Shades of Gray

Once upon a time, the staff at a local United Way office realized that it had never received a donation from the town’s most successful doctor. “Our research shows that out of a yearly income of at least $500,000, you give not a penny to charity,” a staff member told him. “Wouldn’t you like to give back to the community?” “Did your research also show that my mother is seriously ill and has medical bills of several times her annual income?” the doctor shot back angrily. “Or that my brother, a disabled veteran, is blind and confined to a wheelchair?” Stricken, the charity worker tried to stammer an apology, but was cut off as the doctor charged on. “Did your research also show that my brother-in-law died in a traffic accident,” he cried, “leaving my sister penniless with three children?” Again, the charity worker tried to apologize. “I had no idea …” A final time, the doctor cut her off. “So if I don’t give any money to my own family,” he bellowed, “why should I give any to you?”

In most situations, it’s not too hard to divine the ethical choice at home or work: give to charity, care for our families, obey the law. Ethical decisions in an advisor’s workplace are also often clear-cut:

Treat your clients fairly, be honest, quit ogling that intern, and don’t cheat or steal.

Yet many issues that advisors face don’t have black-and-white answers. Instead of having a little devil with a pitchfork whispering into one ear and a little angel whispering into the other, planners sometimes find themselves with an array of seemingly defensible options propounded by a host of respectable-looking consultant elves attired in sixteen shades of gray.

And, let’s be honest, there are unethical people in the world of finance, and there are even (gasp!) unethical financial planners. Consider the most recent investigation by New York Attorney General Elliot Spitzer regarding mutual fund companies and market timers; consider the number of CFPs who lose their right to the CFP mark because they transgressed legal and ethical bounds.

Make no mistake: The gray-area guys have a lot to whisper about. For starters, there are the clients who want you to manage a pot of money and keep it a secret from their spouses, the clients who want you to help them transfer assets in order to gain Medicaid eligibility, and the clients who want you to help them disinherit one of their children. There are also the clients who want you to ignore the fact that they cheated on their taxes, are paying their child’s nanny under the table, or regularly employ shady employment practices in their businesses. These are not the kinds of issues that can be solved by pasting your firm’s well-worded commitment to ethics to your forehead and proclaiming how fair you are. Indeed, many fee-only advisors may be surprised to find that they face a whole slew of ethical dilemmas; fee-only is not a free pass into the never-never land of moral perfection. Forget fee disclosure arguments for a minute; this is about the truly complicated, puzzling issues where even a good, upstanding planner trying to do the right thing may have to stop, scratch her head, and ponder how to proceed.

The CFP Board’s code of ethics requires that its certificants base their actions on the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism, and diligence. The FPA’s code, since it’s based on the CFP Board’s, is virtually identical, and NAPFA’s code adds only one item: full disclosure. NAPFA’s fiduciary oath requires its members to “act in good faith and in the best interests of the client”–a phrase that many planners, NAPFA members or not, love to bandy about in reference to themselves.

But think about it: What happens when the client wants you to do something unethical, but arguably “in his best interests,” on his behalf? Is there a point where your duty to put the client’s interests first ends, and your duty to be an ethical person takes over? Or what if the client has done something illegal in the past? Should you confront him, report him, cajole him to change? And would reporting him be ratting on him, or being a good citizen?

Ernest Hemingway was on to something when he wrote, in his 1932 novel, Death in the Afternoon, “What is moral is what you feel good after, and what is immoral is what you feel bad after.” But we figured our readers deserve a more thoughtful examination of the issue that includes consideration of these gray areas. So we asked a variety of planners to tell us how they would respond to five difficult ethical dilemmas.

ETHICAL DILEMMA #1:

Your client is a small-business owner, and he recently bragged to you that he saved himself some serious bucks by firing an employee just after she became pregnant. Hooray, he says, now he doesn’t have to pay her while she’s on maternity leave. How do you respond?

For Bonnie Hughes of A&H Financial Planning and Education in Rome, Georgia, the answer is easy: Boot him. Who wants to work with a guy like that? “The ‘hooray’ would have done it for me,” she says. If he’s willing to treat his employees like dirt, chances are that “he would eventually treat our relationship the same way at some point,” she says. “That kind of callous attitude is not changeable through an advisory relationship.”

Todd Black of Dogwood Capital Management in Cumming, Georgia, agrees that he, too, would tell the client to hit the road. “I work with honorable people,” he says. “Someone who does this kind of thing is not my kind of people. We don’t need to work together.”

But Ken Frenke, of Kenneth Frenke & Co. in Arden, North Carolina, is willing to cut the client a bit more slack–at least for a while. Frenke says he would probably voice his own concerns, and “give him some time to rethink his actions.” If a change of heart didn’t ensue, however, “I would end the relationship if this remains a pattern of thinking.”

As for talking to the client about the legality of his action, you have to be very, very careful, warns Nigel Taylor, of Taylor & Associates in Santa Monica, California. Unless you’re a lawyer, you must not say anything that could be construed as practicing law without a license, he says. “When you apply the law to a specific [situation] and conclude that what someone has done is or is not illegal, that is the practice of law, and we as advisors should not be offering solid legal opinions,” he says. “We should not be telling the client, ‘That was illegal’ or ‘you shouldn’t have done that.’ There’s only one thing to say [to the client in these situations], and that’s, ‘Get a lawyer.’”

“I’m not an employment lawyer, and although I can guess that this is illegal, I shouldn’t be giving advice about it,” concurs Bob Glovsky of Mintz Levin Financial Advisors in Boston. “My role is to say, ‘Look, you could potentially have some serious problems here. Why don’t you get to an employment lawyer, and we can make sure you’ve got that ‘T’ crossed.”

A strong dose of diffidence can often help the advisor walk the line between guiding the client and actually providing legal advice, notes Phyllis Ernst, an advisor with Paradigm Financial Advisors in Des Peres, Missouri. “In our practice, we are very careful not to say ‘This is illegal’ or ‘That is against the law.’ We say ‘It may be considered illegal’ and ‘You may want to think about thus-and-so’ and ‘It’s possible, so please contact your attorney,’ so as not to be actually practicing law.”

To rectify the situation, Ernst says she’d also try speaking the greedy client’s language, pointing out to the client that if he were to be sued by the fired employee, the lawsuit–not to mention the accompanying negative publicity–would hurt his business financially and damage its reputation: Becoming known around town as “that guy who fired the nice lady with the baby” won’t exactly make the business owner Mr. Popularity at the local Rotary Club, or bring customers to his business in droves. Beyond that, Ernst would also try some casual nudging: “I would inquire occasionally as to the status of the situation, in an attempt to help him realize that he should correct his illegal action.”

As a lawyer and a planner, Ken Robinson of Practical Financial Planning in Cleveland says that he’s obligated as an attorney to “counsel his client against breaking the law, and keep the client’s confidences and secrets.” Thus, his response would be to tell the client he was breaking the law, note his advice in writing, and leave it at that. “It’s a lawyer’s answer,” he says, “but it’s what I’d do.”

As a non-lawyer, planner John McFarland of Midlothian, Virginia, says he’d make sure the client understood that his secrets weren’t entirely safe with him; while the planner would honor the CFP Code of Ethics’ rules about confidentiality, every planner’s pledge of confidentiality “disappears the minute a court becomes involved,” says McFarland. Since non-lawyers have no equivalent of attorney-client privilege, it would only take one subpoena for McFarland to have to spill the beans about his slimy client in court.

ETHICAL DILEMMA #2

Your clients, an aging parent and an adult child, want you to help them transfer or “spend down” assets so that the parent can become eligible for Medicaid. Their proposed plan will not technically violate any laws relating to lookback periods, etc.; it will shelter the adult child’s inheritance and allow the parents to have their long-term care paid for by Medicaid. Should you, as an ethical planner, help them achieve this plan?

First, a little background. In 1997, Congress passed a law making it a crime to advise others about how to transfer or spend down assets in order to gain Medicaid eligibility. The following year, then-Attorney General Janet Reno stated that the law violated the right to free speech and would not be enforced. Today, most advisors agree that what is called “Medicaid planning” is at least technically legal, provided that the client complies with applicable laws, such as those governing eligibility lookback periods. For instance, there’s a three-year lookback period for the transfer of most assets, which means that Mrs. Jones cannot give away $47 million today and become eligible tomorrow; she must give it away at least three years prior to the day she wishes to become eligible.

Second, a caveat: The aforementioned cautions about not practicing law without a license also apply, in many states, to Medicaid planning advice. In Texas, for instance, it is a Class A misdemeanor for a non-attorney planner to advise a client for a fee about Medicaid planning, warns Clyde Farrell, an attorney and planner in Austin, Texas. Non-attorney planners would do well to find out what is legal in their own states before talking about Medicaid planning with clients at all. Another alternative is to refer the client to an attorney, and then ask the attorney to farm out the financial analysis of the situation to you.

The Medicaid Debate

The argument against Medicaid planning is hard to dispute: Medicaid is a government welfare program designed to help the poor, and if you’re not poor, you shouldn’t get Medicaid. Right? “Most people would not think of hiding assets in order to secure welfare payments or food stamps, yet they somehow do not find it wrong to do the same thing to have public monies pay for their nursing home care,” writes Catherine May, executive director of Elder Services of Berkshire County in Pittsfield, Massachusetts, in her organization’s online newsletter. “Why is it that people who have accepted the responsibility for their own health care costs throughout a long life, either out of pocket or through health insurance, upon contemplating the costs of long-term care decide that it is time to quit being responsible and self-sufficient, and time to let taxpayers pay for their nursing home care?”

What’s more, Medicaid funds aren’t a bottomless resource. If you transfer your assets and make yourself “look poor” in order to qualify, what you’re actually doing is taking away resources intended for the truly poor–kind of like cutting in line at a soup kitchen when you still have a fridge full of steaks at home.

Ah, but I want to give some of those steaks to my children for their inheritance, says the client. As long as I give them away at least three years before I get in line for Medicaid benefits, it’s legal, right? And aren’t you, as my advisor, supposed to be putting my interests first?

It’s a sticky issue, says Dr. Somnath Basu, director of the financial planning program at California Lutheran University in Thousand Oaks, California. Basu says he can understand the advisor’s argument that he must do everything within the law to benefit his client. But it’s still fraud, he says, because you’re still taking money intended for poor people, and you’re not legitimately poor. He says he wouldn’t be comfortable doing Medicaid planning for himself: “I would want to give my children the values and the education so that they could stand on their own feet instead,” he says. But in dealing with clients, should he put his responsibility to his clients’ interests above his conscience? It’s a slippery slope, he says. “You’re drawing a line in a gray area, and the danger is: If I’m going to help someone perpetuate a fraud to benefit him, then what’s to stop me from doing one to benefit myself?” he says. “And then if I’m okay with that, then what [philosophically speaking] is stopping me from committing other frauds, too?”

But other planners are less certain about the directions to the high road. “If you as an advisor strongly disagree [with the idea of Medicaid planning], your job is to point that out, and if it’s intolerable to you, you need to walk away and just resign as their advisor,” says Alan Goldfarb, a planner with Weaver and Tidwell in Dallas and a financial planning professor who teaches an ethics course at the University of Dallas. “And if it is tolerable, then your job is to point out all of the alternatives.” “Maybe it’s unfair for the citizens to bear the price,” says Joel Weiner, of the Palatine, Illinois-based CFP training firm Professional Training Services, “but if it’s legal, and it makes sense for my client, why wouldn’t I want to do it?”

Goldfarb does point out the ethical implications of Medicaid planning to his clients and encourages clients to discuss them, but “in the end, it’s up to the client,” he says. In his mind, he says, Medicaid planning is a matter of positioning the client’s assets to benefit that client, and as such is no different than arranging a doctor’s finances to protect his assets from litigious patients, or arranging a family’s assets to maximize their chances of receiving college financial aid. “Is [the latter] a fraud on the system that funds higher education?” he asks. Some might say yes, but Goldfarb says no–”and I see Medicaid planning along those same lines,” he says. Goldfarb cites an old quotation about how politicians think about the next election, while statesmen think about the next generation. Given the choice between benefiting their own children and benefiting the next generation of Medicaid recipients (or the integrity of the Medicaid program), “most clients feel more strongly about their own families than they do about the U.S. government,” he says.

As an attorney and planner, Farrell says his job is “to advise clients about the options that are legally available to them, and I think it would be highly unethical to substitute my judgment for that of my clients by telling them they shouldn’t do something the law allows.” When asked if he himself would ever transfer or spend down assets to qualify for Medicaid, however, he laughs lightly, then says, “My wife and I have purchased long-term care insurance, and I’m doing everything I can to avoid having to answer that question for myself and my family.”