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Be Careful Before Giving Advice You Know May Be Challenged

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An agent recently asked me whether a new wrinkle would distinguish a tax transaction from those “listed transactions” that the Internal Revenue Service specifically has indicated it believes are invalid.

The agent knew the new wrinkle was just a procedural twist and not truly a substantive difference. He also already knew it was questionable, so he was likely trying to get some third-party input.

My response is that, in any transaction that you know regulatory authorities may challenge, the question should really be whether it makes sense to consider the transaction at all. This is so whether the advisor is in life insurance or any other line.

The life professional seeks long-term relationships with customers. Such relationships are the most valuable to customers, since the more the advisor knows about a client’s personal and business situations, the more the advisor can tailor advice to that person. They are also the most personally satisfying for the advisor, since longtime clients often become friends, too.

So, why propose a transaction that common sense and intuition indicate may cause problems?

Why not avoid it in the first place and propose something that is tried and proven? That way, advisors know they have recommended an avenue on which they will not have to reverse direction later on and, therefore, not have to worry about the cost of that reversal (the impact on the relationship, and whether the customer will continue to value the advisor’s advice).

Sometimes agents think they have to propose so-called “bleeding-edge” ideas for competitive reasons. While that is understandable, the better approach would be to explain the alternative to the customer and then dismiss it. That way, if a competitor proposes it, the customer should be more alarmed than interested.

Other times, the agent will say the customer wants to do the deal in spite of the risks. This merits several cautions. At the very least, the customer must be sophisticated and aggressive. This means, first, that the customer has to be able to understand the ins and outs of the transaction. If that doesn’t happen, I submit that the advisor should not advise that customer to undertake the transaction.

Second, it probably means the customer has no other alternatives. If there are safer alternatives, then why not take them?

Finally, it also means that the customer can survive a bad result. A bad result in a tax transaction, for example, may mean the loss of a tax deduction, the assessment of penalties and interest, and the legal and accounting fees that go along with arguing with a large government agency. Even the most well-heeled clients may tire of the cost and time consumed by such disputes. So, it’s good to caution at the outset that whatever time and expense they think the dispute will involve, double it, because that is the least that it will probably involve.

Sometimes a bad result can have more serious repercussions than the loss of time and expense. The customer should only take risks he or she can bear. For example, if the customer will be forced out of business by a bad result, the customer should not take that risk.

There are times when the advisor simply should not engage in the transaction, even if this means the business will be lost. No amount of business is worth the time, effort and expense, not to mention the loss of reputation, of having a customer pursued by a government agency for a transaction the advisor initiated. (By the way, the customer won’t be the only one pursued. The government will usually subpoena, at the least, records not only for the particular client but also for other people the advisor may have similarly advised.)

It may be old-fashioned to say, but the agent’s reputation is very important, particularly if the going gets rough. In fact, one of the first questions I ask when an insurer presents a problem case to me is: What is the reputation of the agent? Is the agent respected among his or her colleagues? Or, does the agent cut corners?

Also, agents should be careful not to take actions they know the insurer will not like if the insurer finds out. Insurers have a right to do business the way they want. If the advisor’s and insurer’s viewpoints are not the same, the advisor should find another insurer rather than try to do an end-run around the current company. More than enough carriers exist, so agents can find one that sees things similarly. (Take investor-owned life insurance; some companies are more comfortable with this than others.)

Even if the agent is able to “slip one by” an insurer, the home office employees, who may have to pay the price for the slip-up, will remember the next time. If the advisor wants to have a long and successful career, it’s important to get all the help one can from colleagues and especially from the home office.

We all have stood in line at the airline counter wanting an airline employee to do something stupendous to help us to get where we need to go. Those employees can indeed do stupendous things, if they want. The same is true of the home office. If the agent wants to get things done again and again over the years, it is much easier if the employees there want to help because they like and respect the agent.

People often cause many of their own business problems. But, by applying some common sense and trusting one’s intuition, life insurance advisors should be able to make better decisions and avoid problems that can interfere with professional success.