Advisors can lose two clients, retain
one or both. Which will you experience?
Cicily Maton, a wealth manager in Chicago, recalls
one particular divorce that's typical of the emotional trauma involved.
"He was a CEO who couldn't absorb that his wife was going to divorce
him. He kept thinking it would go away or she would change her mind and
come to her senses," says Maton.
Meantime, the wife's euphoria quickly turned to
despair when she feared she wouldn't be able to pay her bills or
maintain her lifestyle. "This is the reality of almost every divorce,"
says Maton, who recounts that the couple finally did divorce and went
their separate ways after three years of stalling tactics by the
husband.
Maton, who has 19 years of divorce case experience,
says, "One of the first things I ask of a divorcing client is, 'Do you
have a therapist?' Divorce is temporary insanity."
From antiquity to D.H. Lawrence's Lady Chatterley's
Lover and beyond, divorce has been present. In the U.S., even with
declines in recent years, divorce still cuts down some 30% to 35% of
first-time marriages, according to U.S. Census Bureau figures. In
Colorado, it's 50%. And in Scottsdale, Ariz., 62% of first marriages
break up; 70% of second marriages. Nevada has the highest divorce rate.
If you have not had a client divorce, chances are you will.
What do you do when your clients announce their
intention to divorce on your watch? What are your responsibilities to
both parties? What are your legal, moral and ethical obligations?
Each state has different laws concerning divorce and
the responsibilities of financial professionals. "Financial advisors
would be well advised to first check the laws in their states before
undertaking such duties to a client," suggests Gregg Greenstein, a
Colorado divorce and family law attorney based in Boulder.
Often the issue is one of disclosure-and here it
gets tricky. Some financial advisors attempt to resolve the issue with
both parties. Others elect to represent one or the other party as a
certificated advocate or mediator. Still others walk away altogether,
preferring not to take sides with the warring factions.
What precisely are the rules of engagement? The
Certified Financial Planner Board of Standards' Code of Ethics and
Professional Practice Standards doesn't prohibit advisors from working
with both parties in a divorce. While its ethics code doesn't
specifically address the issue of divorce regarding the position of CFP
responsibility, it does require full disclosure, meaning conflict of
interest must be named and communicated to any parties involved in the
business relationship. (It should be noted that the CFP Board's
jurisdiction doesn't cover all advisors or RIAs, only those who hold
the CFP certification.)
Mark LaSpisa, a wealth manager in South Barrington,
Ill., who has handled numerous divorce issues involving high-net-worth
clients, will work with both parties when divorce occurs. According to
his engagement agreement (which both parties have signed upon becoming
clients) when divorce occurs all communication is shared with both;
nothing is kept secret.
"An initial appointment is scheduled with both
divorcing parties to establish how the client and advisor relationship
has changed and how it will proceed going forward," explains LaSpisa.
Both clients are then given the opportunity to continue to work with
their existing advisor, or one will be assigned to a different advisor
on staff. If they select separate advisors, both parties will sign new
engagement agreements working exclusively with their own advisor. "This
proactive and open communication has kept both divorcing parties as
clients, where in the past both clients were lost following a divorce,"
says LaSpisa.
Maton doesn't back away from the challenge. "Your
clients are going through the most traumatic event of their lives," she
says. "If you back away, what support does that show? This is when they
need you most."
She says, "People are sometimes frozen into inaction
by the trauma of the event. Women typically will react, thinking
they're going to be bag ladies. It's like a roller coaster - euphoria
one day, despair the next. In some cases, it's hourly."
Not all divorce cases are dogfights. One set of
Maton's clients announced they were getting divorced and wanted to do
it in an amicable way. Says Maton: "Each of them expressed that they
trusted me, and felt I had a grasp of their financial picture, better
than any lawyer they might hire." They asked if she would help
structure a financial settlement.
"In their case, there were two major assets: a large
investment account and a piece of real property of equal value." After
discussing the tax implications, she says, they felt strongly one
should get the account, the other the property. "We did a summary
agreement and they hired a lawyer who drafted a legal document. They
were divorced within a short period without a great deal of expense and
emotional trauma. That's not unusual."
Maton's modus operandi usually involves the couple
coming in at the same time to discuss "what role they want me to play."
She explains the potential conflicts of interest and the limits of her
involvement. "I try to make them understand the emotional
considerations. They're both going to get angry, suspicious and may
exhibit lack of trust. I say, 'I'm not going to play any role that will
interfere with the process itself or might lead to a conflict for me.'
What I try to do is make clear that my role is one of neutrality."
