You know you can enlist the help of a financial advisor if you need advice on saving for retirement or help managing your investments. But did you know they can help you through a divorce?
Robert Henderson, president of Lansdowne Wealth Management, says it's always smart to engage a financial advisor as early as possible in the divorce process.
"Once most of the important decisions have been made and settlements agreed to, my job is more about re-structuring the divorcees finances in the most optimal way," he says. "If we can get clients into our office early on, it helps with negotiations on financial issues as to maximize the post-divorce settlement."
Bob adds that the biggest financial struggles he sees are the result of poor financial decision-making during the divorce process - especially related to the family home and how taxes impact assets. And he cautions that not all financial advisors are knowledgeable about divorce, so it's important to find someone well-suited to help with those issues.
Bob recently checked in with us to offer more financial planning insight - especially as it relates to couples who are splitting. Read on:
Tell us about Lansdowne Wealth Management.
Lansdowne Wealth Management is a Registered Investment Advisor based in Mystic, Connecticut. We provide three primary services: financial planning, fee-only investment management and divorce planning.
What advice can you offer us on finding a good financial advisor? What questions should we ask? What are red flags that indicate we should move on from an advisor?
It is very difficult to identify a "good" financial advisor. It is really both an art and a science. Before you divulge a lot of information about yourself, you should be prepared to ask some questions. Ask the advisor about their clients: what types of clients do they have, how many clients do they work with, what is the typical size of client, and what is their philosophy or strategy with managing money.
A good advisor will be able to easily answer these questions in a way that makes sense. The purpose behind these questions is to make sure you are a good fit for them.
If they have 500 clients and are managing $100 million, unless you have a very large portfolio there is a good chance that you are going to get very little attention. Most good advisory practices can only handle 100-150 clients per advisor before it becomes difficult to personally manage each client.
You also need to make sure that their money management "style" meshes with your own needs. Some advisors have very aggressive investment styles, and some are very conservative. You need to weed unwanted investment styles out early on to make sure that you are both on the same page.
The next most important detail is understanding how they make money and what you pay as the client. There are several payment models. The first one is commission-based brokers. Technically speaking, they are what is known as "Registered Reps" of their brokerage firm, essentially selling agents. They sell products such as stocks, bonds, mutual funds, etc. for a commission. For clients that just want a place to buy and sell securities where they can meet with someone in person, this is a great choice. Most often, you will pay a one-time commission; and in the case of mutual funds, you may also incur an ongoing "trail" fee embedded within the fund. Registered Reps are held to a "suitability" