Saturday, July 24, 2004
First Command's Rebuttal Rebutted
Well, that didn't take long.
First Command doesn't take criticism lying down. In fact, I predicted a swift and ferocious counterrattack, although they stopped short of calling Diane Henriques "biased" against 50% front-end loads as I thought they may have, and as they did with Steve Goldberg, a writer at Kiplinger's, who was also critical of contractual plans, in September of 2003.
You can read the Kiplinger's article here, accompanied by a lively discussion from what looks to be a cut and paste from the Morningstar Vanguard Diehards discusion board.(scroll down a bit)
Here's the first graf of First Command's response to that article.
... an irresponsible and misleading story that unfairly attacks the many benefits of systematic investing for professional military families and could seriously impact financial opportunities for these deserving Americans. We view this as the essence of irresponsible journalism and a prime example of why the media is not trusted.
Well, the military doesn't trust the media, sure enough. But that ain't why.
First Command has learned a few tricks since then, and today's response, written by former First Command representative Patrick Swan is far more subtle.
First, a word about the author.
The National Review identifies Swan simply as a reservist mobilized in Baghdad.
But that's only half the story. Swan isn't just a reservist in Baghdad; he also works for the Chief Information Officer, and as such is an official spokesperson for the Army--an organization who's highest ranking officer, General Pete Schoomaker, is a former advisory board member.
Sure, it's not clear that he's writing this in his official capacity as an army spokesman and official media contact. But since he is sitting in that billet, Swan is wading into more ethical conflicts than I care to enumerate--and dragging the Army along with him.
It's probably not deliberate. But as a PAO, Swan should be aware of these potential conflicts.
At any rate, I'm just not sure that Army Public Relations officers should also be doing PR campaigns on behalf of corporations that do business with the US Army and its soldiers.
And now for the point-by-point:
To many Americans, today's military is the smartest, most innovative, most savvy, and most adaptive force in our nation's history. But, if you read a recent New York Times exposé, you'll discover that, despite their competence on the battlefield, our servicemen are actually financial simpletons, and hence are easy prey for unsavory firms ready to exploit military clients.
I don't think there's any doubt whatsoever that many in the military are financial simpletons, for the simple reason that many in the population at large are financial simpletons.
After all, the skills required to set the headspace and timing on an M2 .50 Cal Browning Machine Gun, and then go downrange and kill the enemy with it, are markedly different than the skills it takes to calculate the expected inflation-adjusted future value of a series of payments into an interest-earning account.
The logical fallacy here is a false appeal to authority. Just because we have a high quality army made up of high quality soldiers doesn't mean they're mini CFPs as soon as they get off the bus at Boot Camp. Great soldiers do silly things with their money. Ask Lighthorse Harry Lee. Or just drive down any strip outside a military base and count the number of payday loan shops and 'we tote-the-note' auto dealers.
You'll find that these strips look a lot like those in financially underserved inner cities with financially unsophisticated, largely unbanked, and not incidentally, largely minority communities.
Read the first part (of two) of Diana Henriques's article, and you'll walk away with the sense that military folks are duped by senior or retired military leaders into purchasing investments and life insurance that are not in their best interests.
Yes, and that's exactly the sense you should walk away with. Because the fact that it happens is not in doubt. I've spoken about the issue with some of my own NCOs today. All of them who were on active duty have stories of pitchmen disguised as quasi-official benefit counselors. It happens all the time.
Let's not try to create doubt about the central facts of the matter here, where no doubt exists.
The article is unfair
No it's not. As we shall see.
It would have been nice if, before she accepted these competitors' claims at face value, she had at least presented them with this quiz. Here are several military acronyms related to pay and travel: SBP, BAH, BAS, TDY, PCS. What do they stand for, and what do they do for military people? I'm confident these firms would be hard-pressed to figure out even half of them. [For the record, they are Survivor Benefit Program, Basic Allowance for Housing, Basic Allowance for Subsistence, Temporary Duty, and Permanent Change of Station.] If you don't understand Military Acronyms 101, you are hardly in the position to strike a superior pose on whether someone else's financial producers are suitable or not for servicemen and their families.
