Search results for: "asset location"

A longstanding challenge for independent RIAs has been finding a way to effectively and efficiently help their clients with 529 college savings plans - due primarily to the fact that "advisor-sold" 529 plans are actually built primarily for broker-dealers, while "direct-sold" plans aren't meant to have any advisor involvement at all... and leaving advisors at RIAs stuck in between. As a result, there has been little growth of 529 plans in the RIA channel, and fiduciary advisors who would like to help their clients comprehensively manage their wealth have had few options to facilitate the implementation of 529 plans and manage them thereafter.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the traditional broker-sold and direct-sold channels for 529 college savings plans, the blocking points of why more RIAs don't get involved with 529 college savings plans, and why a third option - the "advisor-supported" 529 plan - is needed to better facilitate RIAs helping clients invest in 529 college savings plans.

From their start, there have been two distribution channels for 529 college savings plans: advisor-sold, and direct-sold plans. Direct-sold plans were simply sold (marketed) directly to do-it-yourself consumers, who could open and invest the accounts themselves. Yet because not every consumer wants to do it themselves, many state 529 plans also created an “advisor-sold” option (and/or mutual fund companies that had long-standing relationships with advisors – like American Funds – established advisor-sold plans that they hoped would become appealing to advisors regardless of their state location). Yet the caveat is that because advisor-sold plans can only compensate advisors via the mutual fund commission structure, they would more aptly be described as "broker-sold" plans and can only be used by those who work under a broker-dealer. Since RIAs can't receive a commission, RIAs can’t even access and use “advisor-sold” (broker-sold) 529 college savings plans at all!

Instead, advisors in RIAs generally have to work with clients through the “direct-sold” plans for do-it-yourselfers. But this is a problem for most RIAs, since direct-sold plans aren't built for an advisor to be involved at all, leaving RIAs with no way to track performance, manage the account, nor to bill the account for services rendered! At best, advisors can try and work around this by using account aggregation tools like eMoney Advisor or ByAllAccounts to access the client's account directly, and some plans (such as the Utah Education Savings Plan) have provided solutions to pipe client account data directly into portfolio reporting tools from the UESP website. But Utah's plan seems to be the exception to the general rule for direct-sold 529 plans right now: that they are not practical, and certainly not scalable, for independent RIAs to use with their clients.

Which means if (direct-sold) 529 plan providers really want to better engage the rapidly-growing RIA community to help their clients with 529 plans, then we need a third type of 529 plan: the "advisor-supported" plan, where the advisor isn't a broker who sells the plan, but an independent advisor who supports and advises on the plan. And a successful advisor-supported 529 college savings plan is going to have to get good in 4 core areas: 1) reporting (which means providing transaction-level data feeds to popular performance reporting tools), 2) trading (by integrating to existing rebalancing and model management trading software for RIAs), 3) billing (to make it feasible for RIAs to include the 529 plan as part of their billing process on their expanded assets under advisement, ideally with an option to bill the fee from the 529 plan directly); and 4) educational and planning tools to help RIAs understand when an out-of-state advisor-supported 529 plan is appropriate and when an in-state plan might be better (e.g., for in-state tax benefits).

But the bottom line is simply to recognize that, while 529 plan adoption has not been significant in the RIA channel, and the few who do use them tend to just choose simple age-based glidepath portfolios in direct-sold plans… it’s not necessarily because that’s the only thing that RIAs want from a 529 plan. It’s because, with the lack of advisor-supported 529 plan options, that has been the only option that was feasible in the first place, given that RIAs fall into the crack between direct-sold and broker-sold plans. And with better advisor-supported 529 plan options (particularly in light of the House GOP tax plan that may expand their use for private elementary and high school savings as well), there’s potential for a lot of growth of 529 plans in the RIA channel... if we can get a true advisor-supported plan!

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As financial advisors, we see the positive impact of our work with clients. From helping them accomplish their life goals, to keeping them from the behavioral mistakes that could derail their plan, we are often in the best position to see the value of what we do. But with the rise of financial planning academics, there has also been an attempt to scientifically quantify the true impact that financial advisors have on client outcomes. Which as it turns out, is remarkably difficult to measure.

In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – explores some of the research available on the use and benefits of financial advisors, and why advisors should still apply a healthy degree of skepticism when evaluating such research.

Broadly speaking, there are two branches of research on the use and benefits of financial advisors. The first includes studies like Morningstar’s Gamma and Vanguard’s Advisor Alpha which have aimed to quantify how much value advisors truly provide to their clients, which helps to both substantiate the advisor’s value to clients, and helps advisors justify how their benefits can exceed their costs. The second branch of research on the use of advisors stems from studies done within universities, often utilizing large national-survey datasets to examine questions such as who uses financial advisors, what impact advisors seem to have, and how public policy may be able to improve outcomes for consumers.

However, as it turns out, each branch of research is not without its own limitations. While industry studies have done an admirable job trying to estimate and quantify the value advisors provide, the reality is that this exercise is much harder to do than it may seem at first glance. In some cases, the “best” advice may require sacrificing financial gains for other ends (e.g., psychological comfort), which means the “best” advice could be wealth-reducing! And in any case, it is difficult to identify the appropriate benchmark that it is best to compare against in the first place (since we don’t necessarily know how the client would have acted in the absence of an advisor). Further, in some cases, such as the value that is assumed to be provided by advisors recommending low-cost investments, the reality is that not all advisors actually advise clients consistent with the assumptions of the models.

From the academic perspective, researchers often have to rely on either large data sets which may have less than ideal questions (at least to address their particular research questions). Yet in a unique study in the Financial Services Review, Heckman et al. (2017) evaluate how well questions about whether someone has used a financial planner actually measure “financial planning” as its defined by CFP Practice Standards. Unfortunately, the researchers conclude that all of the commonly used datasets have significant limitations. And while the alternative for academic researchers, which is to gather their own primary data, can help ensure that the ideal questions are utilized… these methods end up constrained to smaller-than-ideal (and potentially not representative) sample sizes.

Ultimately, the point isn’t that advisors shouldn’t follow the studies on the use and benefits of financial planning, but simply that it’s still necessary to apply a healthy degree of skepticism when reviewing and applying research. Although with the ongoing rise of financial planning academics, more and better opportunities are coming for advisors and academics to collaborate, bringing together best practices in research from academia with the practitioner’s real-world understanding of financial planning and how it is delivered to clients!

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