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The Short Answer

Direct-Sold vs. Advisor-Sold: How to Decide Which 529 Type Is Best for You

In most cases, a cheaper direct-sold plan will do the job, but there are exceptions.

Note: This article is part of Morningstar's October 2013 College-Savings Boot Camp special report. This article originally appeared June 18.

Question: I use our state's 529 college-savings plan, which I bought directly from the fund company, but I understand that some 529 plans are sold through financial advisors. Are these plans different, and are they any better?

Answer: The 529 college-savings plan market is roughly split down the middle between advisor-sold and direct-sold plans. A recent Morningstar report on the 529 industry noted that the 51% of 529 assets held in direct-sold plans at the end of 2012 represents a 3-percentage-point increase since 2010, when a majority of assets were held in advisor-sold plans. Most advisor-sold plans carry sales loads, though some advisors waive them, especially fee-based advisors who charge clients based on a percentage of assets in the client's account.

This tipping of the scales toward direct-sold and away from advisor-sold 529 plans doesn't necessarily mean more college savers are buying plans directly from fund companies, however. This is because some advisors use direct-sold 529 plans, which are often cheaper, in managing clients' accounts. And with some advisors moving away from commission-based compensation structures in favor of fee-based structures, they simply don't have a financial incentive to use advisor-sold plans.

The difference in fees charged by direct-sold and advisor-sold 529 plans can be significant. The Morningstar industry report found that for direct-sold plans, fees for actively managed, passively managed, and blended (which includes both active and passive) age-based 529 portfolios averaged 84, 41, and 56 basis points, respectively. Fees for the same types of age-based portfolios in advisor-sold plans averaged 140, 78, and 103 basis points, respectively (for A-class shares).

Morningstar research has found that fees are one of the strongest predictors of fund performance, and this holds true for funds offered in 529 plans. Morningstar's 529 analyst team found that for the five-year period ended Jan. 31, direct-sold 529 plans averaged gains of 3.67% per year while advisor-sold plans averaged gains of 2.84% per year.

When an Advisor-Sold 529 May Make Sense
By now you might be wondering why so many investors continue to use advisor-sold 529 plans if they cost more and don't necessarily deliver better returns. In some cases investors may simply be following their advisors' advice without realizing there are differences between their state's advisor- and direct-sold 529 plans, including different price tags. If your financial advisor is managing your college-savings investments, be sure you understand what type of 529 plan you own and what it is costing you. In many cases a direct-sold plan will be your best choice, but not always. Below are a few scenarios in which using an advisor-sold plan may make sense.

Your state's advisor-sold 529 plan is better than its direct-sold plan. In rare cases, a state's advisor-sold plan might be clearly superior to its direct-sold plan because of differences in investment lineups or even price. For example, Arkansas' advisor-sold iShares 529 Plan charges between 55 and 64 basis points for its age-based options whereas the state's direct-sold GIFT College Investing Plan charges 75 basis points for its age-based options. Both plans are built around index funds, though the advisor-sold plan uses exchange-traded funds, which tend to charge lower fees than traditional open-end mutual funds.

You are looking for more choice, especially in actively managed funds. Advisor-sold funds tend to offer more investment options than direct-sold plans do. And, as more direct-sold 529 plans move to exclusively passive-based fund menus, investors who prefer to stick with their home state's plan for tax purposes and who prefer active management may find that they have no choice but to consider their state's advisor-sold plan. Also, some advisor-sold plans offer 529 portfolio options that simply aren't available elsewhere.

Your financial advisor uses only advisor-sold plans. Investors who use an advisor to manage their retirement and other financial matters may feel more comfortable paying for his help in college planning. If your advisor prefers to use an advisor-sold 529 plan, you might want to ask if there's a cheaper direct-sold plan that can be expected to perform similarly. Your advisor may say he has a good reason for using the advisor-sold plan, and after all, you are paying for his advice. But at a minimum he should take the time to help you understand why the advisor-sold plan is the best fit for your situation.

There's no telling whether the move away from advisor-sold plans and to direct-sold 529 plans will continue. But given the broader fund industry trend toward cheaper, passively managed investment products, ongoing movement toward index-based, direct-sold 529 plans would seem reasonable to expect.


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