House Panel Approves GI Protection Bill
October 4, 2004
A new bill banning the sale of a certain type of mutual fund on military bases drew unanimous support from a House panel Wednesday, as lawmakers look to protect young American troops from shady sales practices and ill-suited investment products.
The Military Personnel Financial Services Protection Act, or H.R. 5011, was proposed by Rep. Max Burns (R-Ga.) following reports that financial intermediaries were selling inappropriate life insurance policies and mutual funds to young, inexperienced soldiers before they were deployed to Iraq for combat. The bill cleared a House Financial Services Committee markup 68-0.
The proposed legislation expressly prohibits the sale of mutual fund "contractual plans," which are investment vehicles that carry hefty sales commissions of up to 50% of an investor's contributions in the first year. Contractual plans were a popular commodity during the 1970's but later fell out of favor among mainstream investors due to suitability issues. However, they continue to be offered as an investment choice to many members of the armed forces.
The Burns bill would also allow for the full regulation of insurance sales practices by state regulators, including life insurance policies that have very low death benefits and excessive fees. That jurisdiction would apply to bases located within the U.S. as well as installations overseas. The legislation would require that military personnel be informed about life insurance available from the government prior to the sale of any private insurance.
"It is an outrage that financial products that were found so disreputable that they disappeared from the civilian market 20 years ago have continued to survive on-post by being pawned off on unsuspecting young service people as part of approved' savings and insurance plans," said Burns, an Army veteran and former college professor.
Based on a 10-year contractual plan with payments of $100 a month, an investor would incur a total sales load of $1,080 on total investments of $12,000 over the life of the plan. Compounding this unappealing setup is the fact that sales loads can be collected on an accelerated basis. In that scenario, the distributor can deduct half of every $100 payment until the entire sales load has been paid.
For example, after 22 months and $2,200 in contributions, only $1,120 will have been invested while the broker will have pocketed $1,080. In the event that the participant cancels the plan, the broker gets to keep the entire sales load, with the investor getting shafted with a 50% loss. In traditional mutual funds, sales loads cannot exceed 8.5% with most funds capping them at 5.75%. These loads are deducted from contributions as they are made and cannot be accelerated. Thus, if an investor cancels an investment, the commission paid does not exceed 5.75%.
Mercer Bullard, founder of Fund Democracy and an assistant professor of law at the University of Mississippi, believes that the problem stems, at least in part, from the lack of adequate and consistent regulation of investment advice. "The unsuitable recommendations made to military personnel are characteristic of the lower standards that apply to brokers and the even lower standards that apply to insurance agents," he recently testified before the Capital Markets subcommittee. He noted that many brokers are not registered as investment advisors or subject to the same fiduciary standards, while insurance agents are not even subject to minimal suitability standards.
Another part of the problem is that new recruits are in a vulnerable position given the paternalistic and isolated command nature of the armed forces. Most enlistees don't have many investable assets and are primarily concerned with living within their means, avoiding debt and maintaining a savings account for unforeseen events. Many new recruits either don't need the product or can't afford it. Clearly, suitability is an issue.
"For salespeople, it provides the opportunity to more easily exploit investors," Bullard said. He recommends that Congress encourage the military to establish a central office for the regulation of sales practices on military bases. He also cited the uneven application of securities laws by a number of different state and federal regulators as an impediment to consumer protection
"If a soldier is young and single, I am not sure a life insurance policy is necessary unless he or she has dependents or aging parents who need help or is concerned about declining health," testified Elizabeth Jettson, president of the Financial Planning Association.
Brandon Conger, a member of the Army's 82nd Airborne Division who did his basic training at Fort Benning in late summer of 2002, testified that his entire company was brought into a classroom for what he believed was a "briefing" on personal finance. However, two insurance agents from American Amicable Life Insurance posing as financial planners proceeded to pitch their wares to the enlisted men, quick-stepping Conger and his fellow soldiers through a bunch of paperwork for what he thought was a savings plan designed to accrue interest while he was in Iraq.