Of questionable relevance, as only SBP really creates mondo financial planning issues unique to military clients. Everybody who moves as part of his job, military or not, undergoes PCS issues. But military PCS's generally don't involve tax-deductible job search expenses, except at retirement.
The others--BAH, BAS, and TDY, are simply very basic cash flow statement items easily grasped by any competent financial planner. TDY money is generally treated as a windfall--albeit a small one. (Most guys blow a chunk of TDY money on steakhouses and strip clubs, anyway.)
What is clear is that First Command knows and understands them all.
So do I. Heh heh heh.
One specific subject of Henriques's extended derision is First Command's support for front-end-load contractual investment plans. They are designed for career military families with long-term goals and the discipline to pursue them over a 15- to 20-year career.
So is any dollar-cost averaging strategy. But I wouldn't brag about 15-20 year results.
First Command's most often cited flagship fund, Fidelity Destiny, ranks in the bottom 20% of the large growth category over both the trailing 5-year and 10-year time periods.
Fidelity Destiny--a large cap fund--also trails the S&P 500 by an astounding 5% per year over the last ten years.
It's underperformance is consistent over almost any trailing time period you'd care to name.
And this is BEFORE adjusting for the front-end load!
What's more, it delivered these pathetic results with only slightly less volatility as the S&P 500, and the fact that 97% of its returns are explainable by movements of the S&P (high correlation) tells me that it provides next to no diversification benefit against it.
Fidelity Destiny is a dog with fleas. If a 401(k) fiduciary trustee steered employees into this mutt, he'd be facing Department of Labor inquiries and ERISA charges for failing to conduct due diligence.
Five years ago, investors would have been better off investing in a five year CD at 6 1/2% interest rates than in investing in Fidelity Destiny. A First Command rep who put his clients in that fund offered no value added for that transaction for his commission.
None.
Fidelity Destiny II is better: it only trails the S&P 500 by TWICE its expense ratio (it's got a somewhat more value-based approach than Fidelity Destiny I, and so does better in weak markets. But why choose this one over a no load S&P 500 fund going forward? I can't think of a reason at all.)
They are not designed to bring high-flying, short-term results.
They're apparently not designed to bring long term results either.
On the contrary, they are designed to keep short-term, "market-timing" speculators out of the funds — precisely because of the high front-end load. This approach benefits long-term investors by providing a stable fund largely immune to daily market fluctuations.
Oh, horse hockey. There's a much simpler and time-tested way to discourage market timers from disrupting the funds: Simply slap a 2% redemption fee on any shares redeemed within 3 months to 2 years of their purchase date.
But really--is your average E8 with just a few tens of thousands or hundreds of thousands in his account really going to be a market-timing threat? Are enough of them going to redeem at the same time to cause a problem?
Spare me.
It's not the mom and pop investor who creates cash drag and transaction costs sufficient to noticably sting other shareholders. It's the multibillion dollar hedge funds pushing millions and billions at a time.
A 2% redemption fee--payable to the fund itself, and NOT First Command, would cover cash drag and transaction costs easily, without penalizing everyone else.
Problem traders could easily be kicked out of the fund.
But wait: there's even less!
Since the 50% load is a one-time fee, and fund shareholders are then allowed to trade without paying the load, the 50% load would do nothing--NOTHING to discourage market timing in the fund, anyway!!!!
So Swan's argument is a sham.
If you believe Henriques, however, you'll consider these funds bad because they are "obscure" or because they don't employ the follow-the-heard approach.
No. I consider both of these funds bad because they're lousy.
Henriques then quotes some dissatisfied clients who demonstrate that they are short-term (if not also short-sighted) investors.
We've already established that long-sighted investors in the Destiny funds have no business remaining in the funds. Why stay in a large cap fund that trails the S&P over time? Especially a highly correlated one?
