First Command Financial Planning: Recent Trouble with Regulators - Case Study Example

First Command Financial Planning: Recent Trouble with Regulators INTRODUCTION First Command sells mutual funds and insurance. The company offers acontractual type of fund where funds are paid in monthly installments reaching as long as twenty years. This type of plan cropped up in the 1930s but eventually was pushed into extinction in the civilian market in the 1980s. The untimely death of this type of fund was precipitated by the many abuses of sales persons and their companies as well as crackdowns on this type of market. One major reason for the demise of the fund market is the loss o fifty percent on the investment infused during the first year of the fund contract. Further, many faithful investors in the fund do not recover their initial investments. Also, enrolled members who do not finish the twenty year monthly installments and withdraw their money have to pay large sums money in terms of service and other fees to First Command. In response, the chief executive of First Command maintains that the soldier has the freedom to choose whether to save in contractual investment plans or to spend their money and end up with nothing at all at his ripe old age of retirement. The following paragraphs will explain why there is a loud outcry against the hidden agenda of First Command Sales person just to earn sales commissions (Henriques, 2004). BODY: First Command, a company selling mutual funds to its military officers and men, has been on the news for violation of regulatory issues such as its sales strategy of using former high ranking military officers to market the First Command products. First Command has been accused of violating regulatory issues by some quarters. First, First Command, just like some competitors in the mutual fund and insurance market, are using questionable sales strategies to sell insurance and investments (like mutual funds) that the military personnel are do not really need. Second, the military leaders fear that the sales tactics of First Command borders on abuse for private profit the blind obedience, loyalty and trust that is being taught to soldier in the military training schools. Third, First Command violates many sections of the Defense Department Directive 1344.7. Fourth, many insurance specialists stated that the First Command insurance and mutual fund investment policies should be targeted at knowledgeable long term investors who have plenty of idle funds to spare. Fifth, the First Command policy sales person do not explain the true nature of their business. Sixth, First Command violated Securities and Exchange Act of 1933. In reply, First Command Chief Executive Officer Lamar Smith said that all the charges are not true (Lamar, 2004). First, First Command, just like some competitors in the mutual fund and insurance market, are using questionable sales strategies to sell insurance and investments (like mutual funds) that the military personnel are do not really need. First Command is been highly publicized to focus its major efforts to ram its kind of mutual fund where the military clients have to pay more than fifty percent of their contributions during their first years as First Command clients as fees. This has been questioned as too expensive as evidenced by the early extinction of type of this market in the private sector more than twenty years ago. To defend itself, First Command top rank managers retaliated by stating that their sales agents that cater to the military personnel market are mostly retired military personnel as their mouthpiece to the current military soldiers because the veterans are the right persons to understand the monetary as well as personal pressures in the daily soldiers’ obey before your complain military attitude (NASD, 2004). Second, the military leaders fear that the sales tactics of First Command borders on abuse for private profit the blind obedience, loyalty and trust that is being taught to soldier in the military training schools. Consequently, a soldier or sailor who feels cheated or has been given a victim of false advertising may put the blame on the military institution as a whole because many of the First Command agents are former military officers and men who are now part of the veterans or retired military personnel group. This was the comment of John Molino, the deputy under secretary of defense for military community and family policy. For, the resounding effect of this First Command marketing strategy may cause irreparable damage to the morale as well as decrease interest to enter or return to the soldier and sailor life. Thus, one of the repercussions of allowing the retired soldiers turned First Command sales agents to sell First Command products like insurance and mutual fund investments is that current military officers have approved and are accomplices to the much disliked scheme of forcing military personnel to buy the unwanted products of First Command (Henriques, 2004). Third, the sales strategy of using former high ranking military officers to market the First Command products violates many sections of the Defense Department Directive 1344.7. This military directive strongly prohibits sales persons from selling their wares to trainees, recruits and traveling military personnel in a mass or captive audience. This refers to selling inside military bases, selling their products to on duty military men as well as the use of deceiving procedures or and also the flagrant display of allotment forms. However, Frank Keating, the former governor of Oklahoma argues that his current position as president of the Council of Life Insurers has given him additional wisdom to say that preventing the First Command sales people from entering the military bases to convince their captive soldier and sailor market. In fact, another soldier by the name of Michael Fresenburg, 20, who is engaged to a high school sweetheart back in Missouri was misled he was paying for a savings fund. He was even made to freely choose between two accounts. He could withdraw money from the first account but he could not withdraw from the second account because it is a kind of fixed time deposit. He did not know that he had paid for a complicated form of insurance where the military personnel would contribute to a savings fund at competitively high interest rates. However, the soldiers would avail of this savings fund only if they purchased a very expensive twenty year life insurance policy that would literary cut his or her take monthly home pay in the first year of First Command membership by one hundred percent. This would then be reduced