First Command Financial Services

First Command Financial Planning, Inc.

Company type	Privately held companies[1]
Founded	1958
Headquarters	Fort Worth, Texas
Key people	James N. Lanier, Chairman of the Board Lamar Smith, CEO Martin Durbin, President and Chief Operating Officer David White, President First Command Bank
Products	Mutual Funds, banking, life insurance
Website	http://www.firstcommand.com/index.htm

First Command Financial Planning, Inc., formerly known as USPA & IRA, is a financial services company that caters primarily to U.S. military members and their families.^[1] Founded in 1958 and based in Fort Worth, Texas, First Command employs approximately 1,000 registered agents in the United States and other parts of the world, primarily in Europe and Japan.^[2] The company claims to be "[t]he #1 independent provider of financial plans to the professional military family."^[2]

In December 2004, the U.S. Securities and Exchange Commission (SEC) found First Command guilty of willfully violating Section 17(a)(2) of the Securities Act of 1933, a section which deals with fraudulent activities and the mail. The SEC concluded that the firm "willfully" violated the the act by making "misleading statements and omissions" regarding:

1. Comparisons between First Command plans and other mutual funds
2. Thrift Savings Plans (TSPs), which are available to military personnel
3. The effectiveness of an upfront sales load in ensuring that investors remain committed to long-term investment strategies.^[3]

First Command settled with the NASD and SEC without admitting guilt.

History

First Command was founded in 1958 by Carroll Payne, a retired military officer who realized that military families needed assistance in planning for their financial futures. Payne wanted to create a company that recognized and dealt with the unique circustances surrounding United States military personnel.

As of December 31 2006, First Command had over 294,000 client families, $17.4 billion in managed assets, $52.2 billion in insurance products, and $567 million in banking assets. First Command states that of members of the U.S. military, include 40% of the general officers, 33% of commissioned officers, and 16% of non-commissioned officers.^[2] Most of First Command's agents are former senior Enlisted Personel or retired officers. In 2004, when the company was under close scrutiny for alleged unethical behavior and command influence, the Board of Advisors included General Anthony Zinni, the retired Commander in Chief of the United States Central Command, Coast Guard Commandant Robert E. Kramek, General Lloyd "Fig" Newton, Vice Admiral John R. Ryan, former superintendent of the Naval Academy.^[4]

Systematic plans

First Command stresses three "cardinal cornerstones" to financial success. They define them as Adequate Life Insurance, Sufficient Savings, and Prudent Investments.^[1] To this end First Command offers a full array of financial services. This includes investment advice, insurance, and full service banking. These services are designed with the military family in mind. For example, their life insurance products do not have aviation riders or exclusions due to death during the time of war.^[5]

First Command differentiated itself from its competition via the usage of "systematic investment plans." The systematic plans were marketed to prospective clients as the "only five mutual funds that are designed to attract only dollar cost average investors."^[6] According to the First Command sales script, which agents were expected to follow, there are three types of investors:

Agent: There are three categories of funds. First, there are the no-load funds which are popular amoung short-term traders and speculators. Ed [the hypothetical client in First Command's sales script], do you think "no-load" means "free"?

Ed: No.

Agent:Of course not. In fact, no-load funds frequently had some of the highest long-term costs. Next are the load funds. These funds are generally for large lump sum invstments and are sold through investment professionals who manage many of the larger private accounts in the country. Finally, there are the systematic plans. These are designed for dollar cost averagers and used by dollar cost averagers exclussively.

Dollar Cost Averaging is an investment methodology wherein an investor invests the same amount of money on a regular basis without regard to the current market conditions. In theory, a person who utilizes this methodology can still make a profit even if the market declines after the initial investment.

SEC investigation

The SEC deemed First Command for "willful" violation of Section 17(a)(2) of the Securities Act of 1933. This section reads,

It shall be unlawful for any person in the offer or sale of any securities or any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act [15 USCS § 78c note]) by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly-to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading"^[7]

It was determined by the SEC that First Command systematically violated the law by making "misleading statements and omissions" concerning marketing, comparisons with other funds, the availability and effectiveness to military personel of TSPs, and the ability of a large front-end load in keeping people committed to the systematic plan.

