HighPass Blog


The Fiduciary Standard, CFP® Professionals & Commissions Don't Mix Well

Written By Ethan S. Braid, CFA - August 2014

The CFP® designation is a highly respected credential that consumers are wise to seek out. All CFP© professionals who provide financial planning, or elements of financial planning, are expected to follow the fiduciary standard of care when dealing with clients. Deficiencies exist however, with the monitoring of many CFP® professionals for adherence to the fiduciary standard. The author highlights some of these deficiencies in this article. The author's conclusion is that consumers should eliminate the confusion by selecting fee-only CFP® professionals who have no affiliation with any broker-dealer and function as pure investment advisors.

 In the financial services industry, a financial advisor (FA) calling herself a fiduciary is expected to, at all times, put clients’ interests ahead of both hers as well as the firm she represents.  Additionally, an FA who owes a fiduciary duty to her clients must provide certain types of disclosure to her clients, before giving investment advice or entering into agreements to provide investment advice.  Examples of disclosure fiduciaries must provide to prospective clients includes:  how the FA gets paid, conflicts of interest the FA has, the FA’s education and how the FA arrives at investment or planning decisions & products recommended.  Clearly, these legal obligations placed upon fiduciaries are a powerful set of safeguards designed to protect investors.  In my opinion, Congress got it right when they created the fiduciary standard by passing The Investment Advisers Act of 1940.  Unfortunately, most investors don’t even know what the fiduciary standard is or how the fiduciary standard differs from the lower legal standard of care in the financial services industry known as the suitability doctrine.  To make matters worse, there is now a growing number of FAs who say to clients that they are fiduciaries when in my opinion, they absolutely are not fiduciaries. 

The CFP Board’s ill-fated decision.

In 2007 the CFP Board decided to impose a fiduciary standard on CFP® professionals who engage in financial planning services.  The requirement for CFP® professionals to follow the fiduciary standard, which can be found in the CFP® standards of professional conduct, became effective on July 1st, 2008.  While I admire this very lofty goal that the CFP board put in place, I think it has ultimately created more confusion and harm than good. 

Many CFP®s sell insurance, are both brokers & advisors and receive commissions & fees.

When an FA sells life insurance or accepts commissions from various products, you are going to have a tough time convincing me that she is a fiduciary.  Extreme conflicts of interest are present for commission paid, life insurance licensed FAs.  For example, while a term policy may pay the FA only $2,000 in commission, she may be able to sell the client an indexed universal life policy that instead pays $50,000 in commission.  Convincing a client to buy an annuity or a limited partnership for hidden commission can be far more lucrative for the FA in the short term than working for a fee.  Steering the client in one direction or the other regarding products and accounts can result in massive commission & fee differences for the FA.  Therefore, FAs who can be paid commissions and fees (also known as “fee-based”) have serious conflicts of interest.

My experience.

In my 15 years as a financial professional I have met with 100s of families to discuss their finances.  Many times their current FA was a CFP® professional.  Insurance always comes up when I interview a family.  I always ask the question:  “How much commission was your agent or FA paid?”  In 15 years, I have yet to have even one person tell me an accurate amount.  Nearly always what I have been told equates to the commission someone thinks they paid being dramatically lower than what they actually paid.  That statement should tell you something.  Consumers are completely in the dark.  Why are they in the dark?  A lack of transparent disclosure on fees & commissions.  Most consumers I have interviewed on this subject had absolutely no clue that their FA was paid as much as 100% of the life insurance policy first year premium or that a 7% commission (on dollars invested) for a variable annuity was handed to the advisor.  Typically I get responses from consumers that indicate they believe the commissions paid on life insurance equates to between 5 – 10% of the premium, which is a far cry from the typical 100% commission on the first year policy premium! 