to a reduction of the soldier’s take home pay by three fourth for the second to the seventh year in the military service (Henriques, 2004). Fourth, many insurance specialists stated that the First Command insurance and mutual fund investment policies should be targeted at knowledgeable long term investors who have plenty of idle funds to spare. In reality, the specialist are firmly resolved that selling the First Command products through the influenced by former military personnel turned sales agents is like barking at the wrong tree because the military soldiers are mere mortals as evidenced by their modest military take home pay. Also, the military veterans turned First Command sales agents were characterized as taking advantage of young soldiers who have only a greenhorn level in terms of financial matters such as the insurance and mutual fund investments. Furthermore, Professor James Carson whos is specialist in the field of life insurance in Florida State University claimed that “A young single person that has no dependents and with no debts definitely does not need a life insurance at his or her current status in life. He emphasized that even a soldier that has a family to take care of needs more than $ 250,000 insurance to truly rest in peace in case he or she is ambushed while maintaining the violent peace in Iraq or in search of Osama Bin Ladin and his group in Afghanistan. For, the high first year and lessened next year monthly contributions are really eating away a big chunk of the soldier’s and sailor’s take home pay. Fifth, the First Command policy sales person does not explain the true nature of their business. For, the military personnel are simply made to sign a piece of paper stating that they are entering into an accumulation of fund scheme where insurance benefits are not mentioned. Thus, the soldiers are not informed upon enrollment in the First Command contracts that there would be high penalties for withdrawing early in the contract as well as the reality that the slow increases in the case value of their policies. Thus, this First Command policy is not a good instrument for earning interest income in the field of long term investments. Professor Carson states that the soldiers were not informed that they were actually buying insurance. In fact, Soldier Specialist Stachler cancelled his First Command policy when he learned that he only got back $ 500 of the $1,800 removed from his monthly salary because the rest were insurance premium payment that. First Command was selling mutual funds specifically the Fidelity Destiny Fund II and the Pioneer Independence Fund. Evidently, the Securities and Exchange Commission recommended that the U.S. Congress stop contractual plans. Due to the public demand, Congress only revised the laws that current contractual plans. On such congress revision includes allowing the customer to withdraw from the Mutual plan within forty five days with a full refund and an eighty percent refund if the withdrawal is within eighteen months from date of fund and insurance enrollment. Sixth, First Command violated Securities and Exchange Act of 1933. The company specifically violated section 17 (a) (2) of the Securities Act of 1933. The provision states that “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”. Thus, the company specifically violated the Securities and Exchange Act by using misleading statements and omissions in the selling of its products in the field of insurance and mutual funds. This marketing machination with the influence of former military officers gave undue advantage to First Command to the detriment of the free trade of the competing insurance and fund competitors. The Securities and Commission also announce its charges that First Command was not behaving properly when conversing with its customers who filed a complaint or two against First Command. The company was also charged for not having an email to answer customer complaints and suggestions as well as supervisory systems and steps to follow as well as wrong data as shown in its Form U-5. Diana Henriques stated in her article that soldiers loyally and blindly followed orders from their veterans to enter into contracts with First Command because militarily tradition states that the hundreds of thousands of men and women, including those who do not know anything about finance, insurance and mutual funds, were trained to trust leadership, show loyalty to fellow soldiers and to obey orders first before complaining(Henriques, 2004). The findings of the National Association of Securities Dealers, Securities and Exchange Commission and the House of Representatives is that First Command and other mutual fund companies are pressuring military personnel into buying UNWANTED finance products like mutual funds and insurance that they do not NEED. In reply, First Command Chief Executive Officer Lamar Smith said that all the charges are not true. He declared that “T he 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”. CONCLUSION First Command employed retired officers and men from the military to sell their insurance and mutual fund products. The soldiers bought the products at very high prices because they were trained to obey before they complain and to be loyal to their fellow soldiers. The company also violated the Defense Department Directive 1344.7 and the Securities and Exchange Act of 1933. In retaliation, First Command Chief Executive Officer Lamar Smith denied all their charges because the main thrust of the company to let the soldiers choose to save in an investment fund or not to invest at all in their future. REFERENCES Henriques, D., Basic Training Doesnt Guard Against Insurance Pitch to G.I.s, NY Times July 20th, 2004 U.S. SEC. Securities Act of 1933 Release No 8513/ Decembber 15, 2004; Securities Act of 1934 Release 508559, December 15, 2004. Smith, Lamar. "Written Statement of Lamar Smith Chairman and Chief Executive Officer of First Command Financial planning Inc on GI Finances: Protecting those whoe Protect Us before the Subcommittee on Capital Markets, Insurace and Government Sponsored Enterprises of the Committee on Financial Services U.S. House of Representatives September 9, 2004." Accessed 4/15/07. < http://financialservices.house.gov/media/pdf/090904ls.pdf> Henriques, D., Insurers Rely on Congress to Keep Access to G.I.’s, N.Y. Times, July 21, 2004. Henriques, D., Sales of Investments to G.I.’s Under Scrutiny in Washington N.Y., Times, July 22, 2004. NASD Press Release, NASD Orders First Command to Pay $12 Million for Misleading Statements in Sales of Systematic Investment Plans to Military Personnel, December 15, 2004. Read More