December 1, 2000

Military Intelligence

Soldiers and sailors and their officers may not se

Illustrations By Christoph Hitz

In June of 1999, a petty officer second class graced the cover of the Navy Times under the headline "Millionaire Sailor." Planner Ron Pearson of Beach Financial Advisory Service, Virginia Beach, did a money makeover for the sailor, a totally atypical 23-year-old E-5 who, at the boot camp advice of an E-9, had begun to put away $50 per pay period and save all his raises. The petty officer lived off base, was married with a child, had two paid-for cars, $30,000 in savings, and regularly socked away 25% of his income. According to Pearson, figuring in raises and promotions, by the time this E-5 turns 52 he'll be a millionaire.

But with his gross pay of $27,000, that sailor is under the radar of most financial planners. With the current emphasis on the wealth market and the quest to set client minimums at half a million dollars, a million, or even higher, anyone with a net worth as low as most armed forces personnel is generally not even in the running, especially if you consider their special needs--although, as the petty officer's case shows, extraordinary results can be had if the matter is approached in the early days of a soldier's or sailor's career.

Despite the U. S. Armed Forces' reputation for planning and strategy, most active duty military personnel in this country have little or no planning in place for their financial future. This means that military retirees or those transitioning to jobs in the civilian workplace are often starting over financially. Specialized needs with regard to pensions, insurance, savings, estate planning, and education issues are enough to make the average person's head spin.

With personnel levels topping 1.37 million, active duty military personnel make up a pretty hefty chunk of this country's population. But not a great niche market, you might think, perhaps knowing that the military pay scale is such that an O-6 (active duty Navy captain or Army colonel) with 20 years of service makes the princely sum, before housing, uniform, and other allowances, of $76,575.60 in base pay. A Navy chief petty officer or Army sergeant first class with 20 years of service makes $31,924.80, before allowances. Pilots, physicians, and other specialties do command more money, but still lag the civilian pay scale.

Not much to invest with, you might think, and you'd be right. Not worth the effort, you might think, too. But there are quite a number of planners out there, most of them ex-military themselves, who feel otherwise. For many of them, it's more a mission than a job.

Take the planning firm of Ritter, Stouffer, Virok & Van Hoy in Virginia Beach, Virginia. Three of the four partners served in the military, about 25% of their clients are active duty military, and another 25% are connected with the military or the federal government.

Partner Peter S. Virok recalls when the practice started, 12 years ago. "Because we had military backgrounds, we marketed to people we knew." Now, their existing clients refer most of their new business, and that means more military clients, especially since the military is one of the major industries in the Virginia Beach area.

Military Planning
In addition to civilian financial planners who serve the military, there are two other approaches that are pretty much of, by, and for the military, although not federally run. These are the planning services offered by USAA and USPA&IRA, fee-only and commission-only, respectively.

USAA, for over 70 years a source for automobile, property, and casualty insurance for military officers and offering most of its products only to military families, began adding financial planning services four years ago. Now, after a limited rollout in 1998, USAA's services are "going full blast," says USAA spokesman Tom Honeycutt. "Because it's fee-only, we consider it objective advice."

Currently USAA has 18 planners, all CFPs with various other accreditations. They work with 4,500 active clients in different stages of the planning process. Most work is done long-distance, since members are scattered all over the globe.

Planning service fees can be paid in installments, putting it within reach of plenty who might not otherwise be able to manage it, and financial plans come with a money-back guarantee

Fees range from $500 for the basic plan or the retirement module (which includes Monte Carlo simulations and Roth conversion analysis) to $975 for a comprehensive financial plan. With a 4.3-million-member client base (active duty, retired, and reserve) to draw on, that's a lot of potential.

And then there's USPA&IRA. This organization, founded in 1958, takes a different approach to planning. The central office originates comprehensive financial plans for all clients, who otherwise have a face-to-face relationship with agents in offices local to their duty station. Investments are all contractual mutual funds, and clients are counseled on how much and what kinds of insurance they need to supplement or replace government benefits.

When a client moves, his financial plan goes with him. The agent that sells the product, according to agent Ron Huff, a retired Air Force colonel in Aurora, Colorado, gets the commissions, and the new agent at the next duty station doesn't draw a commission "until he does something to upgrade the client's program." There are no trails; after 12 months, commissions are over, resulting, says Huff, in lower premiums for the clients. USPA&IRA currently has 250,000 client families.

Their client base "runs the gamut from enlisted to officers," says Virok. "The one thing we look for is for someone who is serious about doing better. That theme runs from E-4 up to admiral."

Virok, who spent eight years on active duty in the Coast Guard and is still in the Reserves, is enthusiastic about what he and his partners do for servicemen and women. "Because we have so many clients in the military or under the federal employee retirement system, we know those systems pretty well," he says. "We know you can't get disability insurance, but when you retire, here's what you need to look for. We show them what they can expect to get from VA disability benefits, answer questions about life insurance, SGLI, VSPB, RCSBP. . ."

If this sounds like gibberish, then you begin to get an idea of the special financial issues a member of the armed forces must face. Just one of those is SBP, or Survivor Benefit Plan, a form of annuity to protect a servicemember's spouse, paid for by the retiring servicemember out of his monthly pension. But in some cases, says Virok, it may actually be more beneficial for a retiree not to elect this government benefit, and instead buy life insurance with a cash value. If the spouse instead of the retiree dies, the money paid for SBP protection is gone, with no payoff; with a conventional policy, coverage can be cancelled and the policy cashed in. Around age 50-55, though, the situation changes, according to Virok. At that point it's better to take the SBP "because you can't get the same amount of coverage for the money."

