George and Marianne, two of your favorite clients are coming in today. You are especially pleased Marianne will be joining you because you have worked diligently to include her and she has not accepted often. Once seated, however, they announce they are divorcing.
In the awkward silence that follows, your thoughts may initially include how sad you are for them, then drift to how you can help them, and then perhaps stop at, “Wait, what if I lose them?”
Let’s stick with how you can help them. If you felt sad initially, it can be immensely comforting to say, “I am sorry you both are going through this, how can I help?”
One of the realities of divorce today is that this intensely personal disruption is also likely to be the couple’s largest financial transaction to date. George and Marianne own a business, they raised children, and Marianne stayed out of the workforce supporting George in his executive career through domestic and international moves. I have spent the past 31 years helping couples like George and Marianne understand the financial impact of their divorce negotiations.
We often have the benefit of seeing other advisors’ work as we collect marital account and estate information. You will probably not be surprised to learn that even the largest firms that insist they provide financial planning to clients often do not, and that the woman in a couple is often still not involved in the family finances.
For example, while George is a good person, he never got around to saving anything in Marianne’s name for retirement. As an advisor, perhaps you never worried about this because you assumed they would go forward forever. If you did attempt to balance the marital estate, make sure everyone in the process has those records. Thus starts the often long and expensive route to having Marianne begin to really digest what the parties own, owe and earn so she can effectively negotiate, or understand and agree to the negotiations on her behalf. As their advisor, you cannot pick sides at this point.
Advisors will keep both spouses in the loop of communication as part of their contract as a best practice. For example, all copies of whatever you send to one party should be copied to the other party. You can even provide to Marianne, for her records, electronic copies of tax returns, Social Security statements and pension statements that George provides to you. Documents are the backstop to transparent negotiations. Take away transparency and George and/or Marianne are now paying attorneys for discovery, interrogatories, or subpoenas to obtain documents that are often sitting in your files.
Gray divorce (over 50) is common today. We are starting to see millennial divorce. Millennial couples have many similar issues to boomers, including often a spouse in a caregiving role who has left the workforce and bore the financial injury associated with that family decision. Increasingly, many men do not wish to intentionally financially punish their wives or the mother of their children. There are remedies that can be modeled to give each party confidence in their decisions.
Unfortunate fact: A woman’s standard of living still goes down by 27% after divorce. If this happens with a couple you have advised, be aware you will want excellent records of all of your attempts to include both parties.
True story: A woman came into my office in 2013 for retirement planning. Back in 2003, at the age of 45, she divorced and was awarded $1 million, a paid-off home in a wealthy Washington DC suburb and spousal support. She earned $60,000 a year from working. She had four sons to send to college. We were not involved in the financial planning for her divorce, nor the stewardship (or lack thereof) of her settlement. Fast forward to 2013. She was 55, not 45, had $50,000 left, one son left to educate, her home was for sale and she was still working.
We had the unpleasant task of sharing her financial reality: She would need to work past age 70; that last son would go to community college on loans and take loans to complete his last two years; the home price would have to be reduced (it had already been on the market for six months) from its price of $925,000 to $750,000; and after all selling costs, she would net $690,000. That would be banked and she would draw income of $2,300 per month to supplement her pay.
Do not let your client be that woman. Let her be the woman with the same circumstances, but a much richer ending.
Same client, alternate ending: $1 million is invested; she safely withdraws $50,000 per year to supplement her pay; and her invested funds grow to $2.5 million over 10 years while her sons all participate in paying for their college. She can stop working at 55 and is not forced to sell her home. At that point, if she wants to pay off her sons’ student loans she can do so without threatening her financial future.
She gets to create a life she loves because she knew the difference between just moving on and moving on with a stable financial foundation that supports her dreams and desires.
Here’s a second true story. A woman came to us for divorce financial planning. She thinks “they” have $3 million. The advisor they worked with for more than a decade shared records with the attorney on our side after a subpoena. The couple had $13 million. Imagine how happy the client was when she realized their advisor had not included her on years’ worth of financial information. It gets worse: The couple was invested in precisely one stock (not a typo), in addition to several homes and a good pension.
Protect your own work before a couple divorces
Confirm clients have received all documentation shared with one party or the other. Document responses when one party declines to attend meetings or be involved. Have a communication protocol in place for the day any client discloses they are divorcing. Keep meticulous records. Depending on the complexity of the estate, you may wish to have a fee schedule for time spent answering legal inquiries related to your records. If you or your firm do not handle divorce financial planning on a routine weekly basis, outsource this work to a competent professional who will take responsibility for models, working with the attorney, etc.
Other ways you can shine as their advisor in this process include helping them understand their capital gains and losses picture; their total asset, debt and income picture; what they really spend as a family (separating what is spent on children); and even how to read their tax returns. We have seen advisors do such a wonderful job of truly guiding their clients during this difficult time that they manage to re-engage each party separately post-divorce. However, that is another story for another day.
Bonnie A. Sewell, CFP®, CDFA™, AIF®, CEPA®, is the owner of American Capital Planning, LLC, in Leesburg, VA, a fee-only fiduciary wealth management firm with nationally recognized expertise in HNW divorce financial planning. Bonnie is the author of “Love-Jacked! Divorce Your Spouse, Not Your Dollars” and believes effective divorce financial planning is the best antidote to one of life’s most difficult transitions. She can be reached at firstname.lastname@example.org, 703.771.0905, ext. 2, @americancapplan (Twitter).