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Personal Finance FAQ

USAA’s Investment Products Are Quickly Moving to USAA in Name Only

Always sleep with one eye open. Never take anything for granted. Your best friends might just be your enemies.
–Sara Shepard

When I was a junior at West Point, we all were offered a loan. It was for $12,000, if I remember the amount correctly, and there were 3 banks that offered the loans. There was a random assignment to each bank, and the rates were slightly different. I wound up with PNC Bank at about 1.75%. It was commonly called the car loan, since many people bought cars, as you could only have a car at West Point when you were a senior.

I was fortunate in that I got a hand-me-down car from my family, an old Ford Taurus. Nothing says single and attractive like a family sedan! But, since I was not in the market for a car, I decided to invest that money.

I split my money into four and bought four USAA mutual funds. I remember one was the Cornerstone fund. I have no idea what the other three were.

Back when I joined USAA, they were fairly exclusive. You had to be an officer or a cadet to be eligible. I’m sure there were other qualifiers, but I wasn’t particularly concerned with them. It wasn’t until years later that they opened up the eligibility requirements for USAA, and also opened up more offerings.

At the time, they were primarily an auto insurance company that had branched out into credit cards and investment products. Later, they would spread out into other products as well when they started serving more eligible customers.

I primarily bought my mutual funds from USAA because I trusted the brand. I trusted who they were.

Later on, I would get sucked into a front-loaded mutual fund scheme being sold by ex-military officers and senior non-commissioned officers and realize the vast difference between the front loaded fund garbage I lit money on fire contributing to and no-load mutual funds.

Thus, my money went back into USAA mutual funds.

So strong was my brand loyalty to USAA that I held onto those mutual funds several years after realizing that Vanguard was way cheaper and that I could purchase ETFs instead of mutual funds.

But, even back in 2013, I’d identified that USAA investments lagged behind the rest of the company in terms of fulfilling the brand promise.

Apparently, USAA finally came around to believing the same tune. First, they sold USAA funds to Victory Capital, and then they sold the investment management company to Schwab.

Therefore, by the end of May, any invested money in “USAA” is not at USAA.

And, on May 6, Victory Capital put the nail in the coffin of the USAA brand associated with investments by beginning to offer 5.75% front-loaded USAA mutual funds (and the author makes a basic math error in the article…5 points if you can spot it).

The sole reason that I can intuit from offering front-loaded mutual funds is to make the people who sell them money.

The head of product development at Victory Capital even had the brashness to claim that this was a customer driven desire:

We are simply responding to inbound requests from our intermediary partners to provide a variety of share class structures that fit their clients’ overall needs

I cannot see a world where a front-loaded USSPX (and its appurtenant 12b-1 fees) outperforms VOO or VFINX.

USAA’s mutual funds were already behind the eight ball compared to Vanguard due to their expenses.

Now, the “fund manager” is compounding the problem by allowing people who trust the USAA brand name to get sucked into a completely inappropriate 5.75% front load on top of that.

To me, this is the nail in the coffin for the USAA investment management brand. The transition to Schwab has been handled poorly. Now, Victory Capital is sullying the USAA mutual fund name by introducing front-loaded mutual funds, making them no better than the other mutual funds that I previously mentioned.

Even if, for some reason, you want an actively managed mutual fund (you shouldn’t want an actively managed fund, for what it’s worth), you can find better alternatives than paying a 5.75% front load.

If you’re looking to open up a brokerage account or invest in mutual funds, you can do far better than associating that money with USAA.

The rapid hand washing by USAA of their investing arm is alarming. I hope the breaking of the brand promise does not extend to their other products.

By Jason Hull, CFP®

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

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