There's not going to be a such thing as a dissatisfied long term client with First Command. Those with the sense to be dissatisfied will also have the sense to direct their investment dollars elsewhere.
Certainly, some First Command clients are unhappy with the performance of their mutual funds over the past several years. Considering we've just come out of the worst bear market in some 70 years, who hasn't been unhappy with his mutual fund's performance?
That's the wrong question to ask. The right question to ask is how have your funds been performing, on a LOAD-ADJUSTED basis, compared to other mutual funds with similar investment goals and styles?
If other large cap funds have lost 5% and my fund lost 10% over the same period, I'm very unhappy. If other large cap funds lose 10% and mine only lost 5% over ten years, I'd be happy taking my manager out to a steak dinner.
Henriques should have compared First Command's mutual funds with the no-load funds whose managers she uses to disparage First Command. Nothing doing.
Lucky for First Command.
Henriques quotes Jack Bogle, founder of the Vanguard Group.
I'll put Vanguard's lineup up against Fidelity's Destiny Series, or AIM's, or Oppenheimer's or Pioneer's, or Franklin Templeton's lineup any day of the week, fund for fund, style box for style box, over any 10 year period or longer. Especially on a LOAD-ADJUSTED basis!
What's more, I'll RAISE you a comparison of Vanguard's disciplinary record with First Command fund families, since two of them have run into serious regulatory trouble with the SEC or state regulators pursuing market timing
allegations and other trading abuses.*
In addition, she could have explained how this long-term investing approach, called "dollar-cost averaging," allows First Command clients to buy more shares of their mutual funds when the market is depressed, thereby purchasing when shares are "on sale" so they can bring in greater returns when they sell decades later.
Oh. My. God.
Is this guy trying to imply that dollar cost averaging is somehow unique to contractual funds?
Just how much Kool-Aid are they serving at these First Command seminars?
Buy low and sell high?) Instead, these somehow "obscure" funds — from nationally recognized investment firms such as Pioneer, Fidelity, and AIM — are portrayed as "ill-suited" for military people.
50% front-end loads are ill-suited for anybody investing more than 1,000 dollars in his first year. More on that later.
Any such affinity company knows that its word is its bond, and if it fails to live up to its word, it is out of business.
As Porgy and Bess might say: "It Ain't Necessarily So." At least, not in the financial services industry.Morgan Stanley and Merrill Lynch made hundreds of billions of dollars on the strength of bogus research--their analysts have been caught red-handed lying their pants off to investors, and they got a 1.4 billion dollar slap on the wrist--peanuts on Wall Street-- and are still going strong.
Prudential ripped off billions of dollars, and has literally paid billions in fines and disgorgement, thanks to unethical sales practices. Their limited partnership comeuppance in the early 90s--as Prudential-Bache--was the largest scandal in modern market history. They've been hauled before the SEC and NASD and the courts multiple times. But they're still raking in the bucks.
That plan is a mix of investments (to achieve long-term financial goals), savings (for short-term needs of less than five years), and permanent life insurance to cover any permanent financial needs (e.g., providing a permanent "check a month" for widows or widowers, for instance; or death taxes).
A "permanent check a month?" Don't you mean an annuity?
Ok, fine. But that's hardly unique to First Command, either. So let's take a look at the fees? What are the underlying expenses? What are the surrender charges? How long are they in place?
Vanguard offers annuities, too. I'd love to take Swan up on his challenge to compare First Command with Bogle's funds. Vanguard offers annuities, too. (First Command refused to send me any prospectuses when I was first looking at them last January).
If you want an apples to apples comparison with other advisor sold annuities, fine. How about Capital Group/American Funds?
I triple dog dare you.
Lay 'em out, fee by fee, and return by return in variable annuity subaccounts. Let's play ball.
