As the 529 college savings plan market continues to grow in response to escalating tuition costs, the number of financial advisors personally handling them has been steadily shrinking. More clients are getting these plans through direct sales or the retail channel, experts say.   

Roughly one-third of parents surveyed own a 529 college savings plan, up from 24% last year, according to the College Savings Foundation's 2012 survey of parents, released in August. At the same time, financial advisors' share of the 529 plan distribution pie has gone from 60% to 65% between 2008 and 2010 to now slightly less than 50%. Direct-channel distribution now accounts for 50% of overall 529 plan sales.

Industry experts say the shift to more direct distribution has come about because of more cost-conscious consumers and the availability of "do-it-yourself" retail kits that allow them to set up these funds easily. Also, because of their typically small account balances, such funds are less remunerative for financial advisors to handle. 

"Some advisors say the 529 is a small-balance, small-ticket item," says Paul Curley, director of college-savings research at Boston-based Financial Research Corporation. Advisors are more often instead telling their clients to use the direct channel.
Chip Roame, a managing partner at Tiburon Strategic Advisors in Belvedere-Tiburon, Calif., says many accounts start with a few thousand dollars and then languish at around $30,000 to $40,000.

"There's difficulty in justifying a wrap fee on index funds or other low-cost buy-and-hold funds," Roame says. "I don't see it as a ripe financial advisor market; it's more as an accommodation similar to kids' accounts for a wealthy client."

Roame says most 529 plans contained high-priced investment vehicles until around 2008, but since then, many states have closed their 529 plans since private financial firms subsequently were unwilling to bid to take over the plans. He predicts the 529 market will move closer toward self-service.            
       
But other industry experts say that escalating college tuition costs still present an ideal opportunity for advisors, since more parents will seek professional college planning advice.

"College costs aren't going down," says Matt Golden, vice president of college planning for Boston-based Fidelity Investments, who says that 529 plans are still a viable business for advisors because they're still a viable product for clients.

"Independent financial advisors aren't going away at all," says Andrea Feirstein, founder and managing director of New York-based AKF Consulting Group, which monitors the college savings market. She says 529 plans fit into advisors' "whole-cloth holistic approach."

"People are turning to them more than they have in the past," she says. "Parental awareness of 529 plans is now around 35% to 40%; two years ago, it was about 25%."

Kristen Spazafumo, vice president and senior manager of 529 plans at Los Angeles-based American Funds, says the larger the 529 plan pool grows the better.

"This is an opportunity for the financial advisor to bring this up along with retirement savings," Spazafumo says. "Retirement planning and college funding are inextricably tied from a parent's point of view. For advisors, it should just be part of the conversation." 

American Funds is bullish on advisor-sold 529 plans. Its CollegeAmerica 529 college plan is offered by Virginia 529, an independent agency of the state of Virginia.

The plan, which is sold in all 50 states, is offered only through financial advisors. In September, American Funds launched its first college target-date fund. This addition gives the company's $33 billion CollegeAmerica 529 Savings Plan similar options as other 529 plans.

The goal, says Spazafumo, is to streamline and simplify the 529 setup and monitoring process for financial advisors. "We really want to bring the 529 plan business back to that financial advisor distribution channel ratio it was a handful of years ago," she says. "There are a couple of speed bumps that we are really working hard to eliminate by offering omnibus accounting, college target date funds and a streamlined instruction kit for advisors."

Omnibus accounting provides a simpler and easier process for advisors to set up a 529 plan, according to Savingforcollege.com. For instance, when American Funds launched CollegeAmerica, it enabled financial advisors to use Pershing LLC's platform to open 529 accounts. Under the arrangement, advisors can also take those assets and combine them in a client's portfolio with any other of the client's accounts.     
        
FRC analyst Curley predicts other firms may follow the same route. "Since California, we've seen the entrance of SSgA, J.P. Morgan and now ING," he says.

He's referring to California's ScholarShare college savings plan, which was shut down in October 2011 and then taken over by TIAA-CREF in November. Since the plan's collapse, financial firms have begun to enter the 529 plan market in the state.  
"I think that product providers are becoming more selective and business savvy in the evaluation of the opportunities that are in the marketplace," Curley says.

"This cross section of businesses is actually a very good sign. It's not just one particular type of firm looking to enter. It's really going to help the industry grow."

AKF's Feirstein believes that fee-based advisors and registered advisors are becoming more involved in the 529 plan selling process, but simply going through the direct distribution channel.

"It's for the simple reason that very few of the programs today actually offer a share class that is specific to fee-based advisors, Feirstein says. "Union Bank does it; their one would be the Illinois Bright Directions Plan, the Alabama Plan; the Virginia-American Funds does it. It's a low-cost investment. They typically won't have an annual servicing fee, they won't have the trail. It's sold pretty much at the NAV-but that's just a handful of programs that do that.

"You have 529 plans out there in the country that are being marketed to the RIA community and to fee-based advisors. And they're putting in place systems that will give the fee-based advisor the access to the account, the access to information, the ability to make changes to the account. So they're making it easier for these guys, and these are the guys that people are turning to."    
            
To build upon these 529 plan distribution inroads, financial advisors must take a more active role in promoting the plans, industry observers say.

"Advisors need to play an active role in the 529 plan process," says Spazafumo. "They're doing really a necessary service for their clients. If you look at the mutual fund industry, the retirement planning industry broadly, it is majority advisor sold and much less direct sold."

Curley says advisors are not selling the product as much as they should. "But now that there's more wholesaler support and just broader product support, that hopefully will help the 529 college plan grow," he says. "The opportunity to grow is basically for advisors to take up the product more and more."