In an independent investigation, the NASD charged First Command "with inappropriately confronting a customer who complained, failing to maintain e-mail, failing to maintain adequate supervisory systems and procedures and filing an inaccurate Form U-5 regulatory report".^[8]

Media coverage

On June 20 2004, Diana Henriques published an article in The New York Times titled "Basic Training Doesn't Guard Against Insurance Pitch to G.I.'s." According to Henriques, First Command "used their military connections to lend credibility to their sales efforts".^[4] Using its connections, Henrique alleged, First Command presented "captive" audiences with training classes that were nothing more than concealed sales pitches. "The military market," Henrique wrote, "includes hundreds of thousands of men and women, many of them young and financially unsophisticated, all of them trained to trust leadership, obey orders and show loyalty to comrades."^[4]

As a result of her exposé, the National Association of Securities Dealers (NASD), SEC, and House of Representatives initiated investigations on First Command, American Amicable Life Insurance Company, and others. Senator Hillary Clinton responded to the reports by declaring, "So many [military personnel] are being pressured into buying financial products that they don't need and that don't make sense for them"^[9] "There has been over the years a long and shameful history of unscrupulous companies and producers using abusive sales tactics to sell unsuitable financial products to members of the armed services," NASD Chairman Robert Glauber said.^[9]

Lamar Smith, the then Chairman and CEO of First Command, defended the company before the Committee on Financial Services of the House of Representatives on September 9 2004. He declared that First Command does not solicit business from the junior enlisted service members (one of Henriques' principle allegations) but rather from the military's leadership ranks (Senior Seargeant/Petty Officers (E-6) and above). He also said that First Command does not recommend life insurance for savings and investment purposes, nor does it sell products at mandatory formations. According to research performed on behalf of First Command, they count "more than 20 percent of our potential market as clients and to have a more than 90 percent approval rating from them." Finally, he rebutted one of the more inflamatory allegations Henriques made about the use of command influence to sell products:

First Command does not attempt to use command influence to create selling opportunities. Our Board of Advisors is just that – advisors to senior management who keep us in touch with the needs of the military community. The notion that they are involved in any way in our sales process is not true. The men and women on our Board of Advisors each enjoyed long and distinguished careers, some rising to the pinnacle of their respective services. They now work successfully in post-military careers, many continuing to serve in capacities that keep them positively involved in the military community. It would be unfortunate if anyone inferred that these honorable individuals would take any action or support any organization that did not act in the best interests of service members.^[5]

Marketing

First Command relies upon word of mouth advertising to obtain most of their prospective clients. The Company targets senior enlisted personnel (E-6s and above) and officers as their target clientele.^[10] Non-military personnel and civilians are typically not taken as clients of First Command unless they can demonstrate a prior connection, such as a family member who is eligible. When a qualified individual is contacted, that person will generally meet with the agent at least three times before investing with the company.

The first meeting is usually an introductory seminar/dinner. The meeting, the SEC writes, "consists of a multimedia presentation with scripted live narration."^[11] It will include testimonials from current customers, and evokes "themes of patriotism, loyalty, discpline, and duty".^[11] The meeting does not discuss specific planning, but stresses the importance of dollar cost averaging and long term planning. At the end of the meeting, the prospective customer is encouraged to schedule a meeting with the agent to get a customized plan.

The second meeting is one between the agent and prospective client. Agents were graded based upon how closely they adhered to the First Command script. During this meeting the sales script presents the notion of a 50% sales load on the first year's investment as "pre-paying the sales charges you would otherwise pay over the life of your investment." The script then go on to explain, that this sales charge serves as a "wall to keep out the short term speculators."^[12] After the presentation, the agent is to ask, "With these advantages, is this the type of investment plan you want for your family?" After obtaining an affirmative answer the agent collects personal data to create a customized "Family Financial Plan" or FFP. First Command internal documents encouraged agents to recommend one of their five Systematic Plans to every customer who "has adequate monthly dollars to invest."^[12]

