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Fidelity: Clients Need More Help with College Savings

By Murray Coleman August 25, 2016

The new DOL rule is forcing many broker-dealers to re-think how they deal with their clients’ retirement accounts. But a new study released Thursday by Fidelity Investments suggests advisors also need to keep proactively talking to parents about better ways to save for college.

Demand for advice on higher education is at an all-time high, according to the custodian’s 10th annual College Savings Indicator Study. And that’s leading, say the report’s authors, to unprecedented use of tax-advantaged college investment accounts – namely, through 529 savings plans.

The surge is dramatic. Consider a few of the study’s overarching findings, based on a national survey of 2,196 parents by Boston Research Technologies.

First, saving for college is at an all-time-high with 72% of families saying they’re actively setting aside money for higher educational needs. That represents a 24% uptick from 2007.

Second, parents surveyed increased their use of dedicated college savings plans by 62% during that same period. A record 41% of families who see higher education in their children’s future now invest in a 529 savings plan.

“We’re certainly seeing more parents prioritize college savings – it was their second-biggest financial concern behind how to best save for retirement,” says Matt Golden, who oversees 529 plans for Fidelity.

Besides growing interest in such issues, Golden notes that 70% of parents questioned want more specific recommendations on how much they need to save for higher education.

Along those lines, the study finds that 41% of surveyed parents are now working with a financial professional. That’s nearly double how many were utilizing an FA nine years ago.

Still, nearly half expressed concern they remain “off-target” in reaching their college savings goals, adds Golden.

“It’s not like advisors are missing out in engaging clients on their kids’ educational needs,” he says. “But this study suggests that more people are trying to learn about their investment options – and they really appreciate any extra support.”

As a result, Golden observes that “it’s probably going to be an even bigger value-add for advisors in the future to proactively talk to clients about planning ahead for college.”

Jennifer Ellison

That’s just what Jennifer Ellison is doing at San Francisco-based Bingham, Osborn & Scarborough. Like other advisors at the firm, which manages $3.5 billion, she’s incorporating a dedicated online planning tool to address college savings with clients.

The online system, developed internally by the independent RIA, lets Ellison sit with parents and input figures pertaining to things like a child’s present age, expected start date at college and number of expected years of schooling needed.

Then she uses rough projections for higher education costs provided by recent studies. Ellison says she lets parents know that depending on the area where a college is located, they should plan to spend anywhere from $30,000-$40,000 a year on a public university. Private colleges can land in a range that nearly doubles those costs, she notes.

“That’s when a lot of parents start looking at me like deer staring into a car’s headlights,” says Ellison.

The online college savings calculator helps the veteran FA work in such expenses to a family’s overall household budgeting process.

“We don’t let this conversation develop on their own – we raise it with clients who have kids and those who don’t,” says Ellison.

With college costs going up so dramatically and more awareness of the advantages of 529 plans, she believes that raising college savings issues early in the planning process is becoming an even greater talking point for advisors than just a few years ago.

“We’re emphasizing to parents that discussing how much to save for college and how much to set aside each year are critical parts of not only their children’s’ financial future,” says Ellison, “but also their own 401(k) savings and retirement planning decisions.”

Sara Botkin, president of Botkin Family Wealth Management in McMurray, Pa., tries to extend such a dialogue to other family members.

The independent RIA, which manages about $200 million, has created gift certificates for grandparents to hand to their children and grandchildren, showing they’ve contributed to a 529 plan.

“It’s a good tool we’ve found to encourage greater participation in college savings plans and to develop more of a dialogue across different generations within the same family,” says Botkin.

She likes to point out to clients that federal guidelines for 529 plans typically let parents and grandparents each contribute up to $14,000 a year per child.

Also, Botkin discusses with families possible “front-loading” of such tax-deferred savings. “Besides tax savings, we like to explain to parents and grandparents that a major advantage of a 529 plan is that you can contribute up to $70,000 per beneficiary every five years,” she says.

Most of her clients, however, opt to take a more gradual approach to building their college nest eggs.

“Sometimes an executive might get a big cash bonus and decide to front-load their kids’ college savings,” says Botkin. “But in most cases, we find that parents prefer to set up automatic monthly contributions through their 529 plan providers. That way, it becomes a regular part of their household bill paying process.”