Now consider the fact that a growing number of FAs are obtaining the CFP® designation and holding themselves out as fiduciaries.  Many will have a rough time adhering to the fiduciary standard.  A large number of these CFP® professionals work at insurance companies, banks and brokerage firms.  Typically these individuals are licensed to sell life insurance, annuities, mutual funds and other products for commissions but can also work on a fee-basis.  Think about the picture I painted earlier in this article, in my experience most people don’t receive accurate disclosure regarding the commissions paid for life insurance or variable annuities.  Add on that incredible conflicts of interest are present when an FA gets paid commissions to sell products and following the fiduciary standard becomes a real challenge.  Fiduciaries and commissions just don’t mix well.  The CFP Board’s expectation that CFP® professionals will follow the fiduciary standard doesn’t mean that all CFP® professionals will comply, especially given the fact that for many, compliance with the fiduciary standard is not reviewed.  In my opinion, for CFP® professionals selling life insurance, following the fiduciary standard will be very tough for them.  To truly follow the fiduciary standard, a CFP® professional selling life insurance and other products for commission would need to provide so much disclosure to the client that the client may likely choose not to buy the products. Once a client understands the actual commissions being paid and the significance of the conflicts of interest present, getting them to buy will not be an easy sale.

A real life example.

Recently I interviewed a prospective client.  The client was receiving his investment and financial planning advice from a CFP® professional at a large and highly rated insurance company.  In the course of our meeting, the topic of life insurance came up.  As the prospective client began to show me his policies and go over his finances with me it became apparent that he had been sold products that while suitable, were clearly sold to benefit the FA and not the client.  In other words the fiduciary standard had been completely ignored.  The gentleman in question is a 39 year old, successful business owner who is single, has no children and commands a high income.  He was sold three adjustable complife life insurance policies for a total of $4 million of death benefit at a premium rate of $80,000+ per year.  Now, to put things into perspective, this man needed life insurance to fund a buy-sell agreement.  However, his life insurance need was not more than $1.5 million. The additional $2.5 million of life insurance was sold to him as a tax-free wealth accumulation vehicle (a strategy, in my opinion, that is as likely to succeed as a person is to find a unicorn).  Mutual funds, ETFs and stocks were not proposed. 

During the course of my interview, I asked this man what his intentions were for the business he owned and how much longer he envisioned owning it.  Fifteen years seemed like a stretch to him and a sale within 10 years seemed realistic.  Thus, a 20 year term policy, at a drastically lower premium amount could have easily been used to fund the buy-sell agreement for $1.5 million…

But wait a minute, if the FA had talked to him about term insurance, and used term insurance, then the FA would have been paid far less in commission.  Shockingly, the FA never discussed term and also never investigated this man’s longer range plans for his business.  Instead the FA only focused on and ultimately sold permanent insurance, stressing tax-free growth opportunities.

When I told the prospective client that he may have paid as much as $80,000 in commission he nearly fell out of his chair.  He had no idea he had paid the financial advisor so much.  The amount of commission paid on the policies he told me, was never discussed or provided to him.

Was a crime committed?  No.

Were the insurance policies suitable?  Yes.

Did this CFP® professional follow the fiduciary standard?  Not a chance.

Let’s recap the reasons why the fiduciary standard was not followed:

  • No disclosure or discussion of conflicts of interest.
  • Did not explore all options for the client (term vs. universal life for example).
  • Did not explain to the client how he (financial advisor) was paid.
  • Sold products for investment (adjustable complife) that benefitted the financial advisor far more than the client.  Other ideas, ETFs for ex., would have been a better choice.

Now, with this story in mind, let me demonstrate why I think that the CFP Board’s decision to elevate CFP® professionals to the fiduciary standard has only created confusion and harm:

This FA told the client he was his fiduciary, repeatedly.  In fact, he used his “fiduciary status” as a reason why the client was in such good hands with him and why the life insurance policies he (client) had were so wonderful and in his (client’s) best interest…insert unicorn here! 

With so many CFP® professionals able to sell products for commission, you really have to wonder, how many of them actually follow the fiduciary standard?

Who monitors FAs to see if they follow the fiduciary standard?

