Financial Product Sales: Actions Needed to Protect Military Members Page: 12 of 28
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Companies also Selling
Service Members a Mutual
Fund Product with
Features that Reduce Its
Benefit to Most Military
insurance regulators in all states conduct reviews to ensure that the
products being marketed to military members adequately comply with
state insurance laws.
Large numbers of service members, including officers, were also
purchasing a unique securities product, known as a contractual plan, with
features that reduce its benefit to military members. Under the terms of
the contractual plans sold to military service members, they would be
expected to make monthly payments of a set amount for long periods,
such as 15 years, that would be invested in the mutual funds offered by
some of the largest mutual fund companies. Under the terms of the
contractual plan, the broker-dealer selling the product deducts a sales
charge (called a load) of up to 50 percent from each of the first year's
monthly payments with generally no further sales load deductions
thereafter. In contrast, conventional mutual funds typically deduct loads
that average 5 percent from each contribution made into the fund.
According to regulators, about five broker-dealers accounted for the bulk
of contractual plan sales to military members. According to the marketing
materials of the broker-dealer that was the largest seller of contractual
plans, this firm had nearly 300,000 military customers, with an estimated
one-third of all commissioned officers and 40 percent of active duty
generals or admirals as clients. This firm also employs about 1,000
registered representatives in more than 200 branch offices throughout the
United States, as well as locations in Europe and in the Pacific region. The
great majority of the firm's sales representatives are former commissioned
or noncommissioned military officers.
While sales charges for contractual plans are initially much higher than
those of other mutual fund products, the effective sales load-the ratio of
the total sales charge paid to the total amount invested-becomes lower
as additional investments are made. Over time the effective sales load for a
contractual plan will decrease to a level comparable to-or even lower
than-other conventional mutual funds with a sales load.1 As illustrated in
Figure 2, if all 180 monthly payments are made under a contractual plan,
the effective sales load on the total investment decreases to 3.33 percent
'0Many mutual funds that are sold with sales charges or loads offer discounts to investors
who invest certain amounts of money. As such, if an investor continues to invest in a
conventional mutual fund over time, eventually the sales charge percentage of that fund
will decrease as the total initial investments reach a certain amount, such as $25,000 or
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United States. Government Accountability Office. Financial Product Sales: Actions Needed to Protect Military Members, text, November 17, 2005; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc292981/m1/12/: accessed May 23, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.