By Kenneth Corbin, Barron’s featuring Samantha Garcia, CFP®, AIF®, CDFA®, Wealth Advisor at Halbert Hargrove
As the divorce mediation went on, it became clear that the two separating parties weren’t comfortable with the emerging alimony arrangements. The husband, a doctor, was concerned that a protracted alimony obligation could delay his retirement. The wife, who stayed home to raise the couple’s five children, worried that the alimony payments would tether her to her husband for another 12 years, and that they would shut off if she were to remarry.
Sylvia Guinan heard all of this and proposed a solution. Guinan, of Wells Fargo Advisors in Essex, Conn., who specializes in helping clients navigate the financial aspect of divorce, had agreed to sit in on the mediation at the wife’s request. Her role was passive—it was the mediator who was responsible for trying to bring the separating parties to an agreement on how they would divide their assets and arrange for custody of the children.
“I was asked to attend the mediations so that I can educate the wife and make sure she had clarity regarding the assets and proposed settlement agreement,” Guinan says. “My role is to support my client by helping her understand the different settlement options and how they would impact her future.”
A clean break versus years of payments. In this case, the sticking point was a matter of money—but not how much the husband would pay, rather how the payment should be structured. Guinan understood the concerns about the long-term nature of the proposed settlement, ran the numbers, and came up with a present-value calculation of the 12-year alimony payment schedule that had both parties feeling uneasy.
Her solution? A lump-sum payment in lieu of a protracted alimony schedule that resolved the financial aspect of the separation with a clean break, left both parties happy, and swept away what could have been an ugly source of tension, keeping their “co-parenting on a good track,” Guinan recalls.
Guinan slotted the proposed settlement into a financial plan for the wife, who remains a client, to help her see how the lump sum could be put to work for her short- and long-term goals.
Months later, Guinan received a text from the husband thanking her for her help in achieving an amicable settlement. He then referred her to one of his own colleagues who was heading into a divorce.
“The big takeaway is that divorce does not need to be adversarial,” Guinan says. “By listening to the clients, there are solutions that can be a win-win.”
Financial, psychological, emotional. An advisor’s role in working with clients getting divorced can be tricky, particularly if both spouses had been clients of the advisor as a couple before they decided to separate. Like any major transition, divorce can cause havoc with a client’s emotions, so advisors who try to provide guidance through that process have a psychological role to play, as well as a financial one.
Divorce has also taken on a different dimension amid Covid. There’s no shortage of anecdotal evidence that the myriad strains associated with business closures, travel restrictions, school closings, and working from home are straining relationships.
“From dining out, going to the gym, and traveling, most of our extracurricular activities have been eliminated, and the pandemic has isolated us from our support systems,” says Gina Grippo-Martinez, an advisor with Aline Wealth, a Hightower firm. Many court proceedings ground to a halt during the pandemic, leading advisors to speculate that there could be a pent-up demand that will result in a surge in divorces.
When an advisor has a longstanding relationship with a couple, divorce presents a unique challenge. Can both spouses remain clients? What are the disclosure obligations? Do advisors need to recuse themselves from serving one of the spouses?
Firms vary in their policies, but that scenario inevitably puts the advisor in a “compromised position,” according to Evelyn Zohlen, president of Inspired Financial in Huntington Beach, Calif. “It’s almost impossible to provide conflict-free advice to both parties if they’re going through a divorce,” Zohlen says.
Avoiding conflicts of interest. “As soon as a client informs us that they are getting a divorce, we inform them that we are in a conflict of interest,” she says. “For that reason, we are going to need to recuse ourselves from financial planning for you around the divorce.”
At that point, Zohlen says, she will try to seek out an advisor with the certified divorce financial analyst designation to help with financial affairs relating to the divorce. Some advisors say they try to pair one of the spouses with another advisor—within their own firm, if the team is large enough to accommodate that—rather than trying to sustain a relationship with both parties.
“It’s very difficult to maintain that line of balance of being a fiduciary for both clients,” says Samantha Garcia, an advisor with Halbert Hargrove in Long Beach, Calif. “It’s a very, very fine line.”
When a new client comes on board just as they are beginning the divorce process, there is of course no conflict with the relationship with the spouse. But in those cases, advisors have to get up to speed quickly on the whole of the client’s world, from their finances to any children’s needs to their long-term goals.
“I just want to take the time to understand the situation. It’s not just about the assets, it’s not just about the investments,” says Alyssa Moeder, an advisor with Merrill Lynch in New York. “It’s about making sure we understand the total picture.”
When Reegan Rae begins working with a client preparing for divorce, she starts with some basic blocking and tackling, compiling a preliminary list of assets to kick off the process. The advisor, rather than attorneys or accountants or mediators, is best positioned to handle that task, argues Rae, co-CEO and managing principal at Arnerich Massena in Portland, Ore.
“Advisors ought to take the lead on developing the initial asset schedule since we are the ones with title and valuation information on financial accounts, and we usually have this information on real estate holdings as well,” Rae says. “We are often the only party at the table who is not billing the couple by the hour, so our team does as much of the legwork on this data gathering as possible.”
Planning past the divorce. From there, Rae’s second step is to devise a post-divorce financial plan, one that will help clients understand their spending capacity in their new financial arrangement.
“Examining cash flows and budgeting in ‘the new normal’ is critical to helping each spouse get a sense of how their finances look as individuals, and to help them make informed decisions going forward,” she says. “The potential for running out of money is often a concern for newly divorced individuals, so we do everything we can to build a plan and then help with budgeting, tax, and cash-flow questions.”
Rae’s third step is to work on educating the divorcing clients about their financial picture. Other advisors stress the same point, describing a familiar pattern in a relationship where one spouse generally handled all the bill paying and investments, while the other partner had almost no role in the family finances.
Once an asset split has been resolved, the planning process can look ahead to what a client’s cash flow and expenses might look like after the divorce is finalized. Those conversations can turn emotional quickly, advisors say, especially when one client is committed to holding onto an expensive asset like a house.
Such was the case with one of Garcia’s clients. When she explained to the client that, with her post-divorce cash flow, she simply couldn’t afford the house, the client opted to go back to work to earn extra income. It should be enough to get her to the point when her kids go off to college; Garcia convinced her client that it will be time to sell at that point.
“She understands she needs to sell the house. She needs to downsize,” Garcia says.
Apart from ensuring that clients will have enough to live comfortably, Moeder suggests giving clients some time to adjust to their new life, allowing them to absorb the other major changes they’ve been through—downsizing, relocating, etc.—before moving forward with any significant new financial initiative.
“That’s not necessarily the best time to be making major changes,” Moeder says. “It’s kind of important to sometimes live with it for a while before we start making any major recommendations on the investment side.”
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