I was watching this topic and having similar problems. Here's what fixed it for me.
I had set up a secondary email account with my hosting provider and tried to use it in my smtp settings on the board. It wouldn't work, I kept getting the 535 authentication error like you. I changed the smtp settings to use my main email account (the main address and password I use to log on to cpanel and all that other good stuff) and then it started working.
smtp server address festzone.com
smtp user name mfest
Using a secondary email address on my server would not work, only the main one did.
Learning to fly is easy, just throw yourself at the ground and miss.