Tuesday, June 05, 2007

Fidelity Gets Fined for Misrepresinting Destiny Funds 
Long time readers will remember that I had it out with First Command Financial Services San Antonio-based brokerage back in 2004 over their contractual investing plans - essentially investments marketed to military personnel with a 50% front end load.

As if that weren't bad enough, the funds most often sold in these plans - Fidelity Destiny I and Destiny II, were dogs with fleas, with atrocious performace records.

Well, Fidelity just got caught in the act of deceiving military investors by overstating the returns of these dogs - and two Fidelity brokerages were fined 400k by the NASD.

NASD found that between January 2003 and January 2006, the two broker-dealers violated NASD advertising rules by preparing and distributing various pieces of misleading sales literature. For instance, from May 2003 through January 2006, the Fidelity broker-dealers prepared and distributed a brochure entitled "Time is Money" that included misleading performance claims about the Destiny Plans. According to "mountain charts" contained in the brochures, Destiny Plans significantly outperformed the S&P 500 Index over a 30-year period. But during the most recent 10- and 15-year periods—the time frame most relevant to current and prospective investors - Destiny Plans substantially underperformed the S&P 500 Index. The 30-year time period masked the underperformance of the Destiny Plans over the most recent 15 years.

The brochures also showed Destiny Plans' average annual total returns for 1, 5 and 10 years as well as the life of the Plan, without showing comparable returns for the S&P 500 Index. Again, this created the misleading impression that Destiny outperformed the S&P 500 Index throughout the periods shown. The comparable S&P 500 Index average annual total returns would have shown that the S&P 500 Index significantly outperformed Destiny during the more current time periods.

Finally, the broker-dealers used the performance of Destiny Plan Class O shares in these charts, when new Plan investors could only purchase Class N shares. Class N shares did not perform as well as Class O shares because of higher ongoing expenses. The broker-dealers prepared and sent over 10,000 copies of these brochures to Destiny retail brokers or their registered representatives to use them with both prospective investors as well as current Plan holders.

NASD also found that in May 2003, the Fidelity broker-dealers prepared and distributed a misleading Destiny newsletter to over 325,000 Destiny Plan holders. The newsletter included a mountain chart showing Destiny I Plan performance. While the chart showed Plan performance, Fidelity disclosed the average annual total returns for the underlying mutual fund portfolio, rather than for the Plan. Because Plan holders paid a 50 percent upfront sales charge on each of the first year's payments and a continuing sales charge on each additional payment until plan payments were completed, the average annual total returns for the Plans were significantly lower than that of the underlying funds. NASD further found that Fidelity did not adequately supervise the review of this Destiny sales literature in light of the unusual features of the Destiny products.

The $400,000 fine will be paid to the NASD Investor Education Foundation (a tax-exempt, non-profit organization) to help fund its Military Financial Education Campaign, launched in February 2006. The NASD Investor Education Foundation will use the funds to support educational programs, materials and research to equip members of the United States military and their families with the knowledge and skills necessary to make informed financial decisions. More information about the ongoing, global campaign can be found at www.SaveAndInvest.org.

Fidelity Investments Institutional Services Company and Fidelity Distributors Corporation settled the action without admitting or denying the charges, but consented to the entry of NASD's findings.

Yet another reason to rid yourself of these pathetic funds. Actually, I'd rid myself of these two pathetic broker dealers tomorrow: Fidelity Investments Institutional Services Company, Inc. of Smithfield, RI and Fidelity Distributors Corporation of Boston

Splash, out


I guess I've been reading your blog for more than two years!

I remember reading your words about this fund. Hopefully the young men and women affected will pay attention to your alarm.

Good work.
I hope you haven't left us. Yours is one of my first blog reads as well as remaining one of my favorites.

Nice commenting/posting over at Roggio's site. You are on the ball with that stuff. Nice job.
And they still use oxygen?????
anybody know if Jason is alright? He's been offline for over a month now.
Jason? You okay?
Man I just found out that my wife has been investing through First Command in this crap.... AHHH, I HATE FIRST COMMAND, they should be fined too for the stuff they pull.
Oh Lordy, what am I into?

We just signed a contract with First Command for financial advisement. And the Fidelity Destiny Plans II, that we bought back in 1991 from First Command when they were USPA&IRA... My plan shows I have invested $20,916 over the years and it is worth $5,576.
My wife's plan shows she has invested $27,737 and it is now worth $7,336

So I should sell these and ??
I have lost all faith in USPA&IRA/First Command. I paid into the funds they were pushing (Fidelity Destiny I&II) for several years, riding the long sluggish slope to the bottom. Then in Feb of 09 they came out and advised to let them take the money out of these underperforming funds (FDTTX and FDTOX)and put them into funds that were making money. I said BS and kept the funds that I had, figured that if I "sold" them I would be making a basic investing 101 mistake by locking in the losses and not riding it out. As soon as they said sell, the fund started to climb and now, 5 years later, has TRIPLED in price.
What I am wondering is first, What funds did they put those people into that did change and how have the new funds done in comparison to the "old" funds? Secondly, it is my understanding that these were closed mutual funds not sold to the "public", so I'm guessing that First Command "bought" them from their clients just as the funds were at rock bottom........Hummm
Ah, I don't think that's the case. These are open-end mutual funds that publish their portfolios. If FirstCommand wanted shares for their own portfolio, they don't need to buy them from their clients. They can buy them directly from Fidelity.

The arrangement that FirstCommand had with Fidelity was a marketing arrangement. They were using an old model, contractual investment plans, that goes back generations, but is now obsolete, and has been rendered illegal... for mutual funds, anyway... by an act of Congress shortly after my first series on First Command in 2004 - and more significantly, a New York Times article by Diana Henriques.

It should be noted, though, that the commission structure still exists, for good or for ill, in the insurance world. It's invisible to the policyholder if he buys term insurance, but you can see it show up in universal and whole life insurance... your cash surrender value doesn't break even for a few years into your policy. This is due partly to the cost of underwriting and policy issuance, but also because of the commission structure: The agent maybe makes 50 percent to 100 percent of the first year's premium, and the office or branch manager gets a piece, too. Maybe 125 percent total. Then the agent gets a small residual, maybe 3 percent, as long as the policy is in force. For successful agents, that builds up over time to a nice income stream.

Now, that's what it costs for insurance companies to get agents out to beat the streets, get beat up every day and take 50 'no's for every 'yes,' take on the risk of making nothing, while still putting gas in their cars and taking on sales expenses. If they didn't get that nice up front 50-100 percent of first year premiums, they wouldn't sell it, and you'd have a lot of people who were grossly underinsured, because insurance is sold, not bought.

That was also the argument for contractual plans, and I think it was valid a generation or two ago. Now it's so easy for people to get a better deal from TIAA-CREF, USAA, Schwab, Vanguard, T.Rowe Price and many other low-cost, low-expense, low-load or no-load companies that it's not necessary, and therefore not a great deal for troops, who are now pretty computer literate, for the most part. At least they can figure out AKO!

I don't think First Command covered themselves in glory, though, when they threatened to sue me for writing an unfavorable review of them, and having their PR person write letters to Military Times defending their business model while on active duty, without disclosing his relationship with First Command.

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