Your financial advisor is a fiduciary on some accounts, a stockbroker on others and sells life insurance too? Why?

Written by Ethan S. Braid, CFA on 02 - 26 - 2015


My journey in financial services started in the summer of 1997 with an internship at a large brokerage firm.  I realized back then, nearly eighteen years ago, that a large majority of consumers were uninformed regarding how financial advisors (FAs) were paid, what conflicts of interest they should watch out for or which legal standard their FA followed.  I remember thinking back then as I was starting my career how bright the future looked.  Over time I thought, especially with the availability of information from the internet, consumers would become much more educated on these very important topics.  I envisioned more transparency, better educated advisors vs. salespeople and ultimately the reputation of the industry as a whole improving substantially.  Sadly, I was very disillusioned back then!  As I write this article, I can’t recall a time when investors as a group were more confused or misinformed than now. 


Evolving titles, designed to confuse…


My title on my very first business card in the late 1990s referred to me as a “registered representative.”  At the time, I was a series 7 licensed stockbroker.  I could buy and sell bonds, stocks and mutual funds for commissions.  Stock commissions were visible to clients.  Mutual fund commissions were visible for some share classes but could be hidden on others. Bond commissions (also called a credit or markup) were hidden. Depending on the bond sold, commissions ranged from .25% to as much as 4%.  Clearly there was an incentive for brokers to sell bonds that had higher commissions which were good for the broker but may not have been the best deal for the client…one of my first lessons in clients’ interests taking a back seat to brokers’ paychecks.


In the year 2000 I took the series 65 exam and then became dual registered as a both a stockbroker (series 7) and an investment adviser (series 65).  I was then able to get paid both commissions as a stockbroker and fees as an investment adviser. At the same time, my business card title changed.  My updated card said I was a financial advisor. 


How confusing.  An adviser, per the investment advisers act of 1940 is expected to act as a fiduciary for clients and always put client interests’ ahead of his own and the firm he represents.  A stockbroker on the other hand adheres to a lower legal standard of care known as suitability.  Stockbrokers can sell their clients products that may not be in the client’s best interest but still be legally permissible so long as the products sold are deemed suitable.


Since my new business card indicated I (as well as 1000s of my colleagues at my firm) was an “advisor,” it could easily be misconstrued that I was also a fiduciary putting client interests ahead of my own.  In reality, I was still just a salesperson following the suitability rule and capable of offering account products for a fee or charging both visible and hidden commissions.

Was it a coincidence that my firm as well as most others circa late 1990s/early 2000s changed the titles of their salespeople from that of stockbroker or registered representative to financial advisor/financial consultant/wealth manager?  I don’t think so.


Fee-only or Fee-based?  Just a mere thousand light years apart…


These two phrases sound very similar, right?  Yet in reality they could not be more distant.  In my opinion, the financial services industry developed the phrase “fee-based” to sound as close as possible to the phrase “fee-only.”  The marketing phrase “fee-based” is meant to confuse clients into thinking that their financial representative is truly an adviser and not a commissioned sales representative.


Let’s compare and contrast.  Fee-only investment advisers do not accept commissions or sell products.  They have no conflicts of interest.  Fee-only investment advisers are pure advisers compensated only by extremely transparent fees and are expected to at all times adhere to the fiduciary standard of putting clients’ interest first.  Fee-based advisors however can accept both commissions and fees, sell products and may have conflicts of interest present.  Fee-based advisors may not be legally required to put clients’ interests first.  Fee-based advisors are generally dual registered as both series 7 (stockbroker) and series 65 (investment adviser) license holders and may hold an insurance license too.  FINRA administers the series 7 & 65 exams.


The term fee-based is typically found in conjunction with the title financial advisor (or wealth manager or financial consultant etc) and often the FA in question is employed by a bank or large brokerage firm that is connected to a bank.  These clever marketing terms & titles which sound a whole lot like “fee-only” and “investment adviser” have in my opinion done substantial harm and created mass confusion with the investing public.  


Fiduciary on the entire relationship or just an account?