On the subject of life-insurance products offered to military clients, First Command carefully selects the companies with which it deals. In may surprise some that there are companies that sell life-insurance policies containing a "war clause" that invalidates the policy if the insured goes to war. First Command will not sell life insurance with such clauses to its military clients.
That part is commendable. It's hard to imagine a good fee-only planner who would overlook the war exclusion when recommending a life insurance policy to a client. But that is a useful service for First Command to provide. I'll give them that one.
The insurance companies First Command has chosen do. In fact, from a personal perspective, if my "option" were due this month, I could take it, and the insurance company could neither turn me down nor charge me a heavy rate-up premium — even though I'm serving today in a combat zone.
Oooh. First Command's policies are guaranteed renewable.
I'll alert the media.
I've described the operations of this firm in some detail because it is important people know that there are reputable companies out there whose sole mission in business is to help military people.
IraqNow readers, meet USAA. USAA, meet IraqNow readers.
USAA offers solid mutual funds and good insurance coverage in a variety of lines, with much lower fees and commissions than First Command.
What's more, unlike First Command, USAA offers index fund alternatives to high-cost actively managed funds, and does so on a no-load basis. And their counselors understand the military, too.
When a newspaper like the New York Times smears an honorable company, such as First Command, for providing products that are "ill-suited to military people," we should call them on it.
No. I'm calling on First Command for providing a program that is ill-suited to military people.
Here's why.
Consider a case study:
SFC Garon and his wife Lily are 35 years old, with two five year old children, whom they would like to send to a private school. They're just now getting startd with serious financial planning, and schedule a few appointments with a First Command Advisor.
Let's say the First Command Advisor recommends starting Roth IRAs for both SFC Garon and his wife, and recommends--wisely--that they max out their contributions the first year, and every year thereafter. He also recommends they start Coverdell Education accounts for their children, since Coverdell plans allow tax free dispursals on qualified private school expenses.
So in the first year, they make payments of $2000 each on two coverdell accounts for their children, and two Roth IRAs of $3,000 for the sergeant and his wife.
The accounts will then have a combined basis of $10,000, generating a commission of $5,000 for the First Command representative.
And he hasn't even sold an insurance policy yet.
And we're not even considering the long-term opportunity cost of investing in underperforming funds, nor are we considering the opportunity cost of losing years of earnings on the 5,000 dollars used to pay the commission.
Now consider the alternative:
Rather than contact First Command, the couple instead contacts the National Association of Personal Financial Advisors, and finds a good fee-only Certified Financial Planning practicioner in the area.
The CFP would likely make many of the same recommendations: Max out your Roth IRAs for yourself and your wife. Contribute to your children's Coverdells.
The CFP is also more likely to recommend prudent debt payoff strategies; the FC rep will have no incentive to do so, and indeed, Enriques found one instance where a FC representative failed to do so.
The CFP is more likely to explain the benefits of the Thrift Savings Program--a great tax deferred savings vehicle which does not generate a dime in commissions.
The CFP is likely to hold more coursework and credentials than the FC rep.
The CFP is committed to abiding by a rigorous code of ethics--and if a fee-only planner, is committed to acting as a fiduciary. Meaning the client's needs must come first. If he fails to do so, the client has recourse to seek a revocation of the professional designation from the CFP board.
The CFP is more likely to recommend taking advantage of the Federal Thrift Savings Program, which would generate no commission for the First Command Advisor.
The CFP will be able to choose from a wider menu of funds and fund companies, and from insurance companies, and get the client into better funds. Without sales loads.
The CFP is more likely to recommend a sufficient emergency fund, since the fund generates no commissions for the FC rep.
The CFP will be able to develop a full-fledged financial plan for the clients, over a series of appointments.
Total cost: Probably between $500 and $1000.
Better plan. Better funds. $1,000 vs. $5,000.
Which is more suitable to the military family?
You make the call.
Splash, out
Jason
*AIM Funds was forced to settle on fraud charges after it got caught with its hands in the cookie jar, and then lying about it to investors.
