November 15, 2020
Your new divorce client needs help. She’s ceded control of the family finances to her husband for 32 years and knows nothing about what’s going on. She has no idea what she spends or what she is going to need and wouldn’t know where to put her fingers on their investment statements. You smartly suggest she consult with a Certified Divorce Financial Analyst (CDFA®), a financial planner who has specialized knowledge regarding divorce issues. “Oh thank you”, she replies, “But we have a financial planner. Mr. Big at XYZ Financial meets with us every year. I don’t understand half of what he says but I know he’s doing a great job with our investments. I can ask him my questions.”
Mr. Big may know his way around the stock market but that doesn’t mean he’s the best person to help your client make decisions during what could be the most important financial event in her life, for several reasons:
• There are IRS rules that pertain to divorce. These rules don’t affect the normal investment decisions that investors make so most financial advisors won’t know them unless they have the right training. Examples of these include:
o The ability to take a one-time 401(k) withdrawal without penalty during a divorce
o The taxation of a house sold before or after the divorce
o How to minimize income taxes by assigning the personal exemption for children
• Mr. Big has been working for both the husband and wife together. If this is an unamicable divorce in which each spouse needs advice regarding what is in their own best interest, he may not be able to give one-sided guidance. In addition, he may have a good relationship with both parties and would be reluctant to give any advice that could hurt either relationship.
• Many brokerage firms do not have the software to best work with divorces, such as the ability to create forward-looking projections of income and expenses for each party individually.
• Many financial advisors have a book of hundreds of clients and focus much of their day on watching the stock markets and placing trades. They don’t have the time to sit with a party and go over their cash flow or talk about their feelings around selling the marital home.
• Some brokerage firms do not allow a financial advisor to charge for giving divorce-related advice, leading the advisor to offer the advice in exchange for the promise of assets to invest once the clients split. This could create a conflict of interest.
Even if the divorce is amicable, both parties should consult a CDFA® either together or individually. The CDFA® is focused solely on giving advice related to the divorce so she can work with the couple together as a financial neutral, or for one party as their advocate. The advice is valuable and can make a difference in your client’s life. Help her (or him) understand that just as they are consulting with you, an attorney or mediator with knowledge and experience in divorce, consulting a financial professional with the same focus is important.
