Author – Joe Turkal, LtCol (Ret) USMC
If the article’s title caught your eye, did you expect the warning to be for a used car salesman outside your military installation’s front gate? Also did you expect that it would be an article targeted at an E-2 or E-3? I wouldn’t be surprised if you did. As responsible leaders in the military, we have been warning and protecting our junior enlisted members from what traditionally has been prevalent just outside the front gate in the form of unscrupulous businesses that understand that new military service member have all of the following characteristics, a reliable paycheck, a legal standard enforceable by the UCMJ via article 134 to pay just debts and not bring harm to a unit’s reputation or readiness due to default on financial obligations, and typically are young and gullible. If you have counseled a young service member to help avoid this scenario then you have done a good job leading junior members and protecting your command. When I say financial advisor lurking outside the front gate, this is mostly figurative and pejorative (though there are some offices right outside military installations) and I am not warning junior service members. I am actually alerting officers and senior enlisted members. With this article, I intend to educate service members on the opportunity costs and risks within the financial industry, especially as it applies to those who give themselves the title of financial advisor.
What is the standard to call yourself a financial advisor? The securities industry in the United States is highly regulated, to protect investors and prevent fraud. Generally, there are two main types of financial advisors today: a broker dealer /insurance representative or an Investment Advisor Representative (IAR).
The term is really not that old and began taking hold in the late 1980’s. At that time and previous to that, typically one would use either a broker-dealer mainly for mutual funds, individual stocks, and bonds or an insurance salesman for annuities or permanent life insurance (i.e. whole life).
The Glass-Steagall Act of 1933 prohibited affiliations between commercial banks, security firms, and insurance companies. In the 1970’s the idea of a financial advisor started to emerge, and the objective was to provide fiduciary advice regarding finances for individuals. This meant following fiduciary standards of always acting in the best interest of the client and providing full and fair disclosure of all material facts to include conflicts of interest. An example of conflict of interest might be if I am providing you with financial advice and in that advice, I am recommending a specific financial product for you, if I have a monetary gain for selling that product to you (for example commission), then I must reveal this fact. Also, if I don’t believe the product is in your best interest, I can’t recommend it to you. In the financial services industry before 1999, if providing financial advice for a fee, it was nearly impossible to legally be a broker dealer or insurance salesman and at the same time receive a fee for financial advice.
The Gramm-Leach-Bliley Act of 1999 or Financial Services Modernization Act completely changed the regulation. This act made it possible for financial companies to engage in a combination of commercial banking, securities, and insurance. This also facilitated the ability to act as both a fiduciary and a salesman. So now, by regulation, one can be a financial advisor who is also an insurance representative and also a broker dealer agent. In practice, what this means is if I work for a large investment firm or a large insurance firm that has a broker dealer subsidiary, I simply need to pass some securities exams, and I can now refer to myself as a financial advisor.
You may be thinking, but I have some life experience, and I can judge if someone proclaiming to be a financial advisor is competent. This may or may not be true and there is a larger more worrisome issue to highlight. After the law and regulation changes in the late 1990’s, the ability exists to call oneself a financial advisor and claim to be a fiduciary. That might gain trust with you. What I conveniently leave out is now I am permitted to in one sentence hold myself to a fiduciary standard, but in the next sentence sell you suitable products that benefit me because I make a commission – even if in my judgment it is not the best product or strategy. Does this sound a little more complex? Confusing? Now I am able to figuratively wear my fiduciary hat when advising and in the next sentence turn my hat around and be a salesman. The difference is in the standard. As a fiduciary, I must only recommend what is in the client’s best interest, as an insurance salesmen, I only need to recommend a suitable product and as a broker-dealer representative, I must abide by regulation BI (Best Interest), meaning the recommendation must be in the client’s best interest, supported by disclosures, care, conflict mitigation, and compliance, raising the bar above suitability but stopping short of fiduciary status.
