First Command Financial Planning, Inc.

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Template:Infobox Company First Command Financial Planning, Inc., formerly known as USPA & IRA, is a financial services company that for decades catered primarily to U.S. military members and their families.<ref name = "about us">First Command website About Us accessed 4/13/2007</ref> 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.<ref name = "SEC2">SEC p. 2.</ref> Prior to 2004, the company claimed to be "[t]he #1 independent provider of financial plans to the professional military family."<ref name = "SEC2"/> They have since started to serve non-military families.<ref>First Command Press Releases:First Command commits to serving small business owners, self-employed Accessed June 17, 2007. First Command promotes benefits of long-term financial planning at 2006 REALTORS® Conference & Expo Accessed (sicsic) June 18, 2007 First Command rolls out new Web resource for women Accessed June 18, 2007</ref>

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 act by making "misleading statements and omissions" regarding:

Comparisons between First Command plans and other mutual funds
Thrift Savings Plans (TSPs), which are available to military personnel
The effectiveness of an upfront sales load in ensuring that investors remain committed to long-term investment strategies.<ref name = "SEC10">SEC p 10.</ref>

First Command settled with the NASD and SEC without admitting guilt. As a result of this incident legislation has been proposed in both the House and Senate affecting certain types of investment vehicles and the U.S. military has modified its policies concerning various sales to military personnel.

First Command has since endeavored to change its image.

1 History
2 Operations prior to SEC settlement
3 Operations since SEC settlement
4 Notes
5 References

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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.

USPA&IRA, the previous name of First Command, received its broker/dealer registration from the U.S. Securities and Exchange Commission on January 2, 1959. On January 21, 1959, the NASD approved the company’s application for membership. On April 21, 1997 "First Command Bank" opened its doors to expand the services of the company. Four years later, in 2001, the company changed its name to First Command Financial Service. The company explained that they changed their name because:

We are sometimes confused with other companies that service the military and former military clientele and whose names also start with letters “US…”. There are several such companies, but none like us and we don’t want any confusion.<ref>Spring 2001 issue of Independence (the company's monthly magazine now known as First Command)</ref>

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.<ref name = "Henry" />

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.<ref name = "SEC2" /> Most of First Command's agents are former senior Enlisted Personel or retired officers.

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Operations prior to SEC settlement

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Systematic plans

First Command stressed three "cardinal cornerstones" to financial success. They defined them as Adequate Life Insurance, Sufficient Savings, and Prudent Investments.<ref name ="about us" /> To this end First Command offered what they considered a full array of financial services. This included investment advice, insurance, and full service banking. These services were designed with the military family in mind. For example, their life insurance products did not have aviation riders or exclusions due to death during the time of war.<ref name = "Smith"> Smith, p 5</ref>

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."<ref name = "SEC5">SEC p. 5.</ref> They were 15 year contracts that anticipated the investor to pay fifty percent of the first years premium as sales commissions. If the participant pays 15 years of premiums, then their effective rate became only 3.3%.<ref name = "Shapiro">Shapiro, p 3</ref> But if they terminated the policy early, as most did, then the effective commission rate became much higher. As a result, this type of investment vehicle disappeared from the civilian market at least 20 years earlier.<ref>Henrique, Sales of Investments.</ref>

First Command agents, however, were coached to present the sales charge as a means to ensure only long term investors participated in their plans. 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 among 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.<ref name = "SEC5" />

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.

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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"<ref>Section 17 of the Securities Act of 1933</ref>

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".<ref name = "NASD">NASD</ref><ref>Henriques, Inquiry Stymied</ref>

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Section 17(a)(2) violations

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Media coverage

On March 22 2004, Diana Henriques published an article in The New York Times titled "Captive Clientelle"<ref>Kennedy School Press Release: Diana Henriques of The New York TimesWins Goldsmith Prize for Investigative Reporting March 22, 2005. Accessed 4/22/2007.</ref> and another on June 20 2004, "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".<ref name = "Henry">Henrique, Basic Training</ref> 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."<ref name = "Henry" />

As a result of her exposé, the National Association of Securities Dealers (NASD), Securities & Exchange Commission, 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."<ref name = "Bloomberg">St Onge</ref> NASD Chairman Robert Glauber said, "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."<ref name = "Bloomberg" />

Lamar Smith, then the 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 Sergeant/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 inflammatory 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.<ref name ="Smith" />

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Marketing

First Command relied upon word of mouth advertising to obtain most of their prospective clients. The Company targeted senior enlisted personnel (E-6s and above) and officers as their target clientele.<ref>Smith, p. 3.</ref> Historically, non-military personnel and civilians were typically not taken as clients unless they meet certain requirements (generally a family member who is a client or in the service.) When a prospect was contacted, that person generally met with the agent at least three times before investing with the company.

The first meeting was usually an introductory seminar/dinner. The meeting, the SEC wrote, "consists of a multimedia presentation with scripted live narration."<ref name = "SEC4">SEC p. 4.</ref> It included testimonials from current customers, and evoked "themes of patriotism, loyalty, discpline, and duty".<ref name = "SEC4" /> The meeting did not discuss specific planning, but stressed the importance of dollar cost averaging and long term planning. At the end of the meeting, the prospective customer was encouraged to schedule a meeting with the agent to get a customized plan.

