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Neuroscience teaches us how to make our brains more receptive to new ideas. My recent conflict-resolution experience working with the IRS shows how lessons from neuroscience can improve advisor-client interactions.
As a financial advisor, you have to persuade your clients on the benefits of your service, overcoming negative perceptions and an occasional conflict. Compare this to working with the IRS on valuation issues during an audit. That experience will strengthen what you do as a financial advisor. Read on.
A valuation issue with the IRS is gray in nature and involves financial analysis with a business appraiser. It is important for the taxpayer’s team to develop a relationship with the auditor, listen to his or her concerns, educate them on their thoughts and reasoning and then begin the negotiation. Think about this as a form of financial advice. Aren’t you developing a relationship, listening to concerns, providing education on various financial instruments and working to come up with a solution that is financially viable and meets both of your needs?
Here is the scenario, based on my personal experience.
A business appraiser produced an excellent business appraisal for a law firm for an estate valuation. That estate is now under audit. Any increase in valuation will result in an additional 40% tax against this estate. The IRS estate and gift tax attorney (an IRS agent) has contacted the law firm and indicated a proposed change in the business appraisers’ discount for lack of marketability (DLOM) from 25% to 7%. The lower the DLOM the more valuable the business and the higher the taxes. The result proposed by the IRS results in an increase in value of $6 million or $2.4 million ($6 million X 40%) in additional tax to the estate.
The business appraiser suggested the taxpayer’s law firm contact me to help them. An attorney from the law firm informed me that she planned to take a very aggressive position and attack the IRS agent.
I told her that if she was going to do that, she did not need my help. I suggested she contact the IRS agent and engage in 15 minutes of small talk learning a host of things about her and then bring up the issue. We discussed what to talk about and how to approach this. As a result, she scheduled a meeting to discuss the DLOM issue.
A plan was put in place to address building a good relationship with, listening to and educating the IRS agent and beginning the process of a negotiation in a collaborative manner. Think about this as a financial advisor. Isn’t this what you need to do too?
My success in persuading the IRS agent can be distilled to a four-step approach:
Step 1: Relationship
Choose a pleasant location.
Bring on board a good looking counterpart of the opposite sex to assist you (our brains are hard wired to look for food, shelter and sex – everything else is initially viewed negatively until learned otherwise).
Have snacks and beverages that promote listening with antioxidants and water.
Leave more than ample time for the meeting with breaks to avoid time pressures.
Step 2: Listening
When trying to persuade someone, listening is key. The same is true when working with the IRS.
Listen actively to understand how the IRS came up with a 7% DLOM.
Paraphrase and summarize what the other party said even better than she said it.
Take a break and engage in more small talk to allow the brain of the other party to be receptive to your ideas.
Step 3: Education
Prepare, prepare, prepare.
Know your material very well.
Ask questions that will encourage the other party to say “yes.” This releases certain hormones and chemicals that assist the brain in being receptive to other ideas.
Educate your client and help them see why this is in their best interests too.
Step 4: Negotiation
My client indicated that the original appraiser had recommended a DLOM of 25% to 30%, and my client had taken a 25% DLOM on the estate’s return. However, with the information that was just presented, the client now felt that the appropriate DLOM should be 30% and she asked what the IRS agent thought the DLOM should be. The IRS agent thought about everything that she had learned and asked if my client would accept a 28% DLOM. My client indicated she would. The case went from being a $6 million adjustment to the IRS to a $1 million adjustment to my client resulting in a $400,000 refund.
By developing a relationship with the other party, truly listening to their needs and concerns, educating them on additional facts and financial information in a collaborative manner and working with the other party to agree on what was being presented, it was possible to both emotionally and logically come to a conclusion that was in both parties’ interests.
You can apply these lessons to your work as a financial advisor. Consider the adversarial relationship between a taxpayer and the IRS related to how much tax is to be paid. If the neuroscience techniques presented here work with the IRS, think about what you can learn and apply as a financial advisor
Michael Gregory is a speaker and an expert in conflict resolution dedicated to making thought-leading entrepreneurs and executives more successful. Michael’s books, The Servant Manager: 203 tips from the best places to work in America and Just Published-Peaceful Resolutions: A 60-step illustrated guide to conflict resolution are available at http://mikegreg.com/books. Free resources are available online at www.mikegreg.com. Check out the blog. Contact Mike directly at [email protected] or call (651) 633-5311.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