A fee-based advisor is a great example of a wolf in sheep’s clothing.  Fee-based advisors offer account products where the FA can be paid a transparent fee and is expected to act as a fiduciary on that particular account product.  However, for the very same client where on one account the FA is acting as an investment adviser representative, the FA can also in a separate account sell  limited partnerships, structured notes, or life insurance and annuities (if insurance licensed) for hidden commissions.  This trick is called having both “advisory and brokerage” accounts (i.e. fee-based) and many FAs execute on this compensation strategy.  To do so, an FA opens multiple accounts for one client and gets paid commissions as a stockbroker in the accounts labeled “brokerage” and then gets paid fees in the accounts labeled “advisory.”  You have to wonder just how many investors are aware that some of the products they are sold contain hidden commissions?  Confusing?  You bet.  Sadly, many investors are unaware of when the FA is functioning as an adviser for a fee, when the FA is working as a stockbroker for commission or when the FA is selling insurance as a commissioned agent.


In stark contrast to fee-based advisors, fee-only advisers don’t play any of these games.  Fee-only advisers are paid an explicit fee that that the client knows in advance and sees on their statements.  Nothing is hidden and everything is disclosed.  Fee only advisers are also fiduciaries on the entire client relationship and legally bound to put the clients’ interest first at all times.


Let’s review your life insurance…


I don’t believe there is a product with more serious conflicts of interest present than life insurance.  Most people know that life insurance pays substantial commission but few investors realize that the commission paid on life insurance is often 100% of the annual policy premium payment.  Therefore, if the annual premium for a healthy 40 year old male on a $2m Term policy is $2,500 then the agent’s commission will be about $2,500.  Similarly, for the same individual, if a $2m VUL (variable universal life) policy requires a $20,000 per year annual premium, the agent can receive as much as a $20,000 commission when the policy is written. 


Thus by steering the client to a VUL policy instead of a Term policy, the “financial advisor” can get paid approximately $17,500 more in commission for the same level of death benefit (and same amount of paperwork).  What an incredible dilemma these FAs who also sell life insurance must face.  Unfortunately I have seen far too many instances where investors were sold insurance products that were clearly not in the investors’ best interest but were absolutely in the FAs’ best interest.  Commissions can cloud an FA’s judgment.  Before I started HighPass and was working at a major brokerage firm I witnessed firsthand, many times, coworkers (they were called financial advisors) selling insurance products strictly for the commissions.  I sat in sales meetings where the branch manager encouraged every FA in the office to get insurance licensed so they could generate more commissions.  I had conversations with fellow FAs who would explain to me their personal strategies on how to review and sell life insurance and annuities – almost as if they were rationalizing (to themselves) their behavior by selling coworkers on their sales methods.  Sadly, there was very little focus on actually helping the clients but there was a lot of talk about how much more income the FAs were going to make.


Steps to protect yourself…


1.  Know what questions to ask an FA before doing business (or if you are just learning about these issues then go back to your existing FA and ask): 

a.  Are you a fiduciary on the entire client relationship or just certain accounts?

b.  Can you sell products for commission?

c.  Do you offer both brokerage and advisory accounts?

d.  Do you have a series 7, series 65, or both?

e.  Are you licensed to sell life insurance and annuities?

f.  Are you fee-only or fee-based?

g.  What conflicts of interest do you have?

h.  Are you legally obligated to act as my fiduciary at all times?

i.  Please provide me with your educational background, experience and credentials.

2.  Find a fee-only investment adviser who will help you with your financial planning and investment needs while acting as your fiduciary at all times.  The internet, your CPA or attorney are good places to begin your search. 

3.  Find an economically disinterested, objective, third-party person to give you some advice or feedback on your life insurance.  Your CPA or a fee-only investment adviser can help you.  Have them evaluate your life insurance needs and your existing policies.  Determine what amount of life insurance you require and whether you should have term or permanent insurance.  Then find an agent to help write the policies.  Ideally, the insurance agent will be one who does not also sell investments and instead is a true insurance professional.  Often your CPA, investment adviser or attorney may know someone who functions in this capacity.  If the insurance agent talks to you about tax-free wealth accumulation that you can take out of the policy later in life via policy loans, run, don’t walk, right out of his office.  Life insurance is about death benefits and is never, ever a good investment strategy.



Ethan S. Braid, CFA


HighPass Asset Management

800 – 672 - 7916        




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 over 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.

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.