 Dear
College Money Guru,
Could you please tell me if it is better to take out an educational savings fund for college for my twin granddaughters through a bank or an educational savings company? I'm confused.
-- Laura
 Dear
Laura,
When you walk into your local bank branch, you
are likely to see posters and brochures touting
529 plans and other educational savings products.
And then, when you open your mail, watch television
or read magazines you may see advertisements from
mutual fund firms like Fidelity, TIAA-CREF, T.
Rowe Price and others for what appear to be the
same types of savings plans.
No wonder you are confused.
It's important for you to understand that in addition to savings accounts, certificates of deposit and other banking products, banks can sell investment products, including 529 plans, through their brokerage subsidiaries. Purchasing an investment through a bank broker is similar in many respects to using a financial adviser at an investment brokerage firm like Morgan Stanley, Merrill Lynch or Raymond James. When you purchase a 529 plan through a broker, the broker receives commissions, paid for by you directly through sales charges and/or indirectly through additional expenses attached to the investment.
You will avoid these costs by going to a 529 plan and opening your account directly. Each 529 plan has a Web site containing an official program description and other enrollment materials, and most of the "direct-sold" plans allow you to easily enroll online and make contributions via electronic transfer from your bank account. You might also locate 529 plans through the Web sites of the mutual fund firms, including the firms mentioned above, that are hired by the states to manage their 529 plans.
Should you go the direct route or the broker route? The answer depends on your ability to understand and select 529 plans and other investment vehicles, as well as the amount of time you are willing to spend investigating your options. Many parents, and especially grandparents, decide to involve a financial professional and don't mind paying the extra costs associated with broker-sold 529 plans. You may also wish to consider that broker-sold 529 plans tend to use actively managed mutual funds in their investment options while many of the direct-sold 529 plans use index funds.
Another source of help for those who seek professional advice is a fee-based financial planner. Because they do not take sales commissions, these financial planners will usually recommend the lower-cost, direct-sold 529 plans. However, you will be paying the financial planner an hourly fee or a percentage of the value of your investments.
If you decide to use a broker or
financial planner, do your best to select someone
who is very knowledgeable about 529 plans and
other ways to save and pay for college. Ask questions
about their experience in selling 529 plans, how
many different 529 plans will be considered and
why a particular 529 plan is being recommended.
If the recommended 529 plan is not your own state's
plan, be sure you are aware of any special benefits
you may be giving up, such as a state income tax
deduction.
For more discussion, read the Financial
Industry Regulatory Authority, or FINRA, guide
"Selecting
Your Broker."
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