Franklin Templeton has been hit with fraud charges by Massachussets investigators.
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First Command doesn't take criticism lying down. In fact, I predicted a swift and ferocious counterrattack, although they stopped short of calling Diane Henriques "biased" against 50% front-end loads as I thought they may have, and as they did with Steve Goldberg, a writer at Kiplinger's, who was also critical of contractual plans, in September of 2003.
You can read the Kiplinger's article here, accompanied by a lively discussion from what looks to be a cut and paste from the Morningstar Vanguard Diehards discusion board.(scroll down a bit)
Here's the first graf of First Command's response to that article.
... an irresponsible and misleading story that unfairly attacks the many benefits of systematic investing for professional military families and could seriously impact financial opportunities for these deserving Americans. We view this as the essence of irresponsible journalism and a prime example of why the media is not trusted.
Well, the military doesn't trust the media, sure enough. But that ain't why.
First Command has learned a few tricks since then, and today's response, written by former First Command representative Patrick Swan is far more subtle.
First, a word about the author.
The National Review identifies Swan simply as a reservist mobilized in Baghdad.
But that's only half the story. Swan isn't just a reservist in Baghdad; he also works for the Chief Information Officer, and as such is an official spokesperson for the Army--an organization who's highest ranking officer, General Pete Schoomaker, is a former advisory board member.
Sure, it's not clear that he's writing this in his official capacity as an army spokesman and official media contact. But since he is sitting in that billet, Swan is wading into more ethical conflicts than I care to enumerate--and dragging the Army along with him.
It's probably not deliberate. But as a PAO, Swan should be aware of these potential conflicts.
At any rate, I'm just not sure that Army Public Relations officers should also be doing PR campaigns on behalf of corporations that do business with the US Army and its soldiers.
And now for the point-by-point:
To many Americans, today's military is the smartest, most innovative, most savvy, and most adaptive force in our nation's history. But, if you read a recent New York Times exposé, you'll discover that, despite their competence on the battlefield, our servicemen are actually financial simpletons, and hence are easy prey for unsavory firms ready to exploit military clients.
I don't think there's any doubt whatsoever that many in the military are financial simpletons, for the simple reason that many in the population at large are financial simpletons.
After all, the skills required to set the headspace and timing on an M2 .50 Cal Browning Machine Gun, and then go downrange and kill the enemy with it, are markedly different than the skills it takes to calculate the expected inflation-adjusted future value of a series of payments into an interest-earning account.
The logical fallacy here is a false appeal to authority. Just because we have a high quality army made up of high quality soldiers doesn't mean they're mini CFPs as soon as they get off the bus at Boot Camp. Great soldiers do silly things with their money. Ask Lighthorse Harry Lee. Or just drive down any strip outside a military base and count the number of payday loan shops and 'we tote-the-note' auto dealers.
You'll find that these strips look a lot like those in financially underserved inner cities with financially unsophisticated, largely unbanked, and not incidentally, largely minority communities.
Read the first part (of two) of Diana Henriques's article, and you'll walk away with the sense that military folks are duped by senior or retired military leaders into purchasing investments and life insurance that are not in their best interests.
Yes, and that's exactly the sense you should walk away with. Because the fact that it happens is not in doubt. I've spoken about the issue with some of my own NCOs today. All of them who were on active duty have stories of pitchmen disguised as quasi-official benefit counselors. It happens all the time.
Let's not try to create doubt about the central facts of the matter here, where no doubt exists.
The article is unfair
No it's not. As we shall see.
It would have been nice if, before she accepted these competitors' claims at face value, she had at least presented them with this quiz. Here are several military acronyms related to pay and travel: SBP, BAH, BAS, TDY, PCS. What do they stand for, and what do they do for military people? I'm confident these firms would be hard-pressed to figure out even half of them. [For the record, they are Survivor Benefit Program, Basic Allowance for Housing, Basic Allowance for Subsistence, Temporary Duty, and Permanent Change of Station.] If you don't understand Military Acronyms 101, you are hardly in the position to strike a superior pose on whether someone else's financial producers are suitable or not for servicemen and their families.
