October 12, 2007

For Richer or for Poorer?

Advisors can help clients build a solid financial relationship before they exchange vows

Part one of a three-part series

It's not hard to understand why most women feel more comfortable seeing a female doctor. It's easier to talk to someone whose body is going through the same thing yours is going through. The same can be said of working with a financial advisor, especially in times of personal trauma, such as divorce or widowhood.

By that time, though, the help you as an advisor can offer is limited by the financial decisions that were made in the past, often without the input or understanding of the person now sitting in your office. The best time to help your female clients take--and keep--control of their finances is before the wedding.

Opposites Attract

As romantic as that clich?(C) sounds, opposites also repel, especially when it comes to money. Finances are the single leading cause of divorce in this country, and probably the easiest conflict to overcome if couples--particularly women--have a few useful tools going into the marriage.

The first, of course, is good communication. Whether it's a lot or a little, money is almost always an emotionally loaded topic, which is why many couples avoid the subject all together. As an advisor, you are in a unique position to encourage and, if need be, facilitate conversation about spending and savings before vows are exchanged.

If you are already working with one member of the couple, invite them to bring in their fianc?(C)e for an informal meeting. Make it clear that no subject is off limits, and then start off with some opened-ended questions about their dreams and goals for the future. Once they start talking about where they want to be, you can ask how they plan to get there.

This is when the differences in financial personalities become apparent; it is also the best opportunity to get couples talking about their individual beliefs regarding saving, spending, and debt. The sooner you get them talking about these potential sources of conflict, the sooner you can help them build the communication skills they'll need to talk through tough times.

Separate Checks?

One of the first financial decisions couples should make is how many checking accounts they need. If both partners work, many advisors recommend three accounts--one for each partner, plus a household account. They should decide in advance how much each person will contribute to the joint account. It's important, though, for each of them to have their own money about which they can make independent spending decisions.

For many couples, a more pressing issue may be how to manage their savings, particularly their retirement accounts. Two-income households have myriad options for tax-advantaged savings accounts, such as 401(k)s and individual retirement accounts, and the direction the couple chooses will have a direct impact on their taxes now and their retirements down the road.

A key issue to decide before they start filing their taxes jointly is how to participate in a company-sponsored defined-contribution plan. Typically, both spouses can invest in their employers' plans, but a couple will often favor one partner's plan over the other based on company matches or how much they earn.

Men generally earn more than women, and women are typically the ones who take time off from their careers to raise children. So it is no surprise that national surveys report that women are less likely to participate in 401(k) programs than men, and when they do sign up, they tend to take a more conservative approach to their investments.

Ironically, though, women tend to live longer than men, which means that women need to start investing younger and invest more aggressively than men. Women should have their retirement accounts in their own name, managed separately to accommodate their different life spans and career trajectories.

Marrying Your Husband's Ex-Wife

With the divorce rate hovering around 50%, second marriages are an increasingly common scenario, creating a whole new set of financial-planning challenges. If a client is about to become the second Mrs. Smith, the first thing you need to do is get a copy of the first Mrs. Smith's divorce settlement, because that can dictate how the new couple manages their finances.

For instance, does the divorce give the first wife access to the new husband's retirement accounts or pension plans? If there are children from the first marriage, how will they be supported, now and in the future? And if your client is considering getting married without a prenuptial agreement in place, will her assets be protected against future claims from the ex-wife or the children of a previous marriage?

You also need to consider how this new marriage will impact your client's existing financial plan. One advisor related a story about a 55-year-old client who had married a retired gentleman in his mid-60s. The client announced that she and her new husband had decided she should take early retirement because his pension could support them. The advisor asked just one question: What happens if the husband dies sooner than expected? The answer was that the pension would be cut dramatically, forcing the client back to work to make ends meet.

While these aren't the pre-wedding details newly engaged women generally want to think about, the right questions from you now can help ensure their happily-ever-after future--at least when it comes to money. Who takes out the garbage? Well, that's another matter...

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