Contractual plan

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Aug 9, 2007 1:07 pm

Can someone help me out here.....what is a contractual plan? Is it like a proprietary fund that Smith Barney is getting sued for?

Aug 9, 2007 2:36 pm
adviseme:

Can someone help me out here.....what is a contractual plan? Is it like a proprietary fund that Smith Barney is getting sued for?


Contractual plans are used in the sale of funds and variable annuity type products that will be bought with check-o-matic type payments.


There are two types.


A FRONT END LOAD plan is one that allows fifty percent of the investor's contributions to be paid as sales charge.  After the first year they have to scale the sales charge down sharply so that it averages 9% over the life of the contract.  The contract life is based on the age of the investor and how long they have to retirement.


A SPREAD LOAD plan is one that allows charging 20% for sales charges as long as the average is down to 16% at the fourth year and down to 9% over the life of the plan.


These are justified by the SEC and NASD/FINRA by suggesting that the small investor needs to be "punished" if he stops saving for his future.


Another justification is to entice sales people to present the product savings vehicle in the first place.  They are often sold in factory type environments where the prospects are guys who work there.  You're going to try to get them to authorize a withdrawal from their weekly checks--perhaps $50.  Well, 8% of $50 is $4, hardly enough to get a sales guy all worked up.  But 50% is another story.


Both plans require that the plan company must send the investor a letter explaining the extraordinary sales charges--that would be a good time for competitors to strike.  These letters have to be sent to the investor within a month or two after they sign up and offer a refund of all sales charges for awhile--the details escape me and I don't want to look them up.


I also know that with the front-end load plan they have a right to receive a refund of all of their sales charges in excess of 15% as long as they opt out within something like 18 months.


If you run into somebody who bought a Front End load plan within the last 18 months you should have a prospect who is primed for plucking.


Aug 9, 2007 5:36 pm

Most people don't understand these, the funds are terrible, and they are locked into them.  They are typcially sold by Primerica, First Command, and I think Fidelity Advisor used to do them.

Aug 9, 2007 5:41 pm
Broker24:

Most people don't understand these, the funds are terrible, and they are locked into them.  They are typcially sold by Primerica, First Command, and I think Fidelity Advisor used to do them.


While it is true that Primerica is a huge distributor of contratual plans I believe any firm out there can use them if they care to.


They rose to their zenith in popularity in the mid 1980s--driven by AL Williams, which became Primerica.  As bad as Primerica is, its predecessor firm, AL Williams, was far, far worse.