In many cases, unfortunately, the answer is:  no one!  The CFP Board does not examine their certificate holders to see if they follow the fiduciary standard.  The CFP Board merely expects that their CFP® professionals, to whom the fiduciary duty applies, will follow the fiduciary standard.  This expectation is nothing more than a voluntary honor system.  The CFP Board only examines a breach of fiduciary duty when a complaint has been filed with them regarding a CFP® certificate holder. 

Depending upon where an FA is employed, she may or may not be examined for adherence to the fiduciary duty.  Many FAs work for broker-dealers, banks or insurance firms.  In these instances, the examination of branch offices and individual brokers is typically carried out by FINRA.  FINRA is a private self regulatory organization that broker-dealers belong to.  When FINRA examines a broker-dealer, checking to see if the FAs at the firm follow the fiduciary standard is not part of the examination.

FAs who work for Registered Investment Advisory (RIA) firms however, will be examined for adherence to the fiduciary standard.  Therefore a CFP® professional who is employed by an RIA firm and calls herself a fiduciary will also be reviewed for adherence to the fiduciary standard.

RIA firms and their employees are examined by either Federal (SEC) or State (Division of Securities), government regulators.  Upon examination of an RIA firm, these government regulators look for evidence that the fiduciary standard has been followed with respect to the treatment of the firms’ clients.

So to sum it all up, many CFP® professionals are expected to act as fiduciaries.  The rub is that only those who are examined by SEC or State government regulators are checked to see if they actually follow the fiduciary standard.  A large number of CFP® professionals work at firms where they are not examined by these government regulators and therefore no-one is reviewing them to see if they follow the fiduciary standard.

Looking for a better way to get investment advice?

The CFP® designation is certainly something to look for in an advisor, but pay attention to how she gets paid. Find a CFP® professional FA who is “fee-only” and cannot legally accept commissions. Be sure that the FA is a “pure” advisor and not dual-registered as a stockbroker too.  An FA who is “fee-based” can sell you products for commissions.  “Fee-based” sounds like “fee-only,” but in reality is nothing more than a marketing ploy to cover up the fact that an FA gets paid commissions in addition to fees. Ask the FA to demonstrate how she follows the fiduciary standard.  Carefully read the FA’s disclosure brochure (form ADV) and review any conflicts of interest with the advisor. Verify that she does not sell life insurance or get compensated to refer you to a life insurance agent.  Often a fee-only FA can help you evaluate your life insurance but will not sell it to you or get paid when the insurance agent writes your policy.  There is a sense of comfort in working with a professional who can give you honest and objective advice when it comes to insurance needs.  Finally, don’t be afraid to ask the financial advisor for a copy of her tax return, to show you what she does with her own investments or for her Fico report.  If someone isn’t a good steward of their own finances, why would they be a great steward of your money?


About the author of this article.

Ethan S. Braid, CFA is the founder of HighPass Asset Management – an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves. Mr. Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry 15 years ago. Mr. Braid earned a BS in Finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA Charterholder. The CFA program is a graduate level, globally recognized, multi-year program with a focus on investment knowledge. Candidates for the program commit an average of 900+ hours of cumulative study time to complete all three levels.

Mr. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as: estate planning, retirement planning, investment analysis, mergers & acquisitions and behavioural finance. Mr Braid also has a passion for business history with a focus on the late 19th & early 20th centuries.

When Mr. Braid is not helping clients, he enjoys: cooking, wine, exercise, his yellow Labrador retriever, fly fishing, hiking, travel, playing guitar, snowboarding and duck hunting. Mr. Braid is a committee member of the Denver Chapter of Ducks Unlimited.

This article is provided by HighPass Asset Management for informational purposes only. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment or legal advice.




