After way too much effort, we finally have our initial conditions set up for our experiment.
After writing a check and using USPS to send it to MetLife, I logged in to my GVUL account every couple days for about a week. Although they didn’t send me any kind of confirmation or notification, my money suddenly showed up in my investing account one day:
Sorry for the clunky screenshot. MetLife’s way of displaying this information is…well…clunky.
You’ll notice right away that although I sent them exactly $2,000.00, I only have a total of $1,955.44 invested. That’s because MetLife charges us investors a “front load” of 2.25% any time we deposit money. My calculations how that they actually only charged 2.228%, but I don’t count the difference as a big win.
Since I start off at a penalty, the market has to go up 2.279% just for me to get back to my original value of $1,000. And that doesn’t account for the large expense ratios these funds charge.
I would have liked to submit the orders for my Vanguard and Fidelity investments on the same day as the GVUL; however, MetLife’s clumsy system meant I had no way of knowing when that money would actually reach my account. So, as soon as I saw my GVUL balance I ordered $1,000 of VTI with Vanguard:
and $1,000 of FXAIX with Fidelity
The Vanguard investment shows my value at $999.68 because the market dropped slightly from the time I submitted my order to the time I took my screenshot. My Fidelity investment shows $1,000.04 which means the market went up just a little.
From this point we do the most important thing in investing: we wait. Patiently.
Remember: when Fidelity investigated to see which of their investors got the best returns they found that dead people beat everyone else because they didn’t constantly mess around with their investments like their living counterparts.
We’re going to emulate these investors by only checking in on our investments about once a month (or less if I’m too lazy to write about it). The goal here is to show whether MetLife’s fees have an outsized effect on invested dollars, and if so how large that effect might be.
That said, we can put some of our time to good use. I managed to find a treasure trove of background information on the GVUL investments.
GVUL Fund Source Data
For starters, I found some info about GVUL investments on the SEC website. It’s worth reading, but not while you’re flying because it’ll put you to sleep.
From there, I ended up finding the page on the MetLife website with prospectus, annual report, and other information for all of our investing options. Although this page looks very simple, it links to thousands of pages of documents. Digging in to some of that information did not leave me particularly impressed. The most telling thing I found was this chart, from page 6 (labeled “BHFTII-2“) of the Brighthouse Funds Trust II
MetLife Stock Index Portfolio’s Annual Report:
Remember: this never purported to be an actual S&P 500 index fund. The background information for this investment states that it’s an actively managed fund with the goal of approximating the performance of the S&P 500.
This chart freely admits that over the long term, this fund fails to perform as well as the index it aims to track. I don’t even have to beat the dead horse by reminding everyone that the vast majority of actively-managed funds fail to perform as well as the market overall. With this chart, MetLife pulls a President Karpov and says: “I do not deny it. I proudly admit it!”
Not only does MetLife admit that their fund failed to meet its stated goals over the last 10 years, they charge their customers (us) a 0.27% fee…every year…for the privilege of failing so openly with our money.
Hmm.
Digging further into the source data is fascinating, if you can keep your eyes from glazing over. Starting on Page 8 of the Annual report (labeled “BHFTII-4“), we get a detailed list of the specific things in which this fund has invested.
To be fair, most of the investments here are exactly what I’d hope to find in something aiming to match the S&P 500. The list shows that 99.3% of the funds assets are invested in common stocks from companies that make sense: Dow Chemical, American Express, Walmart, Honeywell, etc.
However, toward the end of this section we find some weird stuff.
This fund has:
- Nearly $10M invested in US Treasury Bills
- More than $44M in CDs at banks all around the world.
- Over $37M invested in other mutual funds, including one each at BlackRock and Fidelity
- Much more
These alternative investments only account for 0.7% of the total assets in which this fund is invested. However, we have to wonder: Why?
Part of the reason is that the fund needs some quickly-accessible assets in case a large number of investors want to cash out. That’s fine with me because someday I’ll be one of those investors. (Yes, a CD or a corporate loan isn’t necessarily a liquid investment. The must be part of some other strategy….)
It takes a lot of expertise, research, and administration to find and execute some of these investments at all, let alone to make money from them. If you’re wondering where your 0.27% expense ratio is going, the answer is into the pockets of the fund managers who get all this done.
The annual report showed the net assets for this fund at $7,439,153,437. An expense ratio of 0.27% means that this fund’s managers make more than $20 Million, per year, for failing to meet their stated goal.
This wouldn’t be a bad thing if MetLife’s fund performed well enough to at least equal the performance of the S&P 500, after accounting for their 2.25% front load, their 0.27% expense ratio, and other fees. However, we just saw the chart showing how that isn’t the case.
I’ll spare you a deep dive into the source documents for the BlackRock fund we’re using in this experiment, but you’re welcome to take a look for yourself.
Why Bother?
Are you tired of me complaining about the GVUL investment setup yet? I’m not going to stop, but I will at least say that even with all these drawbacks this investment option might be worthwhile.
Let’s recall that I built a calculator to compare investing in the GVUL to investing the same amount of money in a regular brokerage account. You can download your own copy here. (Yes, a copy. Don’t ask for permissions to edit the master.)
When I initially wrote about the GVUL I showed that, even despite all these crazy fees, investing through the GVUL still appears to be mathematically advantageous in many cases.
This isn’t true because the GVUL has good investment options or low fees. It’s true because the insurance premiums paid by Delta Air Lines get counted as part of the basis for your investments. By my math, Delta will pay at least $250,000 in insurance premiums over the course of the average pilot’s career. That could mean you get a quarter of a million dollars of investment gains completely tax free.
Before you invest in the GVUL, you should consult with a Certified Financial Advisor. When you do, they’ll probably take one look at the fee structure and say, “No way!”
If they do, ask them where they would invest your money instead, and what fees they charge.
Many advisors will do what the Brighthouse Funds Trust II MetLife Stock Index Portfolio does and spread some of your investments among a bunch of mutual funds and ETFs. This means you’re probably paying your CFA upwards of 1% per year to invest your money in mutual funds that charge an additional expense ratio.
If I have to pay a high expense ratio anyway, I’d rather pay a one-time 2.25% fee up front, rather than an ongoing 1% fee every year. I hope you don’t need a fancy spreadsheet to tell you which of those fee structures is worse.
If you’re paying an advisor who charges you an annual fee based on Assets Under Management (AUM), you should understand that they’ll be inherently biased against any investment outside of their control.
Every dollar you invest with the GVUL is a dollar on which they can’t charge you their annual 1% fee. They’ll note that the MetLife fee structure, or the funds’ performance, or a variety of other reasons make GVUL investing a sub-optimal deal, and they’ll be right. However, at least some of the underlying reason for their argument may very well be their natural drive to get as much of your money included in their Assets Under Management.
I can’t blame professional advisors for gravitating toward getting all of your investments under their control. Most of the big players in their industry require them to operate under the AUM model. Most pilots need professional help for things like finding tax advantages and setting up a comprehensive estate plan. It’s okay to invest some of your money with them and pay their fee if that’s what it takes to get their services. However, there’s no need for them to “manage” your 401k, TSP, GVUL, MBCBP, or other investments. You can manage those effectively on your own.
The better model here is fee-based financial planning. You pay a pro a one-time fee to look at your situation and advise you on an investing strategy. This might cost you a few thousand dollars. However, once your plan is in place, you just keep using it as time goes on. You can also hire a fee-only financial planner to help with tax issues, estate planning, etc. I haven’t found a good one to recommend yet, so I’d love to hear recommendations if you find one.
It’s also fair to note that many of us pilots can be both cheap and short-sighted. If we speak with a fee-only financial planner who wants to charge us a one-time fee of $3,000 we balk. Instead we see a “measly 1%” AUM fee and think it seems smaller, especially early in our careers. If paying that fee gets you investing the bulk of your income and gets you specialized help for tricky parts of your overall finances, then I’d rather you pay 1% than not get any help at all. Just know there are other options.
Your Certified Financial Advisor should be okay with you managing some of your own investments and not pressure you to put absolutely everything under their control. If they start to get pushy, push back a little. If they don’t back off, find someone else.
An even worse situation under the AUM model happens if your agreement with your advisor considers them as “managing” any money you invest in the GVUL because they tell you which funds to pick. Then, since that money is part of their AUM, they’d charge you their ongoing 1% fees, on top of MetLife’s 2.25% front load, and the individual funds’ expense ratios.
Please don’t ever sign a contract agreeing to this. If you’re currently in a contract like that, start shopping for a different advisor. I promise you can do better.
Summary
I got my money invested and the experiment is running! Initial balances are:
- Brighthouse Funds Trust II MetLife Stock Index Portfolio: $977.72
- Brighthouse Funds Trust II BlackRock Capital Appreciation Portfolio: $977.72
- FXAIX: $1,000.04
- VTI: $999.68
Looking into the source data for the MetLife funds was a little scary. They freely admit they fail to achieve their stated goal, and we reward that by paying them $20M per year. Some of the investments in that fund have nothing to do with the S&P 500 at all.
Despite this, we must remember that the whole reason for GVUL investing is that Delta’s life insurance premiums allow us to enjoy thousands of dollars in tax-free investment gains.
Certified Financial Planners won’t want money invested in the GVUL for a variety of reasons. However, one reason might be that if GVUL investments don’t count as part of their Assets Under Management, they can’t charge you their own annual fee on those dollars.
You do need to speak with a CFP before investing in the GVUL. Do your homework. Run my calculator for yourself before taking the results to a Fee-Only Financial Planner, if possible, or a regular CFP who has a fiduciary duty to not talk you out of this if it is a good deal.
Despite all the reasons to not like GVUL investing, the math says that it is a good deal in many or even most conditions.
We’ll aim for monthly updates in hopes of supporting or contradicting that theory as our experiment continues.
Thanks for reading!
Thanks to Talha Hassan on Unsplash for this week’s feature image!