Did you catch the subtle differences? One standard is suitable (lowest, i.e. life insurance products), the next is best interest (middle, i.e. broker-dealer representative), and the last is fiduciary (highest, i.e. investment advisors).
Here is the reason I wrote this article for service members, the majority of financial advisors you come across are broker-dealer representatives (who may also be insurance agents). They have an incentive to sell you suitable products that provide a commission or other financial incentives. They will disclose conflicts of interest in fine print writing in what is known as the prospectus (all that paperwork sent to you when you purchase financial products) and will have you sign statements stating that they did so. Since service members have the potential for a pension and now have the Thrift Savings Plan (TSP) with some government matching, you may ask what products a broker-dealer or insurance agent has success selling to service members?
One of the most prominent is permanent life insurance (also known as whole life, universal life, and variable life). These products provide life insurance that usually build a cash value. Let me be clear, the purpose of life insurance is to financially mitigate an unexpected death. It should never be purchased for investment purposes. There are also legitimate legacy reasons for these products because they guarantee payout upon death and are not subject to a limited time horizon (i.e. permanent), so long as the premiums are paid. But I will caution this, never purchase permanent life to consider it an investment that will provide a competitive return of capital and also understand that this insurance is many more times more expensive than term insurance (for instance the Service Group Life Insurance (SGLI) is term insurance) and understand the opportunity cost of deploying your capital on this product.
Other “gateway” products are high-fee mutual funds, annuities, and variable annuities. The reason I refer to these and permanent life as “gateway” products is because as a financial advisor, I have noticed a trend. Often younger officers or more senior non-commissioned officers will get convinced to invest in one of these products by a “financial advisor” and that service member feels good about investing for the future. The initial product may be small, but the advisor becomes trusted and meets with the members from time to time as they get older and continue to sell products that are not the best for the client but are high commission / fee products with disclosures. This way clients don’t really know any better (they are not financial professionals) and are satisfied because the products are not worthless by any means. The products gain in value over time, they are suitable. But the opportunity cost of investing in a suitable product as opposed to the best product could mean tens of thousands of dollars over a lifetime.
I personally recommend service members not to use a broker-dealer agent or insurance agent as a financial advisor. What I do urge is to understand the products and seek counsel of a true fiduciary when choosing financial products for yourself and your family.
How do I know if someone is only acting as a fiduciary? First, I want to point out that many military installations have financial advisors on staff who are funded through the base family services. These advisors receive a salary and do not sell products. Their job is to provide fiduciary advice for service members, free of charge.
If you find yourself talking to a financial advisor in the private market, ask a very direct question and get a very distinct answer. The question is, “Do you receive commissions or any monetary incentives for any financial products sold?” The straightforward answer is either yes or no. If the answer is nebulous and confusing, beware.
In the financial industry you can find financial advisors/planners who are pure fiduciaries. Typically, they work for Registered Investment Advisory (RIA) firms as an Investment Advisor Representative (IAR). Often, they are labeled fee-only financial advisors, meaning they charge a fee based on fiduciary advice / planning and do not receive any other financial compensation.
My intent in this article is to educate service members on the opportunity costs and risks within the financial industry, especially as it applies to those that give themselves the title of financial advisor. I have provided some historical context, examples of what I call “gateway” products, and actionable advice on how to navigate the financial services industry. Now go forth and save and invest in your future with the best advice for the right financial investment for you and your family. But always start the conversation with, ““Do you receive commissions or any monetary incentives for any financial products sold?”
Joe is the co-founder of Sierra Hotel Financial (SHF) with his son Spencer. SHF is dedicated to serving active-duty military and veterans. As part of our commitment to value upfront for veterans and their families, we provide a complimentary three meeting comprehensive financial analysis with recommendations (i.e. Financial Plan). At the time of writing this article, we have produced 107 complimentary plans for active military and veterans. If you are active duty or a veteran and want to take advantage, use our calendar link to schedule your introductory meeting:
https://calendly.com/d/cmcj-65g-b4p/sierra-hotel-introduction-and-briefing
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