Of questionable relevance, as only SBP really creates mondo financial planning issues unique to military clients. Everybody who moves as part of his job, military or not, undergoes PCS issues. But military PCS's generally don't involve tax-deductible job search expenses, except at retirement.
The others--BAH, BAS, and TDY, are simply very basic cash flow statement items easily grasped by any competent financial planner. TDY money is generally treated as a windfall--albeit a small one. (Most guys blow a chunk of TDY money on steakhouses and strip clubs, anyway.)
What is clear is that First Command knows and understands them all.
So do I. Heh heh heh.
One specific subject of Henriques's extended derision is First Command's support for front-end-load contractual investment plans. They are designed for career military families with long-term goals and the discipline to pursue them over a 15- to 20-year career.
So is any dollar-cost averaging strategy. But I wouldn't brag about 15-20 year results.
First Command's most often cited flagship fund, Fidelity Destiny, ranks in the bottom 20% of the large growth category over both the trailing 5-year and 10-year time periods.
Fidelity Destiny--a large cap fund--also trails the S&P 500 by an astounding 5% per year over the last ten years.
It's underperformance is consistent over almost any trailing time period you'd care to name.
And this is BEFORE adjusting for the front-end load!
What's more, it delivered these pathetic results with only slightly less volatility as the S&P 500, and the fact that 97% of its returns are explainable by movements of the S&P (high correlation) tells me that it provides next to no diversification benefit against it.
Fidelity Destiny is a dog with fleas. If a 401(k) fiduciary trustee steered employees into this mutt, he'd be facing Department of Labor inquiries and ERISA charges for failing to conduct due diligence.
Five years ago, investors would have been better off investing in a five year CD at 6 1/2% interest rates than in investing in Fidelity Destiny. A First Command rep who put his clients in that fund offered no value added for that transaction for his commission.
None.
Fidelity Destiny II is better: it only trails the S&P 500 by TWICE its expense ratio (it's got a somewhat more value-based approach than Fidelity Destiny I, and so does better in weak markets. But why choose this one over a no load S&P 500 fund going forward? I can't think of a reason at all.)
They are not designed to bring high-flying, short-term results.
They're apparently not designed to bring long term results either.
On the contrary, they are designed to keep short-term, "market-timing" speculators out of the funds — precisely because of the high front-end load. This approach benefits long-term investors by providing a stable fund largely immune to daily market fluctuations.
Oh, horse hockey. There's a much simpler and time-tested way to discourage market timers from disrupting the funds: Simply slap a 2% redemption fee on any shares redeemed within 3 months to 2 years of their purchase date.
But really--is your average E8 with just a few tens of thousands or hundreds of thousands in his account really going to be a market-timing threat? Are enough of them going to redeem at the same time to cause a problem?
Spare me.
It's not the mom and pop investor who creates cash drag and transaction costs sufficient to noticably sting other shareholders. It's the multibillion dollar hedge funds pushing millions and billions at a time.
A 2% redemption fee--payable to the fund itself, and NOT First Command, would cover cash drag and transaction costs easily, without penalizing everyone else.
Problem traders could easily be kicked out of the fund.
But wait: there's even less!
Since the 50% load is a one-time fee, and fund shareholders are then allowed to trade without paying the load, the 50% load would do nothing--NOTHING to discourage market timing in the fund, anyway!!!!
So Swan's argument is a sham.
If you believe Henriques, however, you'll consider these funds bad because they are "obscure" or because they don't employ the follow-the-heard approach.
No. I consider both of these funds bad because they're lousy.
Henriques then quotes some dissatisfied clients who demonstrate that they are short-term (if not also short-sighted) investors.
We've already established that long-sighted investors in the Destiny funds have no business remaining in the funds. Why stay in a large cap fund that trails the S&P over time? Especially a highly correlated one?
