J.P. Morgan cuts off sales charges in 529 plans

J.P. Morgan Wealth Management is the latest firm to halt the use of upfront sales charges in 529 college savings plans sold by its advisers, announcing on Monday that it will no longer allow that practice.

The decision is in line with overall trends toward fee-based compensation but also hints at the influence of the Securities and Exchange Commission’s Regulation Best Interest on the 529 plan market.

“With this change, more of what the client invests goes towards their education goals,” the company stated in its announcement.

J.P. Morgan is limiting its roughly 4,000 advisers in its branches across the country to recommend 529s without upfront sales charges, which the company noted can be as high as 5.75%. The list of "select plans" that they can sell has not changed, but the waiver of the sales charge is new, according to a company spokesperson.

Most adviser-sold plans include only mutual funds without those charges, but there are several that have share classes with front-end loads.

“They’re trying to eliminate any appearance of a conflict,” said Andrea Feirstein, managing director of AKF Consulting. “It takes away any question about whether the investment was suitable … It puts everything back into this ‘act in the best interest’ standard.”

The announcement is separate from J.P. Morgan’s own adviser-sold 529 plan for the state of New York, which was already designed for fee-based compensation and did not include funds with front-end loads.

Although Reg BI doesn’t apply to 529 plans, distributors last year were vocal about their decisions to move away from plans that include funds with sales charges, Feirstein said. Leading up to the effective date of Reg BI, for example, UBS widely halted sales of funds with sales charges, she noted.

While many firms have their own adviser-sold 529 plans in different states, they can’t always recommend their own products and still act in a client’s best interest. That is often the case when clients live in states that have their own tax benefits. If a J.P. Morgan adviser has a client in Colorado, which offers strong tax perks for college savings, it could be difficult to justify selling the company’s own New York plan, for example, Feirstein noted.

“This shift in advisor compensation better aligns with the reality that college financial planning is an ongoing 18-year marathon that requires shifts over time in 529 account contributions strategies, coordination with other financial planning goals and educational goals from [kindergarten] to graduate school,” Paul Curley, director of 529 and ABLE research at ISS Market Intelligence, said in an email.

Fee-based advisory share classes account for about 3% of the total 529 industry and about 7% among adviser-sold plans, Curley said.

A year ago, 23 of the total 31 adviser-sold 529 plans in the country included fee-based share classes for RIAs, and that figure has since increased to 27, according to AKF.

“Every plan in the country is getting the point where they have to offer a dedicated RIA share class,” Feirstein said.