There are two complex subjects in a divorce where a financial advisor can be immensely helpful: structuring divorce settlements in a tax-advantaged manner, and the division of retirement benefits.
Although divorce attorneys will have a basic understanding of the tax and benefits issues they come across on a daily basis, a good financial advisor will have a much firmer understanding of the intricacies involved with these particular subjects.
However, for a large majority of people going through divorce, the financial advisor is absent from the conversation with their attorney and the process of reviewing crucial financial documents. This can result in tens — or even hundreds — of thousands of dollars in missed opportunities.
A common example may be the use of IRC 72(t)(2), which provides for a waiver of the 10 percent early withdrawal penalty on monies a former spouse receives via QDRO. Proper divorce planning may include utilizing this code section where parties are intent on using retirement monies to pay down their debt.
Financial advisors need to realize when their clients are going through a divorce that they should be proactive in becoming a part of the process. More often than not, neither the divorce attorney nor the client is going to invite them into the process on their own, so it is up to the advisor to educate their clients on how they can help and save money.
The Need For Financial Expertise
The clientele of the average “good” divorce lawyer can be thought of as a bell curve:
On one extreme, you have the very wealthy (who likely routinely communicate with financial advisors), and on the other, you will have people in the lower threshold of the middle class. Meanwhile, the vast majority of the divorce attorney’s clientele will fall somewhere in between these limits.
While the very wealthy usually will have the sophistication to involve financial professionals with the divorce from the start, and the less wealthy may not have a need for financial experts, the clients who fall in this yawning gap could benefit from the expertise of a financial advisor, yet that presence often does not exist.
There are several possible explanations for this absence. Through a misguided halo effect, clients often assume that the divorce attorney is fully capable of handling every financial and legal aspect of the divorce. While an attorney may feel comfortable assuming that role, divorce attorneys are not financial planners. They may not fully understand the nuances of the more complex financial aspects, which can have a major impact on the outcome of their divorce.
Take the example of IRAs. If each party has an IRA worth $100,000, are the two IRAs equal in value? Many attorneys likely would say yes, without the basic understanding that one IRA may be a traditional IRA and the other a ROTH.
Or take the example of two investment accounts that have the same balance on paper, but the disparity in the tax basis may be such that an “equal” division is anything but. By not consulting with a financial planner, one party may leave the marriage with a much larger built-in tax liability.
Additionally, attorneys are typically juggling a number of cases in various stages at once, making it easy for the financial aspects to be overlooked. Finally, whether conscious or unconscious, attorneys are aware that any additional experts brought on board will be competing with the same limited pot of financial resources as the attorney.
Since most clients going through divorce struggle with liquidity, an attorney may or may not be willing to recommend bringing someone else on board if they feel they have a grasp on the situation (despite the fact that they often do not have the expertise to handle everything).
For example, take a pension plan. Many attorneys will include language such as: “The former spouse is awarded 50 percent of the marital portion of the pension.” For that former spouse, the issue of survivor benefits may be critical to protect his or her award. If the pension calculates the retirement annuity upon the life of the employee only, then the former spouse will receive nothing upon the employee’s death without the added protection of a surviving spouse benefit or annuity.
As a financial advisor, when you have a client going through divorce, it is best to err on the side of action vs. inaction, as it will usually be on the advisor to initiate the first move by demonstrating the value they can bring to the table.
Explain to the client that you have a much better understanding of these complex issues that must be resolved during the process, and that it would be very beneficial for them to approve communication between you and the attorney.
Whether through occasional phone conversations or asking to be copied on emails that contain financial settlement or QDRO details, a financial advisor can play a key role in ensuring the best outcome without being any sort of hassle.
In fact, most attorneys should welcome your input and you should be skeptical of any who seem offended by you adding your two cents.
Something to remember, however, is that there will be a meter running and your client will be charged any time you engage with the attorney. Try to keep any communication succinct and to the point, as you are fully aware the financial stress anyone going through divorce is suffering.
Educating Clients
Offering your services to clients facing divorce is a mutually beneficial opportunity, as the advisor can receive more business and the client receives an expert set of eyes from the financial field to ensure their settlement is taking advantage of any potential savings that exist.
Advisors need to realize the important role they can play in a divorce and be proactive about educating their clients to how they can be a major asset if brought into the loop of the proceedings. It is generally very naïve to think the attorney will suggest bringing the financial advisor on board without client initiation.
There is a large majority of people going through divorce who do so with only one expert involved — their attorney. This group could really benefit from the skills and proficiency of a financial advisor to ensure they are not leaving anything on the table. It is up to the advisor to make them realize it.
Joseph E. Cordell is the principal partner of Cordell & Cordell, a domestic litigation firm focused on representing men in divorce. Since co-founding the firm with his wife, Yvonne, in 1990, he and his team of almost 200 attorneys spread across 101 offices in 28 states have helped tens of thousands of men going through divorce.