For Ben Franklin, nothing was certain but death and taxes. While those certainties remain, parents of college-bound teenagers now face another sure thing: the staggering and ever-increasing cost of paying for higher education.
Scholarships and loans can help defray expenses, of course, as can some government-sponsored plans that incentivize college savings. But no method has generated as much buzz in recent years as state-sponsored 529 college savings plans that offer tax-deferred growth and tax-free distribution for accredited educational costs.
Why, then, aren't financial advisers doing more 529 plan business?
One reason is low investor demand. Although the $26 billion invested in 529 plans through the third quarter of 2003 represented a $7 billion, 37% jump from the close of 2002, studies by several mutual fund providers found that nearly two-third of parents and grandparents -- the target demographic -- are unaware that 529 plans exist.
It's hardly surprising, then, as one bank rep related, that confused clients have asked him about "those 429 plans."
While Cerulli Associates, the Boston research firm, estimates that college savings plans will grow to $145 billion by 2008 -- a 40% compound annual growth rate between 2002 and 2008 -- the potential market remains hardly tapped.
According to Financial Research Corp.'s Monitor, there are 72 million children under the age of 18 in the U.S., yet only 3.7 million 529 accounts have been opened. Clearly, then, low advisor demand is also to blame for the plans' sluggish takeoff.
When tax-advantaged 529s emerged in 1997, the first state sponsors marketed directly to consumers. As the number of plans proliferated -- there are currently 75 -- and became more complex, states began to turn marketing over to advisers. But in a booming equity market, 529s' typically low account balances and paltry commissions aroused little broker interest.
Even with commissions up to 4.69% at the end of 2002 and rising, the relative newness of the product and consequent lack of awareness among professionals thwarts the best efforts of marketing gurus to get out the word.
Small Ticket, Big Picture
"It may be a small ticket, but you have to look at the big picture," said financial adviser Eric Kohlmeier, senior vice president at Wachovia's investment services group. Kohlmeier, who covers three Wachovia branches in Park Ridge and Oradell, N.J., and Rockland County, N.Y., describes the mere 5% of his business in 529 plans as "a great relationship builder."
For example, he said, "I have a client who's putting $1,000 into a 529 plan, but he's bringing $1.5 million into our relationship."
So far, 529s have enjoyed their greatest success with independent broker/dealers, Cerulli points out, probably because the independent channel tends toward financial planning. (On the other hand, lower ticket sizes from independents, generally 15% to 25% below those at wirehouses and regionals, diminish the gap.) Brokers at the large firms may require more prodding to ask the personal questions that reveal an investor's need to save for their family's college plans. And, as the equity market continues to return, many will likely revert to old, transactional patterns.
For Les Howard, manager of the Raymond James Financial Institutions Division brokerage at First National Bank in Brookings, S.D., these trends provide precisely the kind of opportunity that community bank reps need.
"I think we're a little more aware of 529s because we have a better feel for what our clients need to do. We know their family situations. It's easier to promote a college savings plan when you know who has kids," Howard said. "Especially in a town this size, we know everything about everybody!"
The population of Brookings, home to South Dakota State University and its "Fighting Jackrabbits," peaks to nearly 19,000 during the school year from a permanent base of 10,000 to 12,000.
With two college-bound kids of his own, Howard has been aware of, and selling, 529 plans since well before South Dakota created its own program in the spring of 2002. One of two producers on his team of five licensed reps, Howard estimates they've done more than a quarter of a million dollars in 529 business to date.
"South Dakota has a reputation for being one of the last states to do most things, and it was true with 529 plans, too," he laughed. "But, as a result, we were able to choose the best pieces from all the other plans: a very multi-managed plan with age-based and mixed stock portfolios involving a real long list of mutual fund families and a high total contribution amount of $305,000."
Thanks to Howard's experience with other 529s and previous employment in state government, he was asked to participate in the creation of South Dakota's College Access 529 Plan. In fact, the rollout took place in Brookings, with Howard doing much of the speaking.
"Occasionally, we'll have a grandparent who puts in $10,000, but most of our [529 plan] investors are of a smaller nature, making monthly installments far from the $305,000 cap," he noted.
But market share alone won't sell 529 plans, In West Texas, where First American Bank operates 100 branches mostly in and around places like Amarillo, Abilene, College Station and Odessa, the concept just hasn't caught on, said Robert Atwood, the senior vice president and sales manager who heads the bank's non-deposit investment program.
"We make them available, but they just haven't been the hit I hoped they'd be," he said.
Atwood hasn't given up on 529s, though. As the $3.2 billion Texas-owned and operated bank expands into the larger markets of Dallas and Houston, he expects to see more opportunities. Right now, however, "most of our clients are from communities of 20,000 or less, and they're older, conservative investors, who are more concerned about interest rates on fixed income and fixed annuities," Atwood said. "They've never invested in anything that helps them make money. They just want to maintain what they have."
Age-wise, First American's investment population should be a perfect target for 529 plan marketing. The insurers and mutual fund companies that manage college savings plans for the 50 states used last winter's holiday season to emphasize both the significance of a 529 gift to a grandchild's future and the tax benefits to the grandparents themselves.
While plan caps differ state to state, contributions are regulated by federal gift tax laws. Under the tax code, there is no limit to the number of tax-free $11,000 gifts anyone can make to another person. Establishing a 529 plan allows each parent, grandparent or other individual to make a gift up to $11,000, or $22,000 in the case of a married couple, for each child.
What makes 529s such a unique vehicle for older investors looking to reduce their estates is that the government permits the donor or donors to make five years' worth of gifts at once. With one such gift, therefore, a grandparent couple can reduce a large estate by $110,000 per child.
And there's more. With 529 plans, donors retain control, eliminating the so-called "Harley or Harvard" dilemma. As well, by retaining control of the money, a grandparent may feel they have a cushion for nursing home care, if need be, even though withdrawals for personal use incur a 10% penalty as well as federal, and possibly state, taxes on earnings as ordinary income. The only three exceptions would be if a student receives a scholarship, dies or becomes disabled.
As Kohlmeier notes, community bankers are in a unique position of having very personal relationships with their customers, including their college-bound children. And 529s are a great way of keeping that dialogue going.
"You have to build a relationship with the client," he said. "You might make less money today, but in the long run, there will be more."
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