Cannon Financial Institute

Dealing with divorce: Protect yourself so you can help your clients

A divorce changes everything. It brings up many questions about assets, visitation rights, and yes, personal wealth.

Money is often the single biggest argument during a divorce (and for happily married couples as well), and the two parties will have to reassess everything they've come to know at this time. In many cases, the proceedings can get contentious. This is only referring to the married couple - it doesn't begin to scratch the surface of a financial advisor's relationship to the soon-to-be divorced.

A pending divorce for two of your clients won't just mean big changes for their family. It will mean changes for you too. You will encounter conflicts of interest, legal requirements, ethical questions and financial requests from your clients. If you don't handle it correctly, you could wind up doing more harm than good.

Plan for the future
It is never possible to predict a divorce, but this doesn't mean you shouldn't plan for one.

The most important step you can take is to prepare for divorce even if there are no troubling signs on the horizon. In an article for Financial Planning, Donald Jay Korn explained that wealth managers can be proactive to reduce their liabilities.

When taking on two married clients, you can:

  • Pair each one with a separate financial advisor
  • Sign a written agreement that defines who the client is
  • Decide to terminate both clients upon divorce
  • Agree to share all information equally between both clients regardless of personal relationship

If you a set plan in place in the event of a divorce, you will have an easier time making the split more amicable.

Redefine your professional relationship
A divorce means the start of a new personal relationship between two people. It should also mean the start of something new for your professional relationship with those clients.

Say you didn't create a divorce contingency when taking on two married clients - what do you do? You have to redefine your role as financial advisor. You can sit down with both parties to suggest representing one - or both - of them, but this opens you up to accusations of conflict of interest. It can also draw you into court proceedings. However, if each person is represented by a different financial advisor within your firm, then you can keep both with less worry.

In most cases, it will be wise to drop both clients. This is the smartest strategy you can take to protect yourself and your business. Korn recommended helping the two people find separate financial advisors to work with during the divorce. Remember that information learned prior to the divorce needs to be shared with both parties' lawyers.

Learn your state's legal requirements
Your options during a client divorce may be limited depending on your state. In an article for Financial Advisor magazine, Bruce Fraser noted that each state can have different rules and regulations regarding your ability to serve both clients when they divorce.

Fraser pointed out that the biggest issue involves disclosure. Imagine that you opted to work with both clients during their divorce. How can you do that without having your ethics called into question? The answer requires you to be as forthcoming as possible. It is necessary that you meet with all involved and directly outline the conflicts of interest.

"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," Mark LaSpisa, an Illinois-based wealth manager, told Fraser.

If both clients agree to work together - and to share all financial information among each other - then get that agreement in writing. However, they could both decide to terminate the professional relationship.

Be there for your clients
Protecting your legal liabilities is only the first step when working with divorcing clients. You need to be there for the long haul if you've agreed to help one or both. A divorce is when a person needs financial guidance the most, and they'll come to heavily rely on your services moving forward.

Susan Miller, a Massachusetts-based financial advisor, explained in an interview for Financial Planning that you need to work with clients to closely assess their personal wealth.

You should begin by cutting costs and reevaluating lifestyles, Miller noted. Many clients become accustomed to a dual-income way of life, and they'll need to be reminded that they won't be able to afford many of the luxuries they've grown accustomed to over the years. You must also address their asset allocation. For example, see if you can find a way to get both parties some equity from their home. If possible, divide many assets equally.

Understand the role you will play
As a financial advisor, you are only one small part of the puzzle during a divorce. You will be joined by multiple lawyers and mediators, and this can sometimes blur the lines regarding your role in the process.

Miller suggested that advisors remain involved during the mediation process. This is important if any large decisions are being discussed, and you can help determine smart ways to split up assets in the divorce. However, don't let mediators or lawyers be involved in the details of the financial planning process. They can only serve to muddy the waters.

"If you're not a financial planner, you can do more harm than good," Miller told Financial Planning.

Don't take a divorce for granted
A divorce is a significant step for a married couple. Watching from the outside, it can be easy to take this event for granted. Don't let this be the case. Understand the significance of the proceedings, and do what you can to alleviate any financial pressure on your clients.

Above all else, don't act like nothing has changed. The divorce will drastically alter your professional relationship with the two clients, and ignoring that fact can cause you all sorts of legal and ethical dilemmas. If you can't be proactive when first taking on a married couple as clients, then protect yourself when you first learn of the pending divorce.

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