What do clients want to know? "They ask us to put the big picture in perspective," Virok says, "cash flow, taxes, estate planning, all those things."

Then there's Brad Bower and his firm, Patriot Investment Management in Knoxville, Tennessee. Bower, ex-Army, says of his firm, "We didn't make it a point to market exclusively to military folks." The servicemember percentage of their business is somewhere between 10%-15%.

But of that percentage, Bower has this to say: "Active duty military clients are extremely disciplined. Not financially savvy, but they have not for the most part got wrapped up in daytrading and dot-coms. They'll take $200-$400 a month and will invest it religiously. We've grown with a number of military clients; we knew them when we first started out, and now they have pretty substantial accounts because of that discipline."

That discipline can stand them in good stead, because when it comes to investing in their futures, says Bower, the military are at a disadvantage. "They don't have a 401(k) or 403(b); there's talk of it in the future but not yet." (See sidebar at right.) "When I was on active duty [1982-1989], the W-2s said you weren't covered by a retirement plan and you were able to take that $2,000 and put it in an IRA. Now they're not even getting that; the W-2 says you're covered and you are not allowed to take the $2,000 deduction. You stay in for 18 years and don't even get any retirement." (Members must stay in for 20 years to draw a pension.)

Why would servicemembers want to get out just short of qualification for a lifetime benefit? Bower points out that the lure of a large civilian salary can be a powerful incentive. "Some company will say, 'I can offer you 80 grand a year' vs. $25,000-30,000 a year, so they get out. Then they're being well compensated for their training, and they don't have to go to Kosovo."

fringe Benefit

Department of Defense officials announced that beginning next year, military members will be able to create their own retirement nest egg by using the Federal Employees Thrift Savings Plan.

The Thrift Savings Plan allows pretax dollars to be deposited in a way similar to 401(k) plans; earnings on those funds are not taxed until withdrawal.

Active duty and Ready Reserve personnel will be allowed to deposit up to 5% of basic pay--together with any special and incentive pay they may receive--up to a total $10,500 annual limit. Whether funds will be matched by the government, however, depends on several factors, including what specialty the servicemember holds and whether he or she is willing to commit to a specified length of service in exchange for the matching funds.

What happens when they do retire after 20 years or more of active duty? This is one issue Patriot can handle. "We help them adjust to the civilian world," says Bower. "We get them to live on their salary and invest their pension [money]."

Don Nalls, another Patriot planner, is in the Army National Guard "15 years and counting." Patriot starts its clients off with no-load mutual funds through a discount broker, says Nalls, "because Bogle is right. Fees over time do matter. The corollary is that we don't get a lot of compensation from that, but if they stay at it long enough, we will. I have a lot of lieutenant colonels and higher who have been on autopilot, and have built up their assets to the point that they'll be over the estate exemption and won't know it. We get them in for proper estate planning."

Charles R. Harr, also at Patriot and a retired Army colonel, points out more specifics. "We all know what we make and it's not much, everybody knows that. In our military careers we've had to be prudent. It's unfortunate, but for many, retirement from the military comes about the time their kids enter college." Harr keeps abreast of available scholarships, particularly lesser-known ones, so that he can steer his clients toward them, especially since he says their children tend to do well academically.

If you're considering whether you want to deal with military clients, you might want to think about one more thing that Don Nalls has to say about clients in uniform: "The remarkable thing is that they're unremarkable. They obey the rules. You don't have to worry about them getting in trouble with the IRS, or doing silly things. If you send them to get a will, they get it done properly. If you tell them to buy an index fund, they buy it, not Priceline.com. They allocate if you tell them to do it. Because of discipline, they understand that there is no get-rich-quick scheme; wealth is accumulated over time by investing regularly. They get that."

And if you're wondering if the frugal, dependable military client actually needs a financial planner, consider this client of Ron Pearson's. "Last January a retired Air Force colonel came in with a trust and joint accounts and UGMAs and such, and said he'd like a second opinion." Pearson gave him the second opinion. He was 53, had $5 million, and had been retired for five years. He'd inherited the trust, taken $10,000, and bought AOL stock that was now "worth a million." His whole portfolio was heavy into technology stocks.

His lifestyle cost about $140,000 a year, and Pearson was alarmed at the amount of risk inherent in the portfolio, as well as the amount of capital gains embedded in his net worth. "I recommended that he restructure," Pearson recalls. "I told him, 'If you sold everything you'd still have $4 million and change, which is still more than you need for your lifestyle. I recommend that you restructure, and generate $200,000-$300,000 in capital gains taxes to rebalance and diversify.' I left him with that information, and he paid me my fee, and I told him he needed to do estate planning and sent him off to do a will."

One can just about guess what comes next, because it's one of the conversations that advisors dream about. Pearson called the colonel in May to check on whether he'd made a will, and the client told him that he had agonized over his advice on restructuring, and hadn't wanted to take it. But in March, at the market peak, he restructured, and watched tech crash in April.

"So if you ever need a referral," the client told Pearson, "send 'em to me."

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