There's not going to be a such thing as a dissatisfied long term client with First Command. Those with the sense to be dissatisfied will also have the sense to direct their investment dollars elsewhere.
Certainly, some First Command clients are unhappy with the performance of their mutual funds over the past several years. Considering we've just come out of the worst bear market in some 70 years, who hasn't been unhappy with his mutual fund's performance?
That's the wrong question to ask. The right question to ask is how have your funds been performing, on a LOAD-ADJUSTED basis, compared to other mutual funds with similar investment goals and styles?
If other large cap funds have lost 5% and my fund lost 10% over the same period, I'm very unhappy. If other large cap funds lose 10% and mine only lost 5% over ten years, I'd be happy taking my manager out to a steak dinner.
Henriques should have compared First Command's mutual funds with the no-load funds whose managers she uses to disparage First Command. Nothing doing.
Lucky for First Command.
Henriques quotes Jack Bogle, founder of the Vanguard Group.
I'll put Vanguard's lineup up against Fidelity's Destiny Series, or AIM's, or Oppenheimer's or Pioneer's, or Franklin Templeton's lineup any day of the week, fund for fund, style box for style box, over any 10 year period or longer. Especially on a LOAD-ADJUSTED basis!
What's more, I'll RAISE you a comparison of Vanguard's disciplinary record with First Command fund families, since two of them have run into serious regulatory trouble with the SEC or state regulators pursuing
market timingallegations and other trading abuses.*
In addition, she could have explained how this long-term investing approach, called "dollar-cost averaging," allows First Command clients to buy more shares of their mutual funds when the market is depressed, thereby purchasing when shares are "on sale" so they can bring in greater returns when they sell decades later.
Oh. My. God.
Is this guy trying to imply that dollar cost averaging is somehow unique to contractual funds?
Just how much Kool-Aid are they serving at these First Command seminars?
Buy low and sell high?) Instead, these somehow "obscure" funds — from nationally recognized investment firms such as Pioneer, Fidelity, and AIM — are portrayed as "ill-suited" for military people.
50% front-end loads are ill-suited for anybody investing more than 1,000 dollars in his first year. More on that later.
Any such affinity company knows that its word is its bond, and if it fails to live up to its word, it is out of business.
As Porgy and Bess might say: "It Ain't Necessarily So." At least, not in the financial services industry.Morgan Stanley and Merrill Lynch made hundreds of billions of dollars on the strength of bogus research--their analysts have been caught red-handed lying their pants off to investors, and they got a 1.4 billion dollar slap on the wrist--peanuts on Wall Street-- and are still going strong.
Prudential ripped off billions of dollars, and has literally paid billions in fines and disgorgement, thanks to unethical sales practices. Their limited partnership comeuppance in the early 90s--as Prudential-Bache--was the largest scandal in modern market history. They've been hauled before the SEC and NASD and the courts multiple times. But they're still raking in the bucks.
That plan is a mix of investments (to achieve long-term financial goals), savings (for short-term needs of less than five years), and permanent life insurance to cover any permanent financial needs (e.g., providing a permanent "check a month" for widows or widowers, for instance; or death taxes).
A "permanent check a month?" Don't you mean an annuity?
Ok, fine. But that's hardly unique to First Command, either. So let's take a look at the fees? What are the underlying expenses? What are the surrender charges? How long are they in place?
Vanguard offers annuities, too. I'd love to take Swan up on his challenge to compare First Command with Bogle's funds. Vanguard offers annuities, too. (First Command refused to send me any prospectuses when I was first looking at them last January).
If you want an apples to apples comparison with other advisor sold annuities, fine. How about Capital Group/American Funds?
I triple dog dare you.
Lay 'em out, fee by fee, and return by return in variable annuity subaccounts. Let's play ball.
On the subject of life-insurance products offered to military clients, First Command carefully selects the companies with which it deals. In may surprise some that there are companies that sell life-insurance policies containing a "war clause" that invalidates the policy if the insured goes to war. First Command will not sell life insurance with such clauses to its military clients.