Maton, who has done a lot of research but has no
formal training in divorce matters, says she hasn't had an occasion
where a couple hasn't honored her rules. "My involvement has always
been one of a facilitator, not an inhibitor. I've even had a couple of
occasions where the couples were referred to me and the three of us
organized the information and together found the best solution for the
division of assets. In more than one occasion, both couples
independently became clients following the divorce, so it was a win-win
for everybody."
In some instances, Maton works with a team of
lawyers and others who may counsel the client. Mostly, acrimony has
been limited because "overriding goals made them want to cooperate."
She allows, however, that once "I wrote a sweet letter to each client
involved withdrawing from their service."
Despite one's best intentions, some advisors feel
you can't wear both hats and be all things to all people, that is, act
as an advisor giving financial advice as well as mediator in divorce
disputes, specifically when it involves your own clients. Besides, it's
not ethical, they maintain.
Carol Ann Wilson, CFP, CFDP, of Boulder, is in this
camp. She helped create the profession of financial divorce
professional for financial planners and recommends that advisors who
don't specialize in people going through a divorce can benefit from
some training.
Wilson, who has written books and lectures widely,
has made divorce essentially a cottage industry in her practice. She
was one of the founders of the Institute for Divorce Financial Analysts
(IDFA) based in Southfield, Mich., where CFPs and CPAs can get formal
training in divorce analysis through a self-study and continuing
education program. Upon completion, they receive certification as a
Certified Divorce Financial Analyst (CDFA). Advisors can get similar
training at the Academy of Financial Divorce Practitioners in Chicago
(www.academyfdp.org), which Wilson also helped establish.
The IDFA's Code of Ethics stipulates that CDFAs who
maintain their financial practices should make divorce-planning
recommendations independent of the financial planning relationship to
alleviate the potential risk of conflict. In other words, you need to
separate the two practices when advising clients going through a
divorce.
Wilson, who separates the two and believes in full
disclosure, says she usually is retained by one party after the divorce
process has started and so is acting as a partisan. She feels that
since both husband and wife are legally the planner's clients, planners
shouldn't favor one over the other because of potential legal issues
that can crop up.
Wilson cautions planners not to move money during
the divorce. The reason: "They don't know which spouse is going to get
which assets. Secondly, when couples file for divorce, all their assets
are frozen to prevent misappropriation of funds, except for reasonable
living expenses. An exception might be that they agree, for instance,
that funds will be used to purchase a home for one or the other."
Another sticky-wicket issue, she says, is that "we
planners tend to tell our clients during financial planning what they
should do with their money. If they are in the midst of divorce, if we
tell them what they should do then we're giving legal advice, and if
we're not an attorney, it can be a criminal offense."
You also run the risk of upsetting attorneys who may
feel you're
poaching on their territory. "What we can say instead," says Wilson,
"is if you sell the house, this could be the financial result. We can
show the financial result in any decision they may make, but we can't
tell them what they should do."
Like Wilson, Joyce Pearson, CFP, CDFA, in
Scottsdale, Ariz., believes strongly in separation of church and state.
Otherwise, she says, you can get into difficulties.
She recounts instances where a financial advisor also trained in
divorce analysis attempted to remain impartial in recommendations to
his divorcing clients, but one of the parties felt the advisor hadn't
remained impartial and was considering suing the advisor because of the
perceived imbalance in his recommendation.
Pearson has set up an independent company, Equitable
Divorce Solutions LLC, devoted solely to the practice of divorce
analysis. "To maintain ethics, I must segregate financial
planning or investment management from divorce advice and working as a
divorce financial analyst. To me, it's a conflict of interest, and also
a disservice to that couple."
Another reason advisors shouldn't work with both
parties going through a divorce, she says, is because "one of the
individuals may want to remain with you following the divorce as a
financial advisor, " and it's tough to maintain the semblance of
independence under those circumstances. You also can consider resigning
both clients, she says.
Pearson says training has been essential to her
practice and she learns something new every day. "The devil is in the
details," she says.
Recommendations From Advisors
With Divorce Experiences
Full Disclosure. Discourage
either spouse from calling you to talk about the other spouse. "Tell
them you don't want to hear it," says Maton. "They should go to a
therapist for that."
Always Use Agendas. Have a
written agenda for each meeting. "That means you have spelled out
what's going to take place," says Maton. "If at all possible, it should
go to each client before the meeting."
Engagement Agreement. You
should amend your engagement agreement to take account of a divorce,
advises LaSpisa. "As a planner, the best time to think about your
company's policy regarding a client's divorce is prior to experiencing
your first real case."