Monday, February 16, 2004

Finance Tip: Fire your First Command Advisor 
That’s right: fire him. Send him packing.

Here’s why:

First Command, a financial advisory firm based in Fort Worth, Texas, has built its business around soliciting personal financial planning services to military families, on a commission basis to its advisors, or sales representatives.

So far, so good. But First Command’s retirement products come with an unusual fee structure. Most advisor-sold mutual funds come with a 5.75% sales charge on everything you put into the fund, much of which goes to compensate the sales rep, or broker, who sold the fund.

First Command, on the other hand, hits customers up for an outrageous front-end fee of up to 50% of the first year’s mutual fund contributions. The deal is that if you pay this fee up front, you can continue to invest in the same funds for 25 years with no further sales charges.

It’s called a ‘contractual plan,’ and the logic behind them is this: consumers who cough up a huge up-front fee are committed, and have more of an incentive to stick with their dollar-cost averaging investment plan.

It works in much the same way as a barbed tip on a spear creates an incentive to push the spear all the way through your body, rather than pull it out the way it came in.

Well, there’s a certain brutal behavioral logic to it, but there’s got to be a better way.

Consider: A military couple consults a First Command advisor, who sits down with them and works out a financial plan. The advisor recommends they each start Roth IRAs, and contribute the maximum allowable $3,000 each, or $6,000, in the first year, and all subsequent years they remain eligible.

The couple just paid $3,000 for a personalized financial plan they could have gotten from just about any fee-based certified financial planner for roughly a tenth of that cost.

And the CFP would probably get them into better funds and fund companies. Three of the five companies listed on the First Command website—AIM, Franklin Templeton, and Pioneer, have been implicated in the market-timing/late trading scandals currently being pursued by the Securities Exchange Commission and NY Attorney General Elliot Spitzer. Basically, these fund companies have been caught ripping off customers.

I contacted First Command and asked them about their fund selection, refund policies, or whether it receives any continuing stream of income from 12(b)1 fees. Company spokesperson Mark Leach declined to answer any specific questions about First Command’s investment products.

"Any balanced story on First Command will not focus on investment, insurance, [or]
banking product(s), but rather on the much greater problem faced by American
wage earners and families, military included,” writes Leach. “The problem is not that they have the second best product, but rather that they do not save and invest
regularly in any meaningful way.”

He’s right about that. The greatest threat to most people’s retirement security is behavioral, not structural.

That said, that’s no reason military members need to settle for a product so markedly inferior even to the mediocre industry norms.

Here’s what your First Command advisor won’t tell you:

1. Most of their fund companies are in trouble with regulators for unethical or illegal behavior.

2. There are plenty of excellent fund companies out there—Vanguard, T. Rowe Price, TIAA-CREF, who don’t charge investors a sales load at all.

3. You can dollar-cost average for free just by setting up an automatic withdrawal from your bank account and forgetting about it.

4. Index funds can provide near instant diversification at a fraction of the cost of most of our funds. And most of the time, they provide better returns.

So what’s a novice military investor to do?

Consider an appointment with a fee-based advisor who can offer independent, unbiased, personalized recommendations. Check out the fund companies listed above. USAA is another good company with a lot of experience serving military families. If you’re a novice, stick with index funds for now, until you can get an advisor’s help.

And sock away as much as you can in the Federal Thrift Savings Program. It’s a great deal, and there’s no sales charge at all.

But above all—and First Command and I are in absolute agreement on this much—get started investing now, and invest regularly, in a meaningful and disciplined way.

Splash, out


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