That part is commendable. It's hard to imagine a good fee-only planner who would overlook the war exclusion when recommending a life insurance policy to a client. But that is a useful service for First Command to provide. I'll give them that one.
The insurance companies First Command has chosen do. In fact, from a personal perspective, if my "option" were due this month, I could take it, and the insurance company could neither turn me down nor charge me a heavy rate-up premium — even though I'm serving today in a combat zone.
Oooh. First Command's policies are guaranteed renewable.
I'll alert the media.
I've described the operations of this firm in some detail because it is important people know that there are reputable companies out there whose sole mission in business is to help military people.
IraqNow readers, meet USAA. USAA, meet IraqNow readers.
USAA offers solid mutual funds and good insurance coverage in a variety of lines, with much lower fees and commissions than First Command.
What's more, unlike First Command, USAA offers index fund alternatives to high-cost actively managed funds, and does so on a no-load basis. And their counselors understand the military, too.
When a newspaper like the New York Times smears an honorable company, such as First Command, for providing products that are "ill-suited to military people," we should call them on it.
No. I'm calling on First Command for providing a program that is ill-suited to military people.
Here's why.
Consider a case study:
SFC Garon and his wife Lily are 35 years old, with two five year old children, whom they would like to send to a private school. They're just now getting startd with serious financial planning, and schedule a few appointments with a First Command Advisor.
Let's say the First Command Advisor recommends starting Roth IRAs for both SFC Garon and his wife, and recommends--wisely--that they max out their contributions the first year, and every year thereafter. He also recommends they start Coverdell Education accounts for their children, since Coverdell plans allow tax free dispursals on qualified private school expenses.
So in the first year, they make payments of $2000 each on two coverdell accounts for their children, and two Roth IRAs of $3,000 for the sergeant and his wife.
The accounts will then have a combined basis of $10,000, generating a commission of $5,000 for the First Command representative.
And he hasn't even sold an insurance policy yet.
And we're not even considering the long-term opportunity cost of investing in underperforming funds, nor are we considering the opportunity cost of losing years of earnings on the 5,000 dollars used to pay the commission.
Now consider the alternative:
Rather than contact First Command, the couple instead contacts the National Association of Personal Financial Advisors, and finds a good fee-only Certified Financial Planning practicioner in the area.
The CFP would likely make many of the same recommendations: Max out your Roth IRAs for yourself and your wife. Contribute to your children's Coverdells.
The CFP is also more likely to recommend prudent debt payoff strategies; the FC rep will have no incentive to do so, and indeed, Enriques found one instance where a FC representative failed to do so.
The CFP is more likely to explain the benefits of the Thrift Savings Program--a great tax deferred savings vehicle which does not generate a dime in commissions.
The CFP is likely to hold more coursework and credentials than the FC rep.
The CFP is committed to abiding by a rigorous code of ethics--and if a fee-only planner, is committed to acting as a fiduciary. Meaning the client's needs must come first. If he fails to do so, the client has recourse to seek a revocation of the professional designation from the CFP board.
The CFP is more likely to recommend taking advantage of the Federal Thrift Savings Program, which would generate no commission for the First Command Advisor.
The CFP will be able to choose from a wider menu of funds and fund companies, and from insurance companies, and get the client into better funds. Without sales loads.
The CFP is more likely to recommend a sufficient emergency fund, since the fund generates no commissions for the FC rep.
The CFP will be able to develop a full-fledged financial plan for the clients, over a series of appointments.
Total cost: Probably between $500 and $1000.
Better plan. Better funds. $1,000 vs. $5,000.
Which is more suitable to the military family?
You make the call.
Splash, out
Jason
*AIM Funds was forced to settle on fraud charges after it got caught with its hands in the cookie jar, and then lying about it to investors.
Franklin Templeton has been hit with fraud charges by Massachussets investigators.
