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ERISAnut

Close to the Edge

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I saw a reverend on television many years ago telling a story intended to make a point about different personalities. For some reason, it created an impression in my mind that I still remember when determining my approach to everyday issues. I though I would share as it does provide some perspective on different approaches we take when addressing questions posed on the board.

Here goes:

There was a rich man living on a Mountain. He was seeking a chauffer to replace is long-time friend who had just retired. Upon narrowing his search down to three finalists, he posed a simple question to each; "How close to the cliff can you drive without falling over?"

Driver 1 states, "I can drive within 2 feet of the cliff without driving over".

Driver 2 states, "I can drive within 12 inches of the cliff without driving over."

The third driver, taking a look out over the cliff and seeing the valleys below states, "I am not sure, I try to stay as far from it as possible".

Sometimes, as consultants, we attempt to impress clients with getting them as close to certain cliffs as possible. When we get it wrong, the client pays in IRS penalties. Other consultants, while attempting to stay as far from the cliff as possible, deprive their clients out of safe leveraging opportunities for no other reason that to stay as far from the cliff as possible.

This is not to say either approach is right or wrong, but certainly worth considering when formulating a position on any given issue. At any rate, it always help to develop a realistic idea of where the cliff actually is. Just keeping things in perspective.

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I like the analogy.

I think when it comes to consulting in such context, the old addage, 'pigs get fat, hogs get slaughtered' captures it too. A consultant should help fatten his clients, but not get them slaughtered. Skinny or dead pigs aren't well served clients.

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The driver needs to have a license which is issued after a standard competency test and which gets some continuity and "regulation" by means of points for certain offenses or rating by insurance companies. Consultants might or might not claim credentials from any of a sometimes meaningless alphabet soup with no way of their track record being checked.

Unfortunately while you will quickly get some idea of the competence of a driver, it is a whole lot more difficult and very expensive to find out about advisors.

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Sometimes, as consultants, we attempt to impress clients with getting them as close to certain cliffs as possible. When we get it wrong, the client pays in IRS penalties. Other consultants, while attempting to stay as far from the cliff as possible, deprive their clients out of safe leveraging opportunities for no other reason that to stay as far from the cliff as possible.

And sometimes the client is in the back seat telling us to get closer and closer to the edge. When they push me closer to the edge than I want to go, I tell them my goal is to never read about my clients in any of the tax publications.

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I don't believe that the analogy applies to my practice, and it should not apply to most others IMHO.

I think of it as looking at a spectrum that includes black, white and all of the grays in between.

I will allow my clients to go to the point that the client is more likely than not to prevail in court if it comes to it, which means right up to the middle of the gray area. However, I assume a very conservative position for normal practice, staying away from the gray altogether. Only when clients (or their advisers) request will I go into the gray area. And then I warn the client about the potential risks of audit, deduction disllowance, litigation, etc.

When possible I put such warnings in writing. although to do so could compromise a client's subsequent case should he elect to take a very aggressive position.

In 35 years of practice, I have had only a handful of clients who wanted to go as far as I would allow them. There have been a few others went to other firms who permitted indefensible practices (ie, funding benefits based on expected increases in the 415 limits, ignoring the 415 interest rate limits in a 412(i) plan, illegal loans or investments in the plan, etc.) The vast majority of clients don't want to be an IRS (or DOL) test case. And it is an irresponsible practice that puts those clients in jeopardy without the clients' informed decision to put themselves there.

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The problem is that not everyone sees the same shades of color in the same place. One man's poison is another man's meat.

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Perhaps the observations above mostly agree on a few principles:

An adviser can enhance her client’s autonomy and dignity by providing as much as the client asks (and pays) for.

That includes advice about different kinds of risks.

That includes advice about how a risk could play out.

Because a client bears the consequences of its decisions and acts (or a failure to act), it’s the client that must decide what to do.

An adviser shouldn’t make her client’s decision, even if the client wants the “adviser” to make the decision.

That said, there are ways for a professional to satisfy herself that a client’s decision really is a considered decision rather than merely accepting an adviser’s suggestion.

An adviser who no longer feels like working for the client may resign. (The professional-conduct rule about not withdrawing until one can do it without harming the client rarely imposes much restraint on a professional if her scope is limited to advice-giving.)

A client that no longer wants the adviser’s advice may fire the adviser.

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