In 1996, Congress created the 529 Plan program to assist parents (and others) to save for children’s college tuition and expenses, and to permit savings to grow tax free, if used for allowed educational purposes. Technically, each state sets up its own version of the plan, but anyone over 18 can set up a 529 in any state; you are not limited to the state where you live.
Now Congress made it relatively easy for someone to open and maintain a 529 plan. One can easily open a plan online in 15 or 20 minutes through a financial institution’s website like a brokerage such as Charles Schwab, Fidelity, or Vanguard. The plans are pretty much self-administered meaning the plan’s creator, or someone that creator designates, manages the plan.
At first glance us financial advisors didn’t love these 529s because of that self-managed thing. How can we make money on these? Fortunately, Congress didn’t put too many obstacles in our way from figuring out how to make them profitable for us. That money our industry spends on lobbyists seems to be money well spent.
Right off the bat, many states actually offer two versions of their 529 plans
- A direct-sold version
- An advisor version
Nothing requires us to mention the direct sold-version, which of course is cheaper overall. The advisor managed version can be, and almost always is, loaded with fees and commissions built right in. Those fees and commissions are very profitable for us.
Fortunately, we aren’t required to tell potential clients that they can open a 529 themselves quite easily on-line in 15 or 20 minutes. We don’t have to tell them that they can use any state’s plan regardless of which state they live in. The last thing we need is for them to start looking for better deals in other states and leaving us empty handed. Better we should choose the state to push that’s better for us, not better for them.
Once the plan is under our management, we can do stuff like move our client’s money around and earn some nice commissions along the way. It gets better: Once we have a client set up with their 529 under out management, we can sell them other really profitable stuff like whole life insurance and annuities. Gotta love those annuities!