The second meeting was between the agent and prospective client. Agents closely adhered to the First Command script, upon which they were evaluated. During this meeting the sales script presented 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 went on to explain, that this sales charge served as a "wall to keep out the short term speculators."<ref name ="SEC6" /> First Command claimed that the only way to ensure that only dollar cost averagers invested in their mutual funds was through their systematic investment plans. This load, the script claimed, serves as a "wall to keep out the short-term speculators."<ref name = "SEC6">SEC p. 6.</ref>

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.<ref name = "SEC5">SEC p 5</ref> 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 collected personal data to create a customized "Family Financial Plan" or FFP.

In its marketing materials, First Command stressed that it provided "a personalized road map for your journey in the pursuit of financial success".<ref name ="SEC3"> SEC p. 3.</ref> 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".<ref name ="SEC3" /> While making these claims, the company encouraged their agents to push their five systematic investment plans. In fact, internal documents encouraged agents to recommend one of five Systematic Plans to every customer who "has adequate monthly dollars to invest."<ref name = "SEC6" />

The five funds were Fidelity Destiny I, Fidelity Destiny II, AIM Summit Investors Fund, Pioneer Independence Fund, and the Franklin Templton Capital Accumulation Fund.<REF>SEC p. 15.</ref> These funds fall into one of two investing styles; the two Fidelity funds are large cap value and the other three are large cap growth.

At the third meeting the agent presents the FFP and closes the deal.

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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 were the "only five mutual funds that are designed to attract only dollar cost average investors."<ref name = "SEC8">SEC p. 8.</ref> 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, the script posited, caused 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.<ref name = "SEC8" />

The script described load funds as ones that are "generally used for large lump sum investments and are sold through investment professionals".<ref name ="SEC8" /> The prospective new customer, was typically about 25 years old with limited savings and investment experience,<ref name = "SEC4" /> was 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.<ref name ="SEC8" />

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."<ref name = "SEC8" />

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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 the military's counterpart to 401Ks. The SEC states that TSPs are similar to Systematic Plans, but the "TSP funds do not charge a sales load".<ref name = "SEC9" /> 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."<ref>SEC p. 8, 14-15.</ref>

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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."<ref name = "SEC9">SEC p. 9.</ref> 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.<ref name = "SEC9" />

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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:<ref name = "NASD" /><ref name = "SEC 12">SEC p. 12.</ref>

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.
The NASD also fined a First Command supervisor for violations in confronting an Air Force officer who complained<ref name = "Shapiro" />

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Operations since SEC settlement

After their settlement with the SEC, First Command hired Adan Araujo, the Senior Counsel for the SEC, as its new Chief Compliance Officer. Adan stated, "My long-term goals include ensuring that First Commandâ€™s legal compliance procedures are second to none and to help provide the ultimate financial protection to our clients and employees."<ref>Araujo, Adan. Questions and Answers. First Command Magazine Summer 2005.</ref> To that end they recruited Bachrach and Associates Inc. According to the Financial Planning Magazine Bill Bachrach is one of the four most influential people in the financial services industry.<ref>Speakers Roundtable Access June 18, 07</ref> The Bachrach says that

Sales techniques are what have to be used with people who don't trust someone. We'll teach planners how to quickly and predictably earn people's trust so they don't have to sell. When a financial advisor is trusted, people will give them all of their money and follow their advice without having to be sold. Don't be a salesperson. Be a trusted advisor.<ref>Business Editors. Financial Profiles, Inc. Hosts Bill Bachrach Seminars Nov 7, 2001. Accessed (sicsic) June 18, 07.</ref>

As a result of their relationship with Bill Bachrach, the marketting techniques of First Command have changed significantly. The company no longer endorses the use of the introductory seminar/dinner.

In the Spring of 2005, First Command filed with the SEC to become a Registered Investment Adviser (RIA) this requires their agents to obtain additional training/certifications. As RIA's the agent are now "Financial Advisors" as compared to "Registered Agents."<ref>Financial job titles clarified by ruling, licenses The Arizona Republic. April 15, 2007. Accessed June 18, 2007.</ref> The former being held to a higher ethical standard (similar to an accountant vs a CPA.) The company no longer offer the controversial systematic investment plans.<ref name = "DOS">First Command.Description of Services: First Command Financial Planning Inc. Accessed 6/19/07</ref>

As of August 2006, Mary Shapiro, the NASD Vice-Chairman and President, Regulatory Policy and Oversight, continued to be critical of First Command calling it an "unscrupulous organization" with an "aweful" product. First Command's new president Marty Durbin responded to her criticism by stating, "It’s unfortunate that settling these charges still doesn’t mean it’s behind us. But it’s a futile effort to try to fight negative press and so we decided not to put a lot of energy that way."<ref>Lee, Shelley. "Marty Durbin on First Command’s ‘Perfect Storm,’ Moving Beyond, and Serving Middle America" Journal of Financial Planning. November 2006. Accessed June 18, 2006.</ref> Since Shapiro's comments in August 2006, she has not repeated her criticisms and First Command has continued to strived to change its image.

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