This week we’re doing a technical breakdown of how the financial plan we reviewed on “The Science of Wealth” got to be so bad, and how much harm it actually causes for someone to be given a plan that is not adequately designed to their individual needs rather than being a sales pitch masquerading as a financial plan. If you haven’t listened to the episode, we recommend watching it here before continuing to read this blog. For those not amused or otherwise offended by profanity, we recommend stopping at the 48:40 mark; apologies for the interruption. Dan got mad.
Well, as the caveat above said, we reviewed a financial plan this past week on The Science of Wealth. And it was, well, frankly: awful. “Morally Reprehensible,” is how I described it at one point. While the financial services industry at large does not enjoy a great reputation in general, “financial plans” like the one reviewed on the podcast are not just harmful to the reputation of financial advisors and planners, but are actively harmful to those they’re given to. If you read the disclosures at the end of the plan (buried back on page 27 of 40 pages, well after the entire plan is presented), the firm that made the plan discloses that the plan is not, in fact, a plan, but is an analysis aimed at recommending the purchase of products for sale by the firm. “You’ve got a great [product pitch]” just doesn’t have the same ring to it, one supposes.
While the plan itself was rife with issues and inaccuracies (overstating earnings by 63% annually, ignoring the client’s very real need for disability insurance in favor of selling life insurance, and wildly lazy planning assumptions), today we’re going to point out the specific harms produced by a plan designed like this, and how it lays bare the stark reality that, while financial planners like those at MY Wealth Planners often take for granted that quality planning is being done by many, the painful truth is that much planning being done today is still just product sales pretending to be something else. For all that the marketing gurus tell us “fee-only” and “fiduciary” aren’t differentiators, the vast majority of the industry (97%+) are still in the product distribution game and not the fiduciary financial advice game.
The Harm of Unnecessary Whole Life Insurance
In the plan presented, the first section of “problems” the “plan” aims to address is the potential catastrophic loss of the client’s income due to death (though it never comes out and actually says that). It stipulates that the client needs a lump sum (e.g., “Death Benefit”) of $2,321,289 to replace the client’s income should they suddenly pass away. Now, never mind that the individual for whom this plan was designed was unmarried, without children, and without any dependent adults or others relying on their income.
The plan then models a presumption of $483/month ($5,794/year) in whole life premiums being paid, with the value arriving at $362,517 in the future. So, not only lacking in the adequate death benefit earlier indicated in the plan, but it is also clearly being used as an accumulation tool. When you run the math on a $483/month policy reaching $362,517 in 32 years as modeled in the plan, this equates to an annual rate of return of 3.87%. Hardly any better than a high yield savings or money market account today. But of course, the rate of return should actually be higher when you factor in that the policy that was then illustrated to this individual indicated a dividend rate of 5%. So, approximately 1.13% of the annual returns are being absorbed by the policy costs throughout the life of the policy, not to mention the fact that the 5% modeled return was not guaranteed.
Even worse, the client couldn’t actually afford to pay the lump sum premium of $5,794/year up front, so they ended up putting in $500/month to pay premiums annually. Adjusted for the increased cost, the already dismal rate of return anticipated in the plan shrinks from 3.87% to 3.68%.
To compound these issues, the financial plan presented never actually makes use of the accumulated cash value in the policy. It was never assumed that the client would get married, have children, or otherwise need the life insurance at all. But in turn, given that it could only then be argued as an accumulation tool, the plan never illustrated taking loans out from the policy to fund retirement income needs! It truly was presented as the purchase of whole life insurance for the sake of selling whole life insurance, with no actual benefit to the client whatsoever.
By the time we met with the client this year, they had already invested $17,500 into the policy, and at the time that she cancelled it, she was given a $327 refund of the accumulated value. A gross return of -98.13%. One might argue, “Well, at least she had life insurance for almost three years, so her money wasn’t completely wasted!” While I wouldn’t be one to say that unused insurance is a bad thing (who wants their home to burn down or to become disabled after all?), I’m hard-pressed to be impressed by the loss of $17,173 by the client in return for 1/5th of the life insurance the “plan” called for. Because remember the $2,321,289 death benefit recommended in the plan? The policy issued was only for $424,755.
An analysis of life insurance available today for this client (now 3 years older) shows they could obtain a 30-year term policy with a $424,755 death benefit for $22.12/month*, or $477.88/month less. Heck, if they were inclined to buy the full $2.3 million and change, it would only cost them $88.38/month**. And while the coverage wouldn’t be permanent or lifelong, it would still have protected the client better during their “32 working years” as shown in their “financial plan,” and left them with $411.62-$477.88 more per month to save and invest or otherwise spend on other goals or interests.
While losing 98.13% of your “investment” in a whole life policy is bad enough, what’s worse is the potential opportunity cost. Imagine the financial plan had recommended something as simple as a two-fund index portfolio of VTI and VXUS in a Roth IRA instead (much as we modeled in our blog last week). While the return over the past decade was a generous 11.72% in that portfolio, imagine you rounded it down to a more reasonable 8% annual return expectation. Today, the client would have $20,267.78 saved tax-free, rather than $327. Even if she’d gone ahead and bought as much term insurance as the “financial plan” suggested, she’d have $16,685.25 and another 27 years of $2-million-plus in life insurance. And even if she stopped contributing going forward, the net opportunity cost of either of those figures saved and left to compound for the remaining 29 years? The $20,267.78 would potentially grow to $188,840.48, and the $16,685.25 would potentially have grown to $155,461.06.
