Overcoming Bad Client Experiences
I don’t usually go into a great deal of detail when I gain a new client because I need to be careful about disclosing specific facts which may compromise client confidentiality. With this in mind, I’d like to share an experience I had this week. I met with a new couple who have decided to engage me as their advisor. I am excited about this opportunity as they are very pleasant people who I’m sure I’ll enjoy working with. However, their last two advisor experiences have not been so good. The first advisor was unethical and the second was neglectful because he was too busy. The funny thing is, if this second advisor had known about their wealth, more than just the account he was managing, he may have found the time. In any event, they’re working with me now.
The story begins about 14 years ago with an experience they had with their first advisor. This advisor made some recommendations that were absolutely unethical. Even though there’s a degree of creativity present, the recommendations were completely inappropriate. The husband had an IRA and this particular advisor recommended that he convert it into an income stream and use the income to purchase a life insurance policy. So far so good, right? Well, here’s the problem. The husband was only 38 years old at the time! So at 38, he would be locked into IRC 72(t) and required to take distributions out for the longer of five years, or age 59 ½. Well, for him, it will be age 59 ½ or, in other words, for the next 21 years! Oh, there’s something else. An audit was completed on this life insurance policy and it indicated that it would lapse at some point before his life expectancy. How much better off he would have been if he’d left the IRA alone and let it grow!
This is the type of behavior that needs to be eradicated. I don’t know if this advisor is still practicing or not. If he is, I feel sorry for any clients who may have the misfortune to place their trust in him. Unethical behavior hurts the client, the industry, and the honest advisors. No one wins when this occurs.
This probably happens more often than we know.
A current client’s previous advisor recommend he buy an annuity, immediately begin withdrawals using the 72t calculation (the proposed annuity would have been purchased in an IRA), and use the income to buy life insurance.
What was the basis of this recommendation? The current advisor informed my client that the funds in his IRA would be subject to IRD, and his kids would pay income taxes on the lump-sum distribution. So, his solution was to get the money out and buy a life insurance policy with a face-value the same amount as the current IRA. That way, his kids would get the value of the IRA tax-free.
Of course, the previous advisor didn’t factor in future growth of the IRA, didn’t discuss stretch provisions and never disclosed that the IRA withdrawals would be fully taxable to my client (not to mention the scenario would have never worked based on the IRA value and the proposed life insurance premiums).
Oh yeah, he never disclosed the fact he would collect big commissions selling the annuity and life insurance policy to my client.
Let’s face it, it is time for change if we ever want to be a real profession!