One of the most common questions I hear in my practice is, "Am I going to be OK?" The answer to this question often determines whether you reach a good divorce settlement, or end up enduring protracted negotiations to arrive at a settlement you might not feel certain about.
Sometimes it's easy for an attorney to answer this question in the affirmative. But there are times when an attorney may not be able to answer this question with certainty. This article will outline the role that a financial planning expert can play in answering this question with you, and building your confidence in the soundness of your agreement.
The most useful way to examine the role of a financial planning expert in divorce is through a case study narrative. To respect client privacy, this narrative is not based on any particular past case, but it is designed to be reflective of the typical cases I work on.
The Case
Mr. and Mrs. Smith have been married for 25 years. Mr. Smith works as an attorney for a large oil and gas firm. Mrs. Smith worked as a nurse until the birth of their first of three daughters. After that, the Smiths decided Mrs. Smith should become a stay-at-home mom. That same year, they bought a house in the suburbs. When their youngest turned 13, Mrs. Smith went back to work part-time at a local doctor's office.
Their daughters are now aged 20, 17, and 14 years. Mrs. Smith is responsible for paying the monthly bills, and Mr. Smith handles the family's investments. While she attends review meetings with their Financial Advisor, Mrs. Smith is not highly engaged with the family's investments. Further, Mr. and Mrs. Smith have never drawn up a formal financial plan.
Mr. and Mrs. Smith have both been unhappy in their marriage for a while. After attending therapy together for about a year, they determined that the marriage can't be saved and they should divorce. Both interviewed and hired attorneys, and Mr. Smith filed a petition for divorce.
In the process of preparing for a temporary orders hearing[1], Mrs. Smith begins to wonder if she'll be OK after the divorce. Will she need to go to work full-time? Will she be able to retire on time, or will she need to work into her late 60s? Will she be able to stay in the family home? Will she be able to continue living the same lifestyle she's used to? What assets will she get in the divorce, and how will she handle them?
Mrs. Smith poses these concerns to her attorney, who tells her honestly that she just isn't sure. The attorney suggests that Mrs. Smith talk to her Financial Advisor. Mrs. Smith considers this, but judges that she never really liked their Financial Advisor and feels he would be biased in favor of Mr. Smith. After searching the internet for a "divorce financial advisor," Mrs. Smith comes up with a person she wants to interview. This person is a Certified Divorce Financial Analysist™ (CDFA®) and a CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) who specifically works as a divorce financial advisor.
The Interview
After a short phone call, Mrs. Smith arranges to meet with the divorce financial advisor for a free consultation. She arrives feeling apprehensive and unsure if this person can really help her. A few minutes into the interview, Mrs. Smith asks, "Am I going to be OK?" The advisor looks up and responds:
"I'm not sure yet, but let me show you how we'll answer that question together."
The advisor goes on to explain her process, which starts with understanding Mrs. Smith's goals for both her divorce and her life after divorce. After defining these goals, she will work with Mrs. Smith, her attorney, Mr. Smith, and his attorney to put together a detailed inventory of assets. Whose name is on each asset? Are the assets easily converted to cash? Is there debt associated with the asset?[2] Are all of the assets Community Property, or are some Separate Property?[3] Part of this process will involve educating Mrs. Smith on the different types of assets in the estate, so she can feel confident in her understanding of what is being divided and what she will receive.
The advisor goes on to explain that she will help Mrs. Smith build a household budget. The budget can be used to decide if Mrs. Smith should return to full-time work, and if so, when. Next, the planner explains that she will help Mrs. Smith determine which assets she would like to ask for in her divorce settlement based on how well those assets serve her needs and goals.
Once Mrs. Smith and the planner have an idea of the assets she may be awarded, the advisor will use specialized software to analyze whether the assets will be enough to get Mrs. Smith to her goals. If this analysis shows the assets aren't enough, the advisor explains that she will make recommendations to help Mrs. Smith increase her chances of meeting her goals. Part of those recommendations will cover how to invest financial assets after the divorce.
"What about after my case is settled?," asks Mrs. Smith uncertainly.
"If you want to continue working with me after your case is settled, I'll be here for you," says the advisor in a reassuring tone. "You and I can decide together what we want that arrangement to look like."
The Resolution
Mrs. Smith leaves the interview with a lot on her mind. After considering her options for a few days, she calls the divorce financial planner to ask for the paperwork she needs to sign to get started.
Mrs. Smith can feel her confidence growing.
Over the next several weeks, Mrs. Smith can feel her confidence growing. She is still apprehensive, but she's feeling more informed each day. The planner takes time to help Mrs. Smith understand the difference between her husband's pension benefit, 401(k), and brokerage account. Together they look at the cost to stay in the family home — Mrs. Smith begins to understand that because of high property taxes and maintenance costs, she would be better off selling and moving into an apartment after their youngest child leaves for college.
They also make a plan to keep enough cash in the bank to cover taxes and maintenance for the next two years. As they continue to work through her case, Mrs. Smith begins to form a clear picture of what her post-divorce life will look like. To her relief, she learns that she will not need to return to full-time work unless she wants to do so. The advisor takes the time to explain the basics of investing, and Mrs. Smith begins to feel more confident about administering the assets she'll be awarded in the divorce.
The advisor takes the time to explain the basics of investing,
Mediation day arrives, and Mrs. Smith and her attorney meet at the mediation center bright and early. They're armed with an opening offer, as well as a clear understanding of which assets Mrs. Smith is able to give up, and which she would rather not. They both know that Mrs. Smith's divorce financial advisor is just a phone call away if they have questions. The mediation session isn't easy, but by the afternoon, the Smiths are able to reach an agreement they both feel comfortable with.
Some weeks later, Mrs. Smith finds herself standing on the steps of the courthouse, having just entered her Divorce Decree with the judge. Reflecting on her experience over the past several months, she realizes how much she's learned, and how much more confident she feels about the decisions she's made during her divorce. Even though she has some healing to do, Mrs. Smith can see a bright future ahead.
After
With her case settled, Mrs. Smith decides that even though she is more educated and confident than she was before her divorce, she still wants to engage a professional to work with her on her investments and financial planning. After all, she still has daughters to raise and plenty to learn about investing. As the years pass, her advisor offers sound guidance on all sorts of financial decisions and continues to help her learn about investing and personal finance.
"Do I Need a Divorce Financial Advisor?"
The answer to this is: maybe.
Not every case or client will benefit from the services of a divorce financial advisor. The key question to ask yourself is: "Can I say with confidence that I'm going to be OK?"
If neither you nor your attorney can answer this question with a yes, that is a sign you should at least interview some divorce financial advisor candidates. Because divorce is a very specific process with very specific rules, consider seeking out a Certified Divorce Financial Analyst™ (CDFA®). If your case is especially complex, you might want to find a professional who holds a CERTIFIED FINANCIAL PLANNER™ (CFP®) certification as well, since they will have advanced training in financial planning, retirement plans, investments, taxes, insurance, and estate planning.
Ending a marriage is rarely easy, but using the right set of professionals can make the process just a little less intimidating.
Think you might need a divorce financial advisor? I'm here to help.
[1] This is a hearing held after a petition for divorce is filed. In laymen's term, this hearing sets the ground rules for the period between the beginning of the divorce case and the final settlement, at which time the marriage is officially dissolved. Each party must prepare financial information to present to the court.
[2] A mortgage or car loan, for example.
[3] Community Property is subject to division in a divorce; Separate Property is not. This distinction is important in formulating any settlement agreement.