The Job We Do

Is Financial Planning Ethical?

How we help our clients: Considerations, cautions and conundrums

by Herbert K. Daroff, J.D., CFP, AEP

Mr. Daroff is affiliated with Baystate Financial Planning, Boston, Ma. Connect with him by e-mail:

Recently, a number of media sources have asked, “Is Medicaid Planning ethical?”

Elder Care Attorneys, Financial Planners, and other professional advisors help clients shelter assets so that they can receive benefits from State Medicaid that they would not have received had it not been for that planning.

The law allows for a 5-year look back and we show clients how to take advantage of that time period, and more. If clients would prefer to retain the Medicaid funds for others less fortunate, they can certainly purchase long term care insurance or combination products of life insurance that allow access to most all of the death benefit during lifetime for qualified custodial care expenses.

What is ethical?

Back in the early 1990s, I served on CFP Board’s Board of Professional Review. I heard about a case brought by a State’s Secretary of State who attended a seminar on Estate Planning. The CFP Practitioner presenting described ways to minimize estate taxes. “How can that be ethical?”

Since the Board of Professional Review is peer review, it was explained that Attorneys, Accountants, Financial Planners, and other professional advisors help clients navigate through the maze of laws, regulations, and court decisions to develop a plan that maximizes income and assets for our clients and their families, in most cases by:

 reducing taxes, such as:

  • income taxes, through qualified retirement plans
  • capital gains taxes, through charitable planning and/or IRC Section 1031 tax-free exchanges
  • estate taxes, by recommending that life insurance be owned in an irrevocable trust, and more
  • qualifying for available government funded benefits, like:
  • skipping a generation from paying estate taxes,
  • receiving Medicaid benefits,
  • claiming strategies to maximize Social Security income, etc.

Congress and State Legislatures write laws. Courts interpret those laws. If they want to change the law, they are certainly welcome to do so.

Helping clients within the confines of the law is certainly ethical.

As with elder care planning, if you want to simply reduce the cost of paying estate taxes, instead of also planning to minimize those taxes, you can purchase sufficient life insurance.

Ethical Decisions

Now, we do have ethical challenges. In addition to practicing financial planning, I am also on the adjunct faculty of a local university teaching Risk Management. One of the areas I practice and teach is the ability to shelter assets from creditors, such as using corporations, limited liability companies, asset protection trusts, etc. All legal, and so, ethical practice, I believe.

But, what do you do when a physician, for example, with a history of malpractice judgments and claims comes to you to help shelter assets just in case he or she is sued again? Is it ethical to take the case?

what do you do when a physician, for example, with a history of malpractice judgments and claims comes to you to help shelter assets just in case he or she is sued again?

In other current events, we saw children recording a man drowning. They taunted him. They did not try to help him, nor did they call for help. They broke no law, in that State. These are called “laws of omission” which do not exist for most of us, in most States. But, was their action ethical, or moral? I think, not.

As a CFP® Professional, I have an affirmative obligation to report to CFP Board if I know that another CFP® Practitioner is acting in a manner that causes harm to the client and/or the profession.

But, what if I know that another financial advisor, who fortunately is not a CFP® Practitioner, is causing harm? To the best of my knowledge, I do not have a legal responsibility. Though, in my mind, I do have an ethical responsibility to help the client.

School teachers, medical professionals, and others have similar affirmative obligations to report various concerns, such as abuse.

If you know a client is taking advantage of an elderly relative or neighbor, is it ethical to help them? I think, not. It is illegal, as well, to help them. But, even if you decline to help them, do you have a legal responsibility to report the elder abuse?

Some insurance and investment firms are making exceptional efforts to alert their advisors to such abuses and giving them an avenue to help. Even if the abuser or abused is not a client, do you have a moral or ethical obligation to report it, to seek help? I think, so.

What do you think?

Medicaid Planning
A person facing the prospect of long-term care with moderate income and moderate savings may eventually have to rely on Medicaid to pay part or all of the cost of care. … Medicaid planning, using a professional Medicaid planning advisor or qualified elder law attorney, allows families to correct inequities in the system.

So, Is Medicaid Planning ethical?
Medicaid planning is no different from tax planning. In fact a Supreme Court decision condones honest methods of eliminating income taxes or estate taxes. Tax planning and Medicaid planning both put an additional burden on taxpayers, but one is considered ethical and the other is often frowned upon:

Medicaid planning as it is usually practiced, however, focuses solely on attaining Medicaid eligibility, not on protecting assets in order to meet the other basic needs of the individual. Is the Medicaid planner protecting assets for the benefit of the client-elder, or to protect the children’s inheritance?

Some argue that Medicaid planning is unfair because Medicaid is a zero-sum game. More money spent on long-term care for middle-class seniors means less for poor children who need medical care. There’s some truth to that argument at the state level, but not at the federal level: ◊


One response to “Is Financial Planning Ethical?”

  1. greg s says:

    Certainly it is. Financial planners should be looking to take advantage of the estate and tax laws in existence to do what is best for their clients. This is no different than the accountant looking to maximize your return in doing your taxes by using loopholes in the tax code. Doing what is best for your client has never been a bad way to conduct your business.