The watchword is suitability.
That’s at the heart of recent enforcement action by an investment industry self-regulatory group known as the Financial Industry Regulatory Authority, or Finra. In late January, the organization announced a crackdown on the sale of certain high-fee 529 college savings accounts that may have been unsuitable to parents and grandparents who are the primary buyers.
Finra has given the brokerage industry until April 1 to review their sales of 529s and self-report any infractions. To avoid fines, firms will need to remedy any defects and compensate any investors who may have been steered into the wrong product. The sales period under review covers January 2013 through June 2018.
Blame the investment firms for pushing high-fee accounts that don’t fit investor objectives but do generate commissions. But the problems also fall at the doorstep of families that opened the accounts without really knowing what they were buying.
Finra’s crackdown revolves around so-called adviser-sold 529s, which are sold by investment firms. Families can also open a 529 directly through the state’s website. These “direct-sold” plans are not part of Finra’s review.
Like mutual funds, these adviser-sold 529s have different types of shares that carry different fees, commissions and suitability standards depending on whether you’ll need to tap the money in the short or long-term.
While there are numerous share classes, the two main plans are class A and class C.
Class A shares carry an upfront commission charge, but have lower annual fees, according to an analysis by Savingforcollege . com. Class C shares, on the other hand, don’t have commission charges, but do have higher annual fees.
Experts consider the class A shares, in general, to be more appropriate for buyers who will be investing for a longer-term. Doing so should give them more time to overcome the impact of the sales charges on their total return.
Class C shares are considered more appropriate for short -term 529 investors.
In its announcement, Finra said it was concerned about advisers not making suitable recommendations to 529 investors. Also, the regulator said it was “concerned that some firms may not (have) provided” adequate supervision to ensure compliance with the rules.
Finra spokeswoman Michelle Ong said it is too early in the process to get a sense of the scope of the problems. But, direct-sale 529s amounted to 7.3 million accounts and $175.3 billion in assets through the third quarter of 2018, according to the College Savings Foundation. Adviser-sold 529s amounted to 5.4 million accounts with assets of $135.1 billion.
If there’s a lesson for families, it’s the importance of understanding the differences between class A and class C shares in terms of commissions and fees and comparing them with 529 plans sold directly through the state.
The biggest advantage of buying these direct-sold plans through the state is that they tend to have no commissions and tend to have lower fees based on the asset size of the account. The plans are also more convenient, since you can enroll online at any time from the comfort of your home.
When buying from a financial advisor, you’re paying for the account to be more actively managed.
The other lesson for parents: Consider how and when you want to use the 529 money that’s building up. Are you starting to save when your baby is born, in kindergarten or high school? And is the money earmarked for college, or do you plan to tap it for kindergarten through high school education expenses, which is allowable now. The answer to those questions could dictate what type of 529 plan best fits your time horizon.
(Article written by Steve Rosen)
(SOURCE: TCA)
