on the size of the firm (and the other responsibilities of each party), dialogue related to compliance could come from the CCO or compliance team themselves, an advisory board that adjudicates complex compliance issues, or even firm-wide town halls, which give team members the opportunity to hear the firm's thinking on compliance matters from senior managers.
In the end, managing a robust compliance program while giving advisors the freedom to grow their client bases can sometimes be a challenging endeavor. Nonetheless, by setting clear expectations for the team and ensuring lines of communication remain open, firms can continue to operate compliantly while ensuring that their advisors feel understood in the process!
The Traits Of An Effective Chief Compliance Officer
(Richard Chen | Advisor Perspectives)
Given the financial and reputational impacts of regulatory violations, the Chief Compliance Officer (CCO) is one of the most important, if unheralded, positions in an advisory firm. And given the importance and technical nature of the position (taking on responsibilities ranging from evaluating issues that pose the most risk to the firm to reviewing and testing the firm's compliance policies and procedures to training employees to ensure they understand their compliance responsibilities), having a qualified individual serve in this role (either full time or as part of their broader responsibilities) is vital.
At a basic level, while there are no specific educational requirements or professional designations required to be a CCO, the SEC and other regulators expect that a CCO will possess sufficient training, knowledge, and experience (e.g., with regard to relevant regulations and how to administer a compliance program) to perform the functions of the position. In addition, a CCO will need to have a solid grasp of the investment advisory business in general in order to be able to identify compliance risks or violations. Next, effective CCOs frequently are organized (given the paperwork involved), detail-oriented (as small details matter when it comes to compliance), are good communicators (so staff understand their responsibilities), and are willing to have difficult conversations with employees, particularly around compliance violations. A CCO also will need to have sufficient time on their schedule to handle their duties, which could range from 10 hours per week (for a smaller firm) to full time (or beyond, requiring additional staff) at larger firms. Finally, CCOs will need to be willing to assume personal liability for assuming CCO duties, as they could potentially face regulatory sanctions (e.g., fines and/or suspensions or disqualifications from the advisory industry) if substantial failures occur in their performance of their duties.
Altogether, choosing a CCO is not an easy task for advisory firms given that the selected individual will be taking on significant responsibilities, which they might have to balance with other duties at the firm. At the same time, firms also can consider outsourcing some of these duties, though the CCO and firm will still ultimately be responsible for remaining in compliance with relevant regulations!
Crafting An Annual Compliance Calendar For A (Solo) RIA
(Ben Henry-Moreland | Nerd's Eye View)
One of the most intimidating aspects of launching a solo advisory firm is the question of how to manage compliance. Advisors coming from a background of working as an employee at a larger firm may be familiar with some of the rules for complying with state or Federal securities regulations from the perspective of an individual advisor, but handling compliance for an entire firm – even when there is just 1 employee – entails a whole additional set of responsibilities to be aware of. Fortunately, the annually recurring nature of ongoing RIA compliance tasks makes it highly conducive to create a compliance calendar for a solo RIA (particularly because they must manage it all themselves) which helps to systematize and manage compliance tasks, requirements, and deadlines by breaking them up into discrete steps to complete incrementally throughout the year.
A good baseline for creating an annual Compliance Calendar comes from the North American Securities Administrators Association (NASAA), which publishes Model Rules for investment advisers that many states base their own requirements on, and can give an overall sense of the types of tasks RIAs can build into their own annual compliance calendar (with the caveat that specific compliance requirements for RIAs vary at the state level, where most solo advisors are registered).
The 1st category of tasks that advisory firms must handle involves renewing their registration with the applicable state(s) in which they do business each year, which typically involves submitting select documents (e.g., accounting reports, client contract templates, and a surety bond) and filing an annual renewal fee near the end of the year. After year-end, firms typically have until March 31 to submit an annual amendment to their Form ADV Part 1 and Part 2A/2B, and until April 30 to offer a copy of their updated Form ADV to their clients.
Second, firms are generally required to adopt and implement a set of written policies and procedures governing the firm's actions in areas including proxy voting, cybersecurity, personal trading of the firm's employees, material nonpublic information, and the firm's business continuity plan. Firm policies and procedures in each of these areas need to be reviewed and updated on an annual basis; however, given how wide-ranging each of these topics can be, solo advisors might want to consider tackling each topic separately at a different time each year (for example, addressing 1 major area each quarter).
Third, regulators require RIAs to maintain an extensive set of books and records of the firm's business and advisory practices, including business and financial records (like bank statements and invoices), client-related documents (like written client communications, client agreements, and written information forming the basis of any recommendation made by the advisor), advertisements (including newsletters, blogs, and social media posts), and written copies of the firm's policies and procedures (including records of holdings and trades in the advisor's own personal accounts).
Putting all of this information together, it's possible to create a compliance calendar that accounts for each task required, its frequency, and the due date for each. Because even though most compliance tasks (save for annual registration renewal and annual ADV updates) don't have specific due dates during the year, setting a date for each task to be done – and blocking out specific time in the advisor's calendar to do so – can ensure that it gets done. Which can be especially helpful for RIA founders who are also their own Chief Compliance Officers, and still have a duty to oversee (and document that they are overseeing) themselves.
