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Teachable Moment: Don't Be the "Bad Guy" in the Eyes of Your Clients

December 28, 2018

For today's teachable moment, we hear from Dan Danford, CEO of St. Joseph, Mo.-based Family Investment Center. He talks about the importance of positioning yourself as an advocate for your clients, no matter the situation ...

I was a trust officer before I started my own advisory firm, and my area of expertise was retirement plans. Many of our clients were doctors, and it was common for them to borrow from their plans. There were rigid limits on the amount they could borrow and their repayment schedules. Part of my job was to ensure that clients didn’t exceed those limits.

One time I sent a notice to a doctor because his repayment was late. This was standard procedure, and the notice was very discreet. So I was surprised when the client’s wife called and took me to task for demanding repayment of what she called their "own money." The call didn’t end well, and I was rattled.

The next day I wrote the couple a letter explaining that my sole purpose was keep them out of trouble with the federal government. I said that while I understood it was their money, the IRS was serious about enforcing its rules. And I enclosed a copy of the IRS rules for loans on the type of plan they had.

Several days later, we received the repayment without comment.

Since this interaction I’ve tried to avoid being the "bad guy" in the eyes of my clients. It’s not uncommon for clients to approach me and ask for something prohibited by government or other rules. Instead of telling them outright that they can’t do what they want to, I usually promise to research the issue. Then I’ll send them a copy of the relevant rules. In the attached note I’ll tell them that I’d be happy to look for other ways to help them achieve their objective.

For example, a client recently told me he wanted to buy some rental property with his IRA funds. I knew immediately that this probably wouldn’t work. But instead of saying that right away, I asked him to talk more about his idea. He told me that his son had been transferred to another city and was having trouble selling his house. He was hoping to buy the house and use it as a rental. He knew he had plenty of money in his IRA.

I told the client I’d research that idea and get back to him. A few days later I sent him a copy of the Prohibited Transaction Rules from the IRS, along with a letter saying it didn’t look like I’d be able to do exactly what he’d envisioned. I also suggested he get in touch with a couple of real estate agents who had helped other clients sell properties in the past. I gave the phone numbers of the agents and said I’d be happy to answer questions or have a follow-up conversation.

This way, I made sure my client understood the rules while also continuing to work toward the goal of helping his son sell the house. The IRS was the bad guy in this situation, not me. I was on my client’s team.

Another scenario I see fairly often is where a client buys a new house before putting their old house on the market. Then they come to me saying they want to borrow from their retirement account to tide them over until their old house sells. When this happens, I’ll actually take my clients to a bank and help them apply for a bridge loan, which will cost a lot less in the long run than paying the penalty on an early withdrawal.

It can be frustrating for clients to hear that they can’t do what they want to do, or that carrying out a plan will come with onerous penalties. When you align yourself with the organization that’s telling them "You can’t do this," you run the risk of alienating clients who thought you were on their side. But by providing them with the facts and some alternative solutions, you can help your clients while remaining in their good graces.