Editor’s Note: This article is from “Speaking From Experience,” an occasional series from RBC Wealth Management—U.S. featuring advisors who discuss how a unique financial or personal situation they’ve experienced impacts how they advise clients.
So much of what we do as financial advisors involves families in that we plan together with a family to grow and secure their wealth for the future. Sometimes, however, that planning shifts to building financial stability for a life apart.
While the divorce rate has ebbed slightly in recent years, the fact is that a high percentage of marriages end in divorce. Difficult under any circumstance, divorce becomes even more legally complex as assets grow. For my own clients – many of whom are women – it can be especially hard to navigate with seemingly endless questions to consider, and no small amount of financial vulnerability.
One silver lining: divorce is no longer a taboo to talk about. When I became one of Boston’s first Certified Divorce Financial Analysts (CDFAs) decades ago, things were very different. I had previously provided legal and tax advice as an attorney, and for many individuals, that was where you would begin and end divorce: with lawyers. In those days, few wealth managers would even embrace this growing demand. But today, the cost of a post-marriage life—and, for many, raising children at the same time—has skyrocketed in certain ways.
For those reasons, many of our clients at RBC Wealth Management—U.S. are now highly proactive about the financial ramifications and the execution of this difficult decision. Here are some of the financial considerations they are making:
It used to be that retaining ownership of hard assets, houses in particular, was paramount. Today, that’s not always the case. The balance sheet of assets and liabilities remains, of course, one of the first things women discuss with us. However, the more important consideration may well be their cashflow—derived through their personal income, alimony, child support, investment income and the like.
While many wealth management clients will come to divorce with significant net worth or assets, it is often confusion or lack of preparation around cashflow that leads to regret—or not being able to make ends meet—six months down the line.
There are a number of reasons why. More women are marrying and divorcing later, so they are more concerned about their retirement and long-term care. Healthcare, as we all know, has exploded as a cost, and insurance isn’t always guaranteed through an ex-spouse who may remarry, unexpectedly become unemployed, or even pass away. How, post-divorce, will they pay for this major expense?
There are also lifestyle and investment choices to consider. Some younger clients simply haven’t lived through market downturns and don’t really consider the cost of their travel or other lavish choices. Part of our job as financial advisors is to give our clients a bit of a reality check to make sure they are planning not only for today, but many years into the future.
Every Last Detail
It is also critical to understand and navigate the financial ramifications that come with the end of a marriage. Though alimony is no longer taxable, a number of other rules or state laws may risk significant penalties. It’s important to understand what those might be in your jurisdiction.
The same can be said of trusts and estates. For instance, an LGBTQ couple recently discussed spousal share clauses for trusts here in Massachusetts with us, as part of a prenuptial agreement. Specialized structures can also be deployed around inheritance and include instructions on who has discretion over the distribution of those assets, and how. These are evolving matters of law that are worth paying attention to.
Beyond being familiar with those kinds of relevant pitfalls and tools, there are two things advisors should focus on when dealing with clients going through the trauma of divorce. The first is the need to be fully informed about the investment process. Many times women will join us at RBC already well into their divorce proceedings, but have received only minimal advice from legal counsel about their own financial investments, potential costs and tax implications. It is our job to help our clients understand how it affects them financially—their lifestyle, their family and their legacy.
The second key is to have a thorough discussion about the client’s financial interests both now and in the future. One common example is college education: young divorcing couples don’t typically want to include this when children are young and it appears so far off. Yet we strongly encourage they consider how this expense will be funded in the future.
Divorce is never easy, and there are always limits to one’s capacity to think about issues that may seem decades away. Documenting the process is crucial, and working with mediators is very beneficial in this sense. As advisors, our goal should always be to prevent a client from looking back on a financial decision made along the way and say “I wish I knew—why did I do this?” They may not like every aspect; no one does. They’ll understand it though, and why it made it sense at the time.
Gabrielle Clemens is a financial advisor with RBC Wealth Management—U.S.