Kiplinger’s Personal Finance
Vol 57, Issue 9, Sep 1, 2003, Page(s) 53 (678 words)
by Steven T. Goldberg
(reporter: MAGALI RHEAULT)
- plus CLARIFICATION on page(s) 10, Vol. 58, Issue 1, Jan 1, 2004
All Loaded Up
page 53 | Investing KIPLINGER’S | SEPTEMBER 2003
FUNDS | A marketer is selling funds with SKY-HIGH FEES to military personnel. By Steven T. Goldberg
Our armed forces are being shot at and ambushed in Iraq, and may soon be quelling genocidal warfare in Liberia. The last thing they need is to be sold overpriced investments by the financial-services industry back home. Just ask Air Force Sgt. Michael Proulx. He attended a First Command financial-planning seminar two years ago near Ramstein Air Base in Germany. After a steak-and-schnitzel buffet, the 35-year-old noncom signed up to invest $166 monthly in a Roth IRA with Templeton Capital Accumulator fund. The first year’s sales charge: 50%.
Little-known outside the military, First Command sells a class of mutual funds that levy huge upfront commissions. Some in the military are susceptible to First Command’s pitch, says Richard Ferri, a money manager and retired Marine major, because they have "zero experience" with funds. "What they’re doing is totally legal," says Ferri. "Is it ethical? No." Replies Ivy McLemore of AIM Investments, whose funds are sold by First Command: "It’s a highly principled product."
Wide reach. First Command, which provides financial planning to clients and sells them life insurance, has been in business since 1958. Called United Services Planning Association until 2001, it counts 290,000 active and former military families as clients. The firm’s 221 offices around the globe boast many former service personnel among their representatives.
The company is the largest seller of Fidelity Investments’ two Destiny funds. Under Destiny’s terms, once you pay the 50% sales charge on your first year’s purchase, you can continue to invest the same amount for up to 25 years with no more sales charges. The lion’s share of the commission goes to First Command and its agents.
But critics say so-called systematic, or contractual, plans place investors too deeply in the hole. "It’s like throwing the first five years of returns away," says Don Phillips, Morningstar’s managing director. If you earn 10% per year--the stock market’s long-term average return--it will take you more than seven years just to get back to even on your first year’s investment.
First Command and the companies that offer contractual funds--AIM, Franklin Templeton and Pioneer, in addition to Fidelity--defend the sales charges with this logic: The first-year sales charge imposes the necessary discipline on investors to stick with regular monthly investing. Says AIM spokesman McLemore: "It helps promote the time-tested principle of dollar-cost averaging." Indeed, fund-industry data shows investors tend to stay with contractual funds for long periods, rather than hopscotch frenetically among funds.
A better approach. Maybe so, but there’s a better way to force yourself to practice dollar-cost averaging, a method that is simple, much less expensive and doesn’t handcuff you to a particular fund. Just set up an automatic-purchase program via bank draft. Most of the major no-load-fund companies, and many smaller ones, allow you to do this, and some will even lower their normal minimum initial investments if you agree to such a plan.
The best defense against the First Command sales pitch is to focus on the impact of that first-year charge. That’s what Air Force Master Sgt. John McKeon, 44, did when, during a sales pitch, he was shown a picture of a brick wall--the 50% fee a good soldier must climb to invest in such a plan. But McKeon, based at Offutt Air Force Base near Omaha, Neb., invested elsewhere. "I couldn’t get past that 50% the first year."
--Reporter: MAGALI RHEAULT
page 10 | Letters KIPLINGER’S | JANUARY 2004
CLARIFICATION
An illustration accompanying the article "All Loaded Up" (Sept. 2003) incorrectly reflected on the sales practices and market of the subject of the article, First Command Financial Planning. First Command representatives are not on active duty nor in uniform, do not use coercive sales practices, and serve only senior noncommissioned, warrant and commissioned officers. We regret any implication to the contrary. Also, the time required to recoup the first year’s front load of a systematic mutual fund with monthly investments at a 10% rate of return is 48 months, assuming you include earnings from investments made in subsequent years.
