Series 51: Suitability And 529 Plans

Taken from our Series 51 Online Guide

Suitability and 529 Plans

When recommending a 529 college savings account, it is important for the recommendation to match the customer’s investment objective. When considering suitability, the dealer must inform the client about the tax advantages of a 529 college savings account. Also, the recommendation should be made in light of the fact that 529 accounts are for customers who reasonably expect to finance someone’s higher education. In other words, 529 savings plans should not be used as piggy banks for other purposes.

While the person who opened and controls the 529 account is considered to be the customer, information about the beneficiary is also required for a suitability analysis. For example, the representative should know the age of the beneficiary and the number of years until the funds will be needed. So in the context of 529 accounts, information about the designated beneficiary should be considered part of the customer’s investment objective.

It is important to understand underlying investments within a 529 plan so that you can help a customer choose investment options that are in line with the customer’s goals. There are two basic types of 529 investment options: age-based plans and static-choice plans. Age-based plans automatically adjust assets towards less risky investments as the beneficiary approaches college age. This generally means that plans begin with a higher risk and higher reward portfolio (mostly stocks and some bonds) and then later shift toward a more conservative bond-and-cash or cash equivalent portfolio. In contrast, static-choice plans typically maintain the same allocation of investment classes over time. Both types of plans typically offer conservative, moderate, and aggressive asset allocations. Investors choosing a static-choice plan will often keep the same asset allocation through the plan’s duration.

General principles to remember about the underlying investments within a 529 plan:

Stocks are ri

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