I was looking through an old New York Magazine (August 2007), and a small article caught my eye. It was titled, "Bear Market? Dump Your Wife." What it said was that some divorce attorneys are advising their clients to pull out of marriages (now!) as a way to cut losses on future payouts. Furthermore, you can't pick up a newspaper without reading about more and more people losing their jobs. I think we can all agree that losing a job is one of life's top stresses. These two factors made me stop and think that perhaps we, as advisors, should be preparing for the possibility of our clients divorcing.
So with that in mind, I had a cup of coffee with Michelle Smith, a Certified Divorce Financial Analyst and a Regional Director for The Institute for Divorce Financial Analysts. Smith works very closely with some of the top divorce lawyers across the country. In fact, she says that one attorney-a fellow of the American Academy of Matrimonial Lawyers-refers to her as the consigliere of divorce.
As her Web site (smithdivorcestrategies.com) states, Smith partners with these attorneys in a way that allows them to stay in control of the case while they are able to outsource the time consuming and tedious forensic financial analyses that must be done. Her specialty is complex high-net-worth divorces-especially those with illiquid assets and private investments. Smith is passionate about what she does, because through analysis and client education, a voice of financial reason is represented at a time when reason is not always the driving force.
I asked Smith one question: Based on her experiences, what were the most common mistakes wealth managers make when working with clients who are contemplating or going through a divorce. Without hesitation, she cited two:
1. Playing in the sandbox
2. Talking out of both sides of your mouthAnd elaborated on each.
Playing in the Sandbox
Smith told me that she has seen too many cases of advisors trying to counsel their clients on their marital asset distribution plan. What she finds is that most advisors have the best intentions, but unfortunately many do not have the specialized knowledge required to do the job well.
She went on to say that the distribution of marital assets is a very complex specialty-not just about property, but also about the taxes, the potential growth, the upkeep costs, the liquidity and a variety of other factors regarding the property that need to be taken into consideration. In other words, the focus should be on developing a long-term forecast for the client's financial situation as opposed to a short-term snapshot.
To make matters worse, respective state laws compound the complexity. Thus, certain items are considered marital property in some states and not in others. For example in New York and a few other states, MBA degrees are considered marital assets which can be assigned a financial value, whereas in other states they are not.
The most important message that Smith wants to convey is that you can't dabble in this specialty. You are either in it with everything you've got or you should stay out of it. To help divorced or divorcing clients correctly, she says, you need to have a very deep, working knowledge of divorce laws, domestic relations law and how settlements tend to pan out in litigation. To protect your own interests (and of course those of your clients), if a client approaches you to do the analysis, politely refer them to a specialist. In fact, she suggests that you have a CDFA as part of your virtual network.
Furthermore, the earlier in the divorce process a CDFA is contacted, Smith advises, the more empowered clients are to make educated decisions as well as help save money during the divorce process. By doing the forensic work and analysis, a CDFA is able to offer a client a clearer view of her financial future. In her experience, Smith has found that those clients who do not have a clear understanding of all the possible financial ramifications end up making decisions based on emotions rather than facts. Furthermore, they get so caught up in the specific percentage of assets they're getting that they lose sight of the overall financial picture and their true financial needs. You must get clients to focus more on the most appropriate assets-not just the percentage. And as you can imagine, to make matters worse, the greater the emotions, the more the legal settlement goes back and forth between attorneys-resulting in a time-consuming and thus expensive, situation. Smith likes to highlight this point with the example of arguments over frequent flier accounts. Frequent flier miles are worth about two cents apiece. So if you have 100,000 miles, in essence you are fighting over $2,000, while the legal costs to settle the matter are quite often more than the asset itself. The key point to understand here, she notes, is that what is emotionally fair isn't necessarily financially sound. The goal is to minimize legal fees and taxes while maximizing the marital assets. This can happen only if the financial divorce analysis is done well, and both parties feel that they are able to sustain a stable economic future.
As you would with any other wealth management relationships, conduct your due diligence and meet with several CDFAs. To find the top credential holders in your community, Smith suggests that you reach out to the best marital attorneys as well as check out the CDFA Web site. When you meet, probe to uncover their business model and experience. You want to make sure that this is the advisor's primary business. Since many CDFAs manage money as well, check to see if you are synergistic or competitive.
Talking Out of Both Sides of Your Mouth
When you have a relationship with both parties in a divorce, it is very easy for any confidant to agree with whoever is in the room at the time. For most people, the risk is that you get caught in the middle and end up losing one friend or two. As an advisor you risk much more: You risk the possibility of being caught in the middle of a legal fight and more importantly, you risk your reputation. As we all know, people talk-especially when the news is not good. The more you worry about losing one-half of the client couple, the greater the probability that you will lose both. So make sure you set boundaries; limit your comments to empathy about the way they are feeling versus the actions of the other spouse.
Sometimes Smith sees advisors take action on a joint account based on the instructions of one party. Obviously, unless there is a power of attorney, this should never be done-but the reality is that this happens many times in the normal course of business. You truly never know what is going on behind the closed doors of someone else's marriage, so try to prevent this practice before it becomes a problem. Furthermore, in your ordinary course of business, Smith strongly suggests that you have a least one meeting a year with both spouses. Not only is this good business practice for you, but if your clients do end up heading for divorce, the spouse that was not involved feels clueless and out of control and as a result, often will hire a "bulldog" attorney to uncover all the hidden assets (which don't necessarily exist) leading to a contentious and expensive divorce.
A financial advisor's work really begins once the settlement is in place. Often the investment assets that a client ends up with are far from properly allocated: Their cash flow is different; their goals are different; their tax rates may be different.
The first step to working with a newly divorced client is really the same as the first step in working with any new client-identifying what they have and what they want. Keep in mind that many newly divorced people are too focused on wanting to continue with their accustomed style of living (which is not necessarily realistic) versus saving for the future. It has been reported that a woman's standard of living goes down by approximately 27 percent after a divorce, while her ex-husband's standard of living increases by 10 percent. Too often we see people tempted to cut back on 401(k) or other retirement savings or even worse, see their settlement as lottery winnings and spend it as soon as they get it. As you are well aware, the key to their success will be a balance between the short and long term. You will be a hero if you can help them look for opportunities to cut down on expenses that are not so painful. For example, look at their various insurance policies: Can they cut down on the amounts or perhaps increase the deductible? Have their beneficiaries been appropriately updated?
The next step is to identify their risk tolerance which will often become different for each respective spouse than it was when they were a couple. For the spouse receiving the settlement, there is a natural tendency to become more risk averse because it feels like-and may in fact be-all that they will have. The spouse that had to make the settlement, on the other hand, has a natural tendency to become more aggressive to make up for lost assets.
Now you are ready to devise an asset allocation strategy and a transition plan. Frequently the accounts are ransacked, mismatched and/or just wacky, with no rhyme or reason to their existing allocation, making it very likely that adjustments will be called for. Also, make sure that title and beneficiary designations have been changed to reflect the new situation.
Divorce is not fun for anyone-including you as an advisor. The more you know what you don't know and pass the analysis on, the more neutral you can be, and the higher the probability of keeping both clients-if you still want to!
Susan L. Hirshman, CFP, CPA, CFA, CLU, a former managing director for JPMorgan Asset Management, operates a wealth management consulting business in New York. She can be reached at firstname.lastname@example.org.