Ultimately, the key point is that turning a litany of annual RIA compliance tasks into a compliance calendar helps to systematize the process of managing compliance (especially for a solo RIA) in order to stay on top of all of the firm's compliance requirements, even when there are other matters like client-facing work that can seem more urgent at any given time. Because once compliance tasks are systematized into time blocks on a calendar basis – approximately 1 hour for monthly tasks, 4 hours for quarterly tasks, and 8 hours for annual tasks, at least for a solo advisor – it's feasible for the RIA to keep their compliance house in order with barely 2% of their annual working hours… leaving the other 98% of their time to serve their clients effectively (and get new ones, too!)!
5 Common College Planning Mistakes
(Steve Garmhausen | Barron's)
As the calendar turns to September, many families have college on the mind, whether they recently dropped a kid back at school, are gearing up for application season, or realize that their younger high school student will be heading off to college soon. With this in mind, advisors can help clients in these situations avoid financial mistakes that could cost them serious money.
To start, advisors can encourage clients to start the college conversation early with their children so that both sides are on the same page, for example by having the parents communicate how much they're willing to contribute for their child's education (potentially avoiding a situation where a student falls in love with a particular school that's well out of their price range). Next, even if parents think their income is too high to qualify for aid, it can still be valuable to fill out the FAFSA and apply for financial aid, as schools can have varying standards for who qualifies for need-based aid. Relatedly, while pursuing need-based aid and merit aid (scholarships from a school not determined based on financial need) can be well worth the time and effort given the size of these pools of money, some families get bogged down researching and applying for private and nonprofit organization scholarships, which sometimes can be more competitive and less valuable. Another potential pitfall is gifting kids assets in ways that are particularly unfriendly for financial aid (e.g., a brokerage account in the student's name rather than a 529 plan). Finally, the biggest pitfall of all might be not having a plan in the first place, as creating a strategy (perhaps with the help of a financial advisor) can ensure that savings goals and deadlines are met.
In sum, while the college application and financial aid process can be stressful for families, financial advisors have the opportunity to add value by opening up the lines of communication (between themselves and the parents as well as between the parents and their children) and creating a college savings plan (whether in contributing to 529s or other accounts and/or having an organized plan for applying for need-based and merit aid!).
Why Aren't 529 Savings Plans More Popular?
(Leo Almazora | InvestmentNews)
For those who are fortunate enough to have parents and/or grandparents with the desire and means to pay some or all of the cost of a higher education, 529 plans offer a tax-efficient means of saving and paying for college expenses. Notably, distributions from 529 plans are tax- and penalty-free to the extent that they are used for the beneficiary's qualifying education costs (and, thanks to new rules in 'SECURE Act 2.0', can also be rolled into a Roth IRA, subject to strict limitations).
Nonetheless, a recent survey from Edward Jones and Morning Consult found that fewer than a quarter of Americans surveyed have 529 plans and half don't even know what a 529 plan is. While some individuals likely don't save in 529 plans because their cash flow might not support this additional savings, another reason could be a misperception that a large amount of savings is required to make 529 plans useful (as even if a family might not have significant money to contribute at the moment, they could open a 529 plan to allow grandparents or others to contribute to it). Further, many individuals likely aren't aware of the flexibility offered by 529 plans, which can be used not only at 4-year colleges, but also vocational or trade schools or for graduate education (among other uses), and offer flexibility in changing the beneficiary to other family members (which can allow wealthier families to create 'dynasty' 529 plans that last for generations).
Ultimately, the key point is that 529 plans can offer significant tax benefits and flexibility when it comes to saving and paying for education expenses. Which presents an opportunity for financial advisors to add value not only by making clients aware of these benefits (and perhaps encouraging them to start saving early on to maximize compounding benefits), but also to create a broader college savings need that fits a family's current cash flow and expected savings needs!
Is College Still Worth It?
(Tony Isola | A Teachable Moment)
News reports regularly discuss the eye-popping sticker prices many colleges charge these days (reaching $90,000 per year or even higher at some schools). Combined with increased attention to the prevalence of student loans, some Americans are questioning the value of a 4-year college education (according to a recent survey by the Pew Research Center, 47% of respondents said a 4-year college degree was only worth it if it didn't require loans, 29% said it wasn't worth it at all, and only 22% said a degree would be worth it, even with loans).
Nevertheless, Isola argues that some individuals might be confusing the price of college with the value it provides. For instance, while many private schools have huge sticker prices, public schools (and some private options, when need-based and merit aid is taken into account) can offer a lower price while still providing many of the benefits of top private schools (including a lifetime wage premium, which persists for those with a bachelor's degree compared to those without one). For example, a study from Stanford found that the factors that led to a successful college and post-graduate experience included the opportunity to engage in internships while still in school, the ability to find mentors, small class sizes, and student involvement in the college community (to foster connections and contacts that can lead to future professional opportunities). Notably, given that none of these factors require a $90,000 per year college, these findings suggest that success in college (and beyond) is not just a matter of the name on the degree, but rather how a student spends their time in school.
In the end, while there is no one 'right' college option for everyone, given the persistence of the college wage premium and the ability to access it without having to attend a pricey private school, a 4-year college degree appears to remain a solid financial option for many students, particularly those who are willing to explore different fields through internships and network with staff and fellow students to find the right job 'fit' once they graduate and beyond!
We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!
In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog.