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?