So not only has the unnecessary sale of whole life to this individual cost them $17,173 in real dollars, but another $155k-$188k in lifetime savings before reaching retirement.
The Seldom-Fiduciary Class A Share
It was referenced on the podcast, but I’ve made a point recently of speaking to regulators and organizations such as the CFP Board about how a Class A mutual fund can be justified by anyone acting in a fiduciary capacity. For those unaware of what that is, a Class A mutual fund is an investment fund that charges an up-front commission to those who buy into the fund, typically paid in part or in full to a broker who sells the fund to an investor, and then continues to charge an ongoing “marketing fee” called a 12b1 which is then also paid to the broker who sold the fund.
While that arrangement made some sort of sense in a pre-internet era where most people working with day-to-day folks on their investments did so entirely on a commission basis and research was hard to come by or otherwise expensive to access, it makes far less sense today when almost all the data you could possibly want on investment funds is available online and can be purchased with a click or two on any number of brokerage platforms. While you can purchase Class A shares on such platforms, they also regularly offer “no load” versions, which do not charge a commission up front and off the top of your investments, nor do they charge ongoing “marketing fees.” And while that produces a classic conflict of interest like that present when the brokers who made the “financial plan” presented it, there is no way to satisfy your fiduciary duty of candor to a client by hiding that they could save 5.75% of their investment up front at the cost of only 0.05% annual higher ongoing costs in fund fees, which would take decades to even approach breaking even on.
For example, after the financial plan was presented, it was recommended that the client invest not only the $500/month into the whole life policy but a separate $6,000 a year into a Roth IRA, for which the brokers sold the client the “American Funds American Balanced Fund Class A.” This fund came with a 5.75% commission, meaning that their $3,489 IRA Rollover and $6,286 Roth IRA took a $189.70 and $341.79 haircut to start. The loss of $531.49 up front could have been completely avoided had these brokers acted as fiduciaries and recommended the F-1 share class of the exact same fund, which would still cost 0.61% annually for management fees, but would forgo the 5.75% commission; and of course, that’s nothing to say of whether an expensive actively managed fund was the best recommendation at all!
And therein is the problem. Because the brokers could only get paid to recommend commissionable mutual funds, and because by law their advice can only be solely incidental to the sale of an investment or insurance product, they not only were not financially incentivized to recommend lower cost or better performing investment products, they were essentially prohibited from it. If their broker-dealer platform did not authorize them to recommend investments not available for sale on commission on their platform, it would actually even be a regulatory violation called “selling away.” Not only was the client’s best interest nowhere to be seen in the investment recommendations being made at the time, but the client’s best interest was effectively legally prohibited from being served by these brokers acting in their capacity as brokers!
But had these brokers had the opportunity to recommend something as simple as our aforementioned two-fund portfolio, assuming even just equal gross returns of 8% and even forgoing the up-front commission and just assuming the 0.56% expense ratio of ABALX, the net asset accumulation over a working career is staggering. A client paying the weighted average 0.038% expense ratio of the blended VTI/VXUS portfolio versus the ABALX portfolio cost of 0.56% (even ignoring the commissions!) would have ended up with $958,604.79 instead of $844,622.74; a working life difference of $113,982.05, to say nothing of the drag the sales charges and commissions would cause in addition to that gap caused solely by ongoing costs.
The Price of “Solely Incidental” Advice
The funny thing about the aforementioned solely incidental issue is that most of the advice you get day-to-day is solely incidental. If you go to a car dealership, you won’t be surprised when the salesperson says that whatever brand of car they sell there is going to meet your needs just fine, and that there’s no need to go to the other dealership for that other car brand next door. You’re unsurprised that the waitress at the restaurant says the catch of the day or the $60 steak is her favorite when you ask. You’re nonplussed at the idea that an employee in a Best Buy would recommend you buy a TV there and now rather than going home to compare prices on Amazon.
But when you meet someone holding themselves out as an impartial financial expert, and they present you with a fancy document detailing your savings, cash flow, investments, and retirement picture, it’s no wonder that you might lose sight of their role as a salesperson rather than as an advisor acting in your best interest; even when it’s disclosed in writing on the 26th page of the plan in fine print!
We said at the top that we wouldn’t belabor the many errors and issues of the financial plan, but let’s take some time to highlight some low hanging fruit and missed opportunities for this client that are otherwise absent from the plan because all the advice therein had to be solely incidental to the sale of whole life or mutual fund products that ended up being recommended:
- There was no discussion of employer benefits and the value of contributing to a 401(k) or 403(b) plan through the employer to get the match rather than investing in a Roth IRA.
- There was no recommendation that this individual, who has a job that jumps between W2 employee and 1099, take advantage of any self-employed retirement plans or savings vehicles.
- There were no recommendations to pay down high-interest-rate auto and student loans (good thing the client did that on their own anyway!)
- There was no proposal of disability insurance or quote provided, despite the risk of losing the ability to earn an income while still being alive being far more relevant for this individual than their risk of dying and leaving their non-existent spouse and non-existent children without an income to survive on.
- There was no review or discussion of short-term goals such as buying a home or preparing for the future expense of their next car, a wedding, travel, or any other short-term objectives that could possibly arise.
- There was no discussion or review of future educational expenses; not just for fictional future children but even for the client, whose income could be greatly enhanced by graduate school or doctoral education.
- There was no review of the client’s inadequate cash savings to provide an emergency fund in the event of extended job loss (likely as a travel nurse) or otherwise helping make ends meet in the event of an unexpected catastrophe, nor any recommendation as to how to invest or otherwise place existing cash into higher yield savings vehicles like a high yield savings account or money market account.
- No review or discussion of the use of credit cards for points or rewards to help subsidize ongoing costs from routine spending.
- No discussion of any type of insurance other than whole life insurance and a single page of caution about disability; so leaving renters’ insurance, auto insurance, umbrella insurance, malpractice, and general liability insurance when self-employed out of the conversation entirely (because they can’t sell those!)
- No discussion of parents’ health or any need to plan around their needs or supporting them in the future.
- No tax planning whatsoever, just the half-truth of life insurance loans being “tax free” in much the same way that spending money on a credit card is “tax free” or a mortgage is “tax free.”
- No review or discussion of whether pre-tax IRA contributions would be more or less affordable than Roth contributions, given her limited budget and lack of employer plan coverage from time to time.
- An assumption that all investments would yield the exact same rate of return both pre-retirement and post-retirement, rather than assuming more aggressive returns while in the savings and accumulation phase and more conservative returns in the retirement phase as most people experience.
- No career management or salary planning insofar as recommendations around remaining a travel nurse long-term versus converting to more stable long-term employment, or whether her career would be benefitted by the aforementioned investments in education to improve her earning capacity.
- No discussion of social security beyond the assumption that it will be there for her someday in the future; no reference to claiming timelines, whether it’s preferable for her to claim earlier or later. Heck, not even an actual date she’s expected to claim it!
- No estate planning of any kind; despite the whole life policy ostensibly being purchased for the death benefit (for the non-existent family), there was no reference to a need for a will, powers of attorney, healthcare directives, or whether she would benefit from a trust or consultation with a licensed estate planning attorney.
All of those issues just barely begin to scratch the surface of what a comprehensive financial plan should cover for anyone in this individual’s situation. But the problem is that most, if not all of the problems described above, cannot be addressed by the purchase of a mutual fund or the application for a life insurance product. The brokers cannot get paid for advising on these things, and they could even get into trouble if they did so.
And that’s the problem.
The problem has left a 31-year-old woman with $327 after spending $17,500 on life insurance.
The problem that has her investments costing her eleven times more than they otherwise would if they were invested in low cost index funds instead of commissionable Class A mutual funds, without even considering the 5.75% haircut every contribution she’s made over the past 3 years has taken.
The problem that has a self-employed nurse without disability insurance or a self-employed retirement plan to help build her wealth with not only more flexible contribution limits but also better creditor and bankruptcy protection than just a Roth IRA or taxable brokerage account.
The problem that goes on and on and on.
So that’s why, if you listened past the 48:40 mark, I asked the question. “What the f-?” Because when someone says they have a financial plan, I want to believe them. I want to believe that they found competent help and received great advice that has really aligned their finances, priorities, and values in a constructive way, hedging risks while enabling them to live their best lives.
But that’s not always the case. I dare say that even may seldom be the case.
I have carried water for fee-based and commission-only folks in the industry for a good while now. Despite serving on the NAPFA West Region Board, where I represent a good portion of the fee-only community in the western United States, I’m sympathetic to the argument that being fee-based means you have more tools to help clients with. After all, I came up in that world and with that type of thinking. But the more time goes on, and the more cases I see year after year in which someone has fallen victim to a broker’s conflicts of interest rather than getting the help they need, the more I tire of the argument.
It’s all well and good to say “it’s just a few bad apples,” but it always seems to be the case that no matter how far I dig down in the barrel, the rotten ones always seem to come to hand. We are fast reaching a point in America where we need to say “enough is enough” to the financial services industry. It’s high time that brokers and salespeople masquerading as financial planners be outright prohibited from doing so. It’s high time that those who demonstrably place their own financial interests before their clients’ find themselves not just out of a job or the industry, but behind bars. Enough is enough.
*Quote from Legal & General America, OPTerm Horizon Product, health class preferred plus non-tobacco, 30 year term, monthly payment mode. Quote for 31-year old female. Quote generated via PolicyGenius on 9/16/2025.
**Quote from Legal & General America, OPTerm Horizon Product, health class preferred plus non-tobacco. 30 year term, monthly payment mode. Quote for 31-year old female. Quote generated via PolicyGenius on 9/16/2025.