Wealth Management Blog

Posts published in February 2013

Pros and Cons of Section 529 Plans

By JJ Burns

February 10, 2013

A Section 529 college savings plan can be a tax-smart way to help your children pay for their higher education. But you should also be aware of several potential pitfalls of this planning device. Here’s a brief rundown on the main pros and cons.

The Pros

The account can make money.

A Section 529 plan works much like a mutual fund, with account assets typically invested in equities by professional money managers. They do the hard work while you sit back and watch the account grow.

Count on the tax benefits.

Contributions to the plan are gift-tax-free, the earnings within the plan are income-tax-free and any distributions that are used for qualified education expenses are also income-tax-free. That’s a hard combination to beat.

Funds may be invested automatically.

Frequently, a plan will let you have funds automatically withdrawn from your checking or savings account. Not only is this convenient, it also takes some of the guesswork out of saving for college.

Contribution limits are generous.

State law effectively controls the amount you can sock away in a Section 529 plan, but the limits are favorable. In some states, you can contribute as much as $200,000 to your child’s account, which should be sufficient to cover tuition for four years at most schools.

Account assets are portable.

Although 529 plans are sponsored by individual states, the money can be used to pay for college wherever your child attends. Also, if funds are left over when your son or daughter completes school, you can use the excess to pay college expenses for another child. You don’t have to close the account until the youngest child reaches age 30.

The Cons

Funds must be used to pay qualified expenses.

If you make a withdrawal and use the cash for any other reason—say, to pay emergency medical expenses—the distribution attributable to earnings is taxed on both federal and state levels, and you’ll owe a 10% penalty. You’ll also be taxed on any leftover amount you receive after closing the account.

The investments are out of your hands.

This is the flip side of having professional money management. If you’re a savvy investor, you may prefer to have greater control over the funds. Should you be inclined to use a different investment option outside of a 529 you’ve established, you’ll be taxed and penalized if you withdraw funds and invest them elsewhere.

It might affect financial aid eligibility.

The impact of a Section 529 plan is usually negligible if held by a parent. Nevertheless, it must be factored into the equation to determine the “expected family contribution” (EFC) for college costs.

For most families, Section 529 plans are a good deal, but they’re not for everyone. We can provide the necessary guidance.

Choosing an Advisor: Big or Boutique?

By JJ Burns

February 6, 2013

A survey from the Luxury Institute shows that high-net-worth investors (with $5 million or more in assets) prefer boutique wealth management firms over Wall Street giants. Those who opt for boutique firms cite quality, exclusivity, and other factors. But what about investors of more limited means? What’s the best choice for them—smaller independent firms or big-name companies?

The Wealth Management Luxury Brand Status Index (LBSI) survey from the independent Luxury Institute in New York scores respondents’ answers based on each firm’s quality, exclusivity, social status, and ability to deliver special client experiences. The average respondent reported $15 million in net worth and income of $720,000.

“Reputations for honesty and superior client service are what make the smaller firms standouts in this survey,” says Luxury Institute CEO Milton Pedraza.

Investors have been shifting toward independent advisors for years. The number of independent Registered Investment Advisors, for instance, surged 31% between 2004 and 2010, according to Cerulli Associates Inc. A report by Charles Schwab, the 2012 RIA Benchmarking Study, shows RIAs enjoyed an 8.2% increase in new clients in 2011 (subtracting departing clients cuts the increase to 4.7%), along with a 12% gain in revenue.

The trend is partially due to technology, as smaller firms are now able to offer access to many of the specialized investment vehicles and services that were once the province only of larger corporations with more resources. Declining trust in larger firms in the wake of the 2008 financial crisis is another factor.

Smaller firms enjoy a reputation of being more likely to put clients’ needs first, while large firms are believed more likely to push in-house products. Another widespread belief is that smaller firms offer more in-depth, personalized service.

Many investors remain with big-name firms, however, especially if they are primarily looking for investment services that include access to high-end alternative investments. Even though access has become more widespread through technology, many of the larger firms still have an edge in terms of cost.

Some investors have even more specific reasons for sticking with the larger companies. For instance, an executive at a big, publicly traded company who has stock options may want to work directly with the financial services firm that handles that company’s options.

Still, many investors have shifted to smaller, independent firms, which tend to offer more comprehensive wealth management services and more coordination among investment, tax, legal, and other advisors.

If you are looking for a financial advisor, consider interviewing advisors from both large and small firms, then compare them in relation to your own needs and goals.