Variable Annuity High Fees, Tax-Deferral Myths & Rider Misnomers Exposed


Written by Ethan S. Braid, CFA on 04 - 27 - 2014


Variable Annuity Tax-Deferral Myths, High-Fees & Rider Misnomers Exposed


I will never forget my first experience in being trained on how to sell variable annuities.  The year was 2000 and I was only one year into my career as a financial advisor at a major Wall Street brokerage firm.  A wholesaler (this is a term for a sales representative of an insurance or mutual fund company who calls on financial advisors and solicits the financial advisors to sell his/her product to the financial advisors’ clients – similar to how pharmaceutical sales reps call on Drs. and attempt to convince the Dr. to prescribe the drugs that his/her company distributes) had bought lunch for my office and was pitching the brokers (while they were eating his sandwiches) on why they should sell annuities to their clients.  Since only some of the brokers in the office had an insurance license, he lead his pitch by showing the brokers how they could ramp up their commissions, significantly, by getting an insurance license and then selling variable annuities (VAs) to their clients. VAs, he explained, paid 7% commissions (7% of the premium going into the contract, for example a $500,000 investment pays a $35,000 commission) and the best part was that the client didn’t see the commission (still true today, unfortunately).  After he got done getting the brokers excited about all the money they could make, he then showed them his NO-1099 propaganda.  Since this was the year 2000, the recent eighteen year bull market had resulted in capital gains taxes for many investors.  What better way to sell a VA than stressing the tax-deferral aspects he said?  Just ask your clients, “If I could show you a way to grow your money and eliminate 1099s, would you be interested?”  He then showed charts and graphs demonstrating the power of tax-deferral over time and how the investor who puts her money into a VA comes out ahead in the long run vs. simply investing in stocks and mutual funds which were just plain tax inefficient he told us.  Towards the end of the meeting the branch manager stopped by to confirm all that the wholesaler told us and encouraged the brokers to move forward with VA sales since they were a great way to increase commissions.  I recall leaving that meeting and thinking that if the insurance company pays 7% commissions and these investments are “sold” and not “bought” then there must be a catch somewhere… 


In this article, I will show how and why VAs are not optimal from a tax-efficiency or fee standpoint.  Ironically, tax-deferral is one of the supposed key-benefits for VA investors and a key selling point for financial advisors who promote them.


Income vs. Capital Gains

Gains in VA contracts are taxed as income.  Gains in stocks, ETFs, real estate and mutual funds when held longer than one year are taxed at long term capital gains tax rates.  The difference between these two tax rates, which can be substantial, is a major reason why a VA is a poor choice for long term wealth creation.  In this article I will provide an example that will clearly demonstrate how getting taxed at income tax rates for an annuity investor dramatically underperforms the investor who gets taxed at the long term capital gains tax rate.

High Fees vs. Low Fees

It is no secret that VAs are high-fee investments.  The layers of fees look like this: 

  • Mortality & expense risk charge                                 typically                      1% or more
  • Administrative charge                                                 typically                       .10%
  • Rider charges                                                              ranges from                 .35  - 2.00% +
  • Investment (mutual funds) charges                            typically about            1%

In my experience of reviewing dozens of VA prospectuses:

  • Typical all-in VA cost:                                                                                   3.25%

Compare this high-fee VA cost structure to a professionally managed stock, mutual fund or ETF portfolio where an investor’s cost structure looks like this:

  • Investment management expense                              ranges from                 .75 – 1.50%
  • Investment (mutual funds) charges                           typically about              1%
  • ETF expenses                                                             ranges from                 .09 - .60%

Depending on the investment management fee and the mix of stocks/mutual funds/ETFs used:

  • Typical all-in professionally managed account cost:                                       2.00%

Therefore, the fee-gap between VAs and professionally managed after-tax accounts is substantial at about 1.25% in my estimation. 

All things equal, paying an extra 1.25% per year on your investments will substantially diminish the wealth accumulation potential of a VA over a long time period when compared to an after-tax, professionally managed account. 

Lifetime Income?