A third meeting is then held wherein the agent presents the FFP and closes the deal. The way First Command ensured that only dollar cost averagers invested in their mutual funds was through their systematic investment plans. These plans, sold through five different mutual funds, were sold to prospective clients with the expectation that the prospective client would invest in the plan for a period of 15 years. Rather than paying the load throughout the 15 year period, the First Command customer would pay a 50% sales load during the first year and pay nothing thereafter. If the customer completed the 15 year contract, then the effective load would only be 3.3%, which is less than the 5.2% average for load funds.^[6] This fifty percent load during the first year, the script claimed, serves as a "wall to keep out the short-term speculators."^[12]

In its marketing materials, First Command stressed that it provided "a personalized road map for your journey in the pursuit of financial success".^[13] They also boasted that the company maintains independent relations with industry giants in order to "provide [the customer] with an objective analysis of [the customer's] situation and to make an independent recommendation for specific products".^[13] While making these claims, the company encouraged their agents to push their five systematic investment plans. Those five systematic were with Fidelity Destiny I, Fidelity Destiny II, AIM Summit Investors Fund, Pioneer Independence Fund, and the Franklin Templton Capital Accumulation Fund.^[14] These funds fell into one of two investing styles; two are large cap value and the other three are large cap growth.

Comparisons to other funds

The SEC was highly critical of the manner in which First Command's sales script compared their Systematic Plans with other mutual funds, in particular, the representation of no-load mutual funds. According to the script, no-load funds "attract only speculators" while the Systematic Plans are the "only five mutual funds that are designed to attract only dollar cost average investors."^[15] The advantage of the Systematic Plans, the company claimed, was that they maintained stable cash flow. No-load funds are portrayed as being highly volatile due to fund managers having to sell shares when speculators unexpectedly redeem their shares. This causes no-load funds to "frequently have some of the highest long-term costs." The SEC, however, noted that no-load funds are lower than load funds or Systematic Plans.^[15]

The script describes load funds as ones that are "generally used for large lump sum investments and are sold through investment professionals".^[15] The prospective new customer, who is typically about 25 years old with limited savings and investment experience,^[11] is not told that one can invest in other load funds for as little as $50 per month on an automatic payment plan, and that these plans can be purchased through brokers or directly from the mutual fund company.^[15]

The company then misused data from the Investment Company Institute (ICI). Using ICI data, First Command created charts that showed that the typical no-load investor moves their money every two years. In reality, the ICI data explicitly warned that their data "cannot be used to measure the holding period for the typical fund investor." ICI also warned that a "small number of shareholders can and likely do generate a disproportionate percentage of the total redemptions, thereby masking the activity of the typical investor."^[15]

Thrift Savings Plan (TSP)

While First Command claimed to be "objective" and to offer advice related to other assets such as 401Ks, the SEC found fault with the way First Command represented TSPs. TSPs are plans similar to 401Ks, but that are available to military personnel. The SEC states that TSPs are similar to Systematic Plans, but the "TSP funds do not charge a sales load".^[16] When comparing TSPs with Systematic Plans, First Command literature "fails to account for the impact of the 50% upfront sales load on the long-term cost of systematic plans, both in terms of the actual costs and the lost opportunity costs in terms of overall return."^[17]

Effectiveness of systematic plans in keeping out speculators

The SEC wrote that First Command "mischaracterizes the upfront sales load as the only way a fund manager can ensure that most of the shareholders are committed, long-term investors."^[16] The SEC then goes on to indicate that the company knew that the sales charge has not "worked." In fact only 43% of those people who purchased Systematic Plans between 1980-1987 completed their contract.^[16]

Settlement

In December 2004, First Command settled with the SEC and NASD without admitting guilt. As part of their settlement First Command agreed to the following:^[8][18]

• Restitution to all clients who purchased and sold a systematic plan between 1999 and 2004. This restitution was to make the effective sales charge 5% rather than the effective one they might have paid.
• Educational programs in the amount of 12 million dollars less the restitution paid above.
• Independent Consultant who, for two years, monitored the restitution process and made recommendations pertaining to business practices of the company.
• Pre-use filing with the NASD of all literature, advertisements, and sales scripts that the company will use.
• Several reports on who was owed what, how much they were owed, the efforts taken to repay them, and their success in making the restitution.

Notes

References