Planners preying on military personnel

(Money Magazine) -- Question: I am a pilot in the military and my wife is currently a student. We have a financial advisor who likes to refer to himself as a "fiduciary" and not a financial advisor. This company specializes in military families and was referred to us by a fellow active serviceman.

They advised us to:

- Max out both our IRAs every year using Franklin Templeton (FTCOX) and buy a non-retirement fund with Franklin Templeton (FPAAX). Both of these charge us a 4.5% load and expense ratios just under 1.5%.

- Buy whole life insurance for my wife and me at $375 a month.

- Stop paying into my TSP [the government's retirement plan], but I continue to put $500 a month.

My wife and I are sacrificing new cars and nice things now so we may plan for our future, please help us make the most of it.

The Mole's answer: It seems to me that your advisor is acting as anything but a fiduciary. A fiduciary should act on your behalf and put your needs ahead of his.

I just don't see it here. In fact I see quite the opposite as he told you to stop contributing into a high-performing low-cost plan (the TSP) in favor of high-fee low-performing investments.

Guess which investments he makes more money on.

Let's look at the facts.

First, the two investments your "fiduciary" put you in are fund of funds from Franklin Templeton, which Morningstar ranks as average for domestic stocks, and a bit below average for international.

It's not likely they will perform well going forward given such high annual fees.

Your planner also recommended you stop paying into your Thrift Savings Plan, or TSP, with is the U.S. government's retirement plan, similar to a 401(k).

With dirt low fees of 0.03% and index funds that allow you to build a global portfolio, a TSP is something I wish I had access to. Walter Updegrave's story in Money Magazine on the Thrift Savings Plan will show you why this plan is so good.

So far, your "fiduciary" has steered you away from a great tax-deferred plan and to investments that have 20 to 30 times its costs. That makes me especially suspicious of the whole life insurance policy he sold you, especially on your wife. Since your wife is a student and you have no kids, I'm not seeing a great need for life insurance. I am seeing a big fat commission paid to your advisor. Whole life policies, which combine life insurance with a savings plan, are generally expensive and low return vehicles.

It sounds like you have the discipline to save so, if you need life insurance, I'd recommend buying term and investing the rest directly. Chances are that you'll see your investment grow more quickly, especially if you stay away from your advisor.

The terrible truth is that financial advisors sometimes prey on military personnel. The Financial Industry Regulatory Authority (FINRA) has a Web site at http://www.saveandinvest.org/index.htm with advice for military personnel. In fact, they fined one financial services company $12 million for "misleading statements in sales of systematic investment plans to military personnel."

Finally, I'm suspicious that your advisor refers to himself as a "fiduciary" rather than a financial advisor. I've found that the planners who constantly beat the drum of putting the client first are among the worst.

In my Money Magazine column, Planners: Why 'Trust Me' makes me nervous, I wrote about a CFP with fiduciary responsibility who sold his 60-year old client seven expensive annuities. I don't think your fiduciary has done right by you either.

You are right to be concerned about your advisor. You are doing the right thing by sacrificing buying new things and saving for your future. My advice is to take that savings and max out your TSP. If you need insurance, buy inexpensive term insurance and invest the rest. Keeping your costs low will make your nest egg grow much more quickly. And most of all, tell your "fiduciary" he's fired!