Insurance companies and the financial advisors who sell their products prey on investors’ emotions to influence investors to buy insurance products.  Today many investors fear running out of money.  Therefore insurance companies and their marketing departments have created some slick ways to offer a solution to investors who fear running out of money.  Hello lifetime income rider!  But what exactly is “lifetime income?”  Lifetime income, as presented by insurance companies offering VAs with a supposed lifetime income guarantee, is a misnomer in my opinion.  When you start peeling layers off the onion, you learn that the lifetime income one is receiving from a VA contract is really just a return of his/her principal and any deferred income that resides in the contract.  Hmmmm.  So what exactly is the insurance company offering if the investor is simply getting his/her own money back every month, even though the payments are labeled as “lifetime income?”  The insurance company is guaranteeing to the investor that if in the event the policy runs out of money (i.e. the investor spends 100% of his/her own money), then and only then will the insurance company begin to pay the investor “lifetime income.”  Put another way, the insurance company is guaranteeing the investor that he she can take a payment (subject to limitations) for life, but those payments will just be a return of the investors’ own money and the insurance company will only have to provide “income” to the investor if the unlikely event of the investor truly running out of money were to happen.

So the game is rigged.  The insurance company charges a rider fee for this lifetime income guarantee forces the investor to use an asset allocation model and then limits the investors’ withdrawal to some predetermined percentage of the contract.  These constraints placed on the policy holders drastically reduce the likelihood that any policy holder will run out of money before her death.  Thus the insurance company gets to collect rider fees on a lifetime income claim that they most likely will never even have to pay out on.  Is this financial genius or theft, you decide.

Variable Annuity Fee & Tax Impact Example

Hypothetical investors Laura and Peter are considering investing some of their after-tax cash in a variable annuity.  On paper:

  • Laura and Peter are both physicians who live in Colorado.
  • They are 55 years old.
  • They are planning to retire in 10 years at age 65.
  • Both Laura and Peter are concerned about not having enough retirement income.
  • At age 65 they plan to use social security, Peter’s pension and income from investments to pay for their living expenses.
  • They have a $3,000,000 portfolio, of which $2,000,000 is in retirement accounts.
  • The remaining $1,000,000 is held in a brokerage account overseen by a financial advisor.
  • Their financial advisor is recommending a $500,000 variable annuity investment as a replacement for some of the mutual funds they hold in an after-tax account.
  • The financial advisor has stressed that the reasons to buy the annuity are tax-deferral and lifetime income guarantees.

With a 10 year horizon on the potential $500,000 investment, let’s first analyze the impact that fees can have on the VA investment when compared to a professionally managed portfolio of mutual funds.


  • VA all-in cost                                                                                 3.25%
  • Mutual Fund portfolio all-in cost                                                   2.00%
  • Similar mutual funds used in both investments
  • Top line mutual fund returns approximately the same at               9.00%


            VA Calculation:

  • Time Period                       10 years
  • Net Return                        (9.00 – 3.25) = 5.75
  • Beginning Value               $500,000
  • Ending Value                    $874,528


Mutual Fund Portfolio Calculation:

  • Time Period                       10 years
  • Net Return                        (9.00 – 2.00) = 7.00
  • Beginning Value               $500,000
  • Ending Value                    $983,576

Thus, all other variables equal, the additional fees of the VA result in the VA accumulating $109,048 less than the mutual fund portfolio at the end of ten years.

Now let’s investigate the tax impact.  To keep this example simple, we will assume that Peter and Laura have retired at 65 and are in the 28% federal tax bracket.  They live in the state of CO and pay 4.63% state income tax.  Peter and Laura already receive social security & a pension and thus 100% of any annuity income will be taxable at both the federal and state level.

Therefore, the $374,528 of deferred income in the VA will be subject to a total tax rate (fed & state) of 32.63%. 

The mutual funds however, which have $483,576 gain will only be subject to 19.63% total tax (fed capital gains tax and 4.63% state income tax).


VA Net of Tax Value in 10 years

  • $500,000         principal
  • $374,528         deferred income
  • ($122,208)       deferred tax liability (32.63%)


  • $752,320         Net of Tax Value       


Mutual Funds Net of Tax Value in 10 years


  • $500,000         principal
  • $483,576         long term capital gain
  • ($94,926)         deferred tax liability (19.63%)


  • $888,650         Net of Tax Value

Putting it all together, we can now quantify the dollar impact that the higher fees and higher taxes can have for a variable annuity investor:


  • The VA underperforms the mutual fund portfolio by $136,330.


Clearly the combination of higher fees and higher taxes is highly detrimental to the wealth accumulation potential of the VA in this example.  Longer time horizons only make matters worse as there is more time for compounding at different rates and an even greater ending value differential for the two investment scenarios.

Hopefully this article will stimulate investors to ask more questions when their financial advisor recommends a variable annuity.  While not everyone will be in the 28% tax bracket (or higher) at retirement, the 25% tax bracket is a safe bet for most people, and even at that lower tax bracket the VA will still have a tax disadvantage as long as capital gains are taxed at 15%.  One other thing I would like to make investors aware of is that in my example above, it is likely that over the 10 year time horizon the mutual funds would have paid dividends and also distributed capital gains along the way.  The likely result would be that at different points over the 10 year horizon, an investor would pay taxes depending on capital gain and dividend distributions.  The tax rate however, would be the same at 19.63%.     

There can be times when a variable annuity might be a sensible investment.  Although in my opinion these instances are limited.  The situation where an annuity might make sense as an investment would be for the person who doesn’t mind paying exorbitant investment fees, emotionally needs and wants the death benefit guarantees VAs offer and finally only wishes to leave the funds to the next generation.  In this case, a VA may make sense because the person can take market risk in the VA contract and at the same time put a minimum guarantee on the inheritance amount the beneficiaries will receive. 


About the author of this article.

Ethan S. Braid, CFA is the founder of HighPass Asset Management – an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves.  Mr. Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry 14 years ago. Mr. Braid earned a BS in Finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA Charterholder.

Mr. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as:  estate planning, retirement planning, investment analysis, mergers & acquisitions and behavioural finance.  Mr Braid also has a passion for business history with a focus on the late 19th & early 20th centuries.

When Mr. Braid is not helping clients, he enjoys: cooking, wine, exercise, his yellow Labrador retriever, fly fishing, hiking, travel, playing guitar, snowboarding and duck hunting.  Mr. Braid is a committee member of the Denver Chapter of Ducks Unlimited.

This article is provided by HighPass Asset Management for informational purposes only.  No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment or legal advice.



Bond Literacy Quiz

January 24th, 2014

Bond Literacy Quiz

The 30 year bull market for bonds has created a tremendous amount of confusion for both financial advisors and individual investors.  I developed this quiz as a way for individuals to test their knowledge about an asset class that is widely used and highly misunderstood.  The answers are at the end of the quiz.

  1. 1.
    1. a.True
    2. b.False


  1. 2.Bond funds help investors protect their wealth from rising inflation.
    1. a.True
    2. b.False

Bonds Lost, Now What?

Written by Ethan S. Braid, CFA on July 16, 2013 

Bonds Lost, Now What?


Recently I went on a fly fishing trip to a wonderful lodge & trout stream in Wyoming.  One night after dinner my fishing partner, his son and myself were sitting on the deck of the lodge discussing the issues of the day with some of the other guests.  One of those guests happened to be a financial advisor.  Tired from a long day in the sun, I turned in early just as the conversation shifted to investments.  The next morning, my buddy says to me, “you should have stuck around for the conversation last night!”  Intrigued, I asked, “why?”  “Well, according to the financial advisor who was holding court last night, he invests his clients’ money in bonds because bonds never lose money.”  “Come again?” I said in total disbelief.  “Yep, that’s right, the financial advisor said that bonds are a great place to invest because bonds don’t lose money.”  At that point I pinched myself just to make sure I wasn’t dreaming…



Written By Ethan S. Braid, CFA - 03-28-2013

Avoiding the Bond Bubble

When I first wrote about the bond bubble, it was May 23rd of 2012.  On that date I wrote an article titled:  “When the Bond Market Blows Up.”  The article can be found on my company’s blog site.  My analysis at the time was that at a 2.86% yield on the 30 year treasury, there was no value proposition in the bond market.  Instead, I encouraged investors to look to the equity markets for more compelling investment opportunities, with many stocks yielding in the 3% - 5% range and the market as a whole undervalued at that time.