Parents of older children turn to financial advisors for college funding strategies.
Back in the mid-1980s, Philip Johnson was transitioning from a 15-year career as a college administrator into financial planning when he discovered what potential clients were really concerned about. "I'd start discussing their retirement and they'd say, 'I'd love to talk to you but I have three kids to get through college first,'" recalls the Clifton Park, N.Y., financial advisor. "It dawned on me that this was a big issue that most advisors weren't addressing."
When Johnson decided to fill the gap by shifting his focus to college planning, he noticed something else he hadn't anticipated. The seminars on planning for college, which were geared for people with younger children who had years to save, drew only a handful of participants. But the ones on paying for college, which focused on those with children on the verge of graduating from high school, were standing room only. "It's one of those great mañana issues," he says. "With a sense of urgency, people are more likely to give you their undivided attention."
A lot has changed since Johnson began mining the nascent college market nearly 20 years ago. Until the late 1990s, the only tax-favored savings options for most people were UGMA or UTMA accounts. While the introduction of Coverdell Education Savings Accounts and 529 savings plans brought college planning from the back burner to the forefront a few years ago, they may be less of a draw than many advisors anticipated. The $2,000 annual ceiling on Coverdell contributions limits their utility and appeal, and despite ample promotion, about three-quarters of 529 savings plans still have less than $10,000 in assets.
What hasn't changed is the sense of urgency parents feel as spring approaches, acceptance letters begin coming in, and their children prepare to move into what will probably be the most expensive four years of their lives. "People can put off insurance planning, estate planning or retirement planning," says Deborah Fox of Fox College Consulting in San Diego. "But they can't put off an imminent tuition bill."
At first glance, courting parents who are facing more than $160,000 in college costs over the next several years, and who could easily become tuition-tapped spenders rather than diligent investors, may seem counterintuitive.
And providing good advice to those individuals requires a more sophisticated skill set than simply setting up a Coverdell Education Savings Account or 529 savings plan. Some people, particularly business owners, might be candidates for strategies involving use of pretax dollars to pay for college, or hiring their children. The quirky rules surrounding financial aid create both planning opportunities and stumbling blocks for the uninformed. The optimal coordination of withdrawals from savings plans with the appropriate tax credits and deductions could mean thousands of dollars in savings.
Those who use paying for college as part of their marketing effort say putting in the time to bone up on such strategies-or pairing up with a consultant who knows the ins and outs of college funding-is worth the effort. "It isn't unusual for someone to be wowed by a college engagement because they are being shown something unique that they won't be likely to get from their accountant or other advisor," says Fox. "And that turns people into long-term clients." Even if someone already has a standing relationship with another financial advisor, a college engagement can be a good way to generate referrals, she says.
Tailoring An Approach
Expertise in the nuances of paying for college holds appeal even to affluent families, says Troy Onink, National Accounts Manager at Harris Insight Funds. "These people may have more than enough money to pay the bills, but they may not be familiar with strategies that can save thousands of dollars," he says. "Clients can avoid liquidating portfolios to pay college bills if advisors are proactive in suggesting other alternatives."
Onink advises those aiming at the higher end of the net-worth spectrum to hold a seminar at a private high school. Discussions about shifting assets to qualify for need-based aid, a common topic at college seminars, would be of little use here because private colleges often preclude families with incomes of more than $130,000 from receiving such aid, he says.
Instead, the focus shifts to tax issues, cash flow and borrowing alternatives. "Never mention any products, even in a generic sense," he advises. "This is all about planning." Referrals from clients with children at private schools are a good way to get a foot in the door, or advisors whose children attend private school might approach administrators about conducting a seminar. Other networking opportunities may come through contacting private school associations such as the National Association of Independent Schools (nais.org).
While affluent families with incomes well into six figures may not qualify for need-based financial aid, they often do not have the full cost of four years of college tucked away, says Fox. To evaluate their options, her firm uses a three-tiered approach. First, she looks at academic considerations by asking a student to fill out a profile, then matches it to colleges that will not only admit that student, but are likely to offer merit-based aid. She then evaluates cash flow strategies, which often include the use of low-cost government loans. If rates rise too much, clients can always pay off these loans without a prepayment penalty and utilize other sources of financing. She then evaluates tax strategies, which may include gifting appreciated assets and shifting income to students so they can claim valuable tax deductions and credits their high-income parents can't. "With the combination of these three pieces, we can typically reduce costs by $20,000 to $40,000 over the course of four years," she says.
Other financial advisors generate referrals from seminars at schools. Chuck Moore, a college-planning consultant in Louisville, Ky., often speaks at high schools and businesses about paying for college. "Public school guidance counselors often aren't familiar with strategies that go beyond how to fill out financial aid forms, so parents are generally very receptive," he says.
To gain credibility as a funding specialist, Moore contacted the executive director of guidance counselors in his state. "I emphasized the educational nature of the proposed presentation and made it clear that I didn't want to talk about shifting assets, financial aid tricks or investments," he says. His speeches at schools have led to engagements at other area businesses, including the largest hospital in the state.
Learning how to navigate the draconian financial aid system has created a comfortable niche for some advisors. Dan Claffey, a financial advisor in San Ramon, Calif., says many of the parents he meets at his seminars have children who are juniors or seniors in high school and have an immediate need for advice on how to get the best financial aid package possible. "In some cases, it makes sense to move assets from a UTMA account into a 529 savings plan because it is assessed more favorably in federal financial aid formulas," he says. "Or, a client might transition from assessable assets in taxable accounts into 'uncounted' annuities or cash-value life insurance." Claffey says that even though they may be able to qualify for financial aid, many of his clients are middle-income families that have well over $100,000 to invest.
Getting Up To Speed
College advisors warn that becoming fluent in eleventh-hour college
funding strategies and integrating them cohesively into a family's
broader financial plan requires more than reading a few articles on the
topic. A burgeoning industry has been built around helping financial
advisors who want to key into the need for advanced college funding
strategies, but who may not have the time or inclination to learn
everything themselves. Fox's firm (www.foxcollegefunding.com), for
example, consults with about 70 advisors around the country who charge
their clients a fee of between $1,250 and $2,750 for a comprehensive
college funding plan, depending on the level of complexity. After the
advisor gathers the information, her firm creates the plan
and retains a portion of the fee. She also offers referral and training
Rick Darvis, a certified public accountant and one of the most widely quoted college funding specialists in the country, trains financial professionals on how to provide college funding services for their clients through his firm, College Funding Inc. Using information provided by the advisor, his CollegeSolution program (www.solutionsforcollege.com) produces reports and other information for clients. Ron Them, an advisor in Dublin, Ohio, specializes in personal coaching for college planning advisors and financial planners who use college funding as a niche market through his Tuition Rx and Student Athlete Rx Programs (www.tuitionRx.com).
A number of educational resources are available to advisors who want to bone up on the basics of college funding. Web sites such as finaid.org and collegeboards.com offer good starting point for information and guidance on financial aid and scholarships. The National Institute of Certified College Planners (niccp.com), co-founded by Darvis and Them, offers courses on paying for college, loans and other education funding topics. A free online booklet available at the "How To Survive the High Cost of College" Web site, provides a good primer for those new to the subject.