With that in mind, here are five questions that every parent investing for college should ask their financial professional:
Question #1: What Are Your Credentials?
While I’m sure there are plenty of great advisors out there with minimal credentials, your chances of finding the right advisor are much greater if they have a few letters after their name. Ideally, your advisor will have some type of comprehensive financial planning designation such as the Certified Financial Planner (CFP) designation.
Other designations that would indicate some level of appropriate knowledge are going to be the Certified College Planning Specialist (CCPS) or a Certified Public Account (CPA) credential. On the other hand, simply passing one of the Federal or state licensing exams for securities or insurance is not usually sufficient by itself to make someone an expert on college planning.
Question #2: How Do You Charge for Your Services?
One of the great frustrations that still exists in the financial services industry is the lack of transparency in how clients are charged for services. Often times, it is some combination of commissions, account fees, and “hidden” management fees built into mutual fund investments.
It may not seem like a big deal, but a total annual management cost of 2-3% of your portfolio’s value is very likely excessive. Such a high cost of investment management can greatly slow your overall portfolio’s growth. Ideally, the total cost to have your investments managed should not exceed 1.50% of your portfolio’s value, on an annual basis.
Question #3: How Much Do You Know About Financial Aid?
Due to the rising cost of college, keeping your financial aid options open is more important than ever. Even parents who diligently save may need to apply for some scholarships, grants, or loans to help cover the remaining costs after their investments are depleted.
The amount of financial aid that you’re eligible for is going to be determined by your family’s Expected Family Contribution (EFC). This amount is calculated not just on your family’s income, but also who (the parent or child) has what type of assets saved in their name. Saving in the wrong account, or putting the wrong name on the right type of account, can have a huge impact on how much aid you’re eligible for later.
Ideally, the person handling your college funds should have a working knowledge of how these different things impact your future financial aid opportunities.
Question #4: What Is Your Investment Strategy For College Accounts?
Investing for college, which must be done over a relatively short period of time, is very different than investing for a retirement that might be 30-40 years away. Additionally, unlike a retirement portfolio that will be drained slowly over decades, all the money in your child’s college account will be used during a very short window of time.
Ideally, your professional will show an awareness of these unique time horizons and will select your investments with these factors in mind. They will be keenly aware that there are certain types of investments that should be avoided for college accounts. They should also voice the fact that your portfolio’s volatility, determined by its underlying asset allocation, should become more conservative as college draws near. Many good advisors will use the aged-based portfolios available in Section 529 accounts to accomplish this purpose.
Question #5: Which Section 529 Providers Can You Use?
Section 529 accounts are, for many good reasons, the best thing to happen to college planning since the creation of the UGMA account. These plans allow for tax-free withdrawals of invested funds when used for qualified higher education expenses.
However, not all Section 529 Plans are created equal. There are over sixty different plans offered through the different states, and you can typically use any plan from any state. If your state’s government doesn’t offer a state income tax deduction for using their plan, it is very often in your favor to choose another state’s plan.
But, if your advisor is limited by their firm to only offering some states’ Section 529 plans, you may be getting the short end of the stick. Many times, the plans offered through advisors have substantially higher annual fees or commissions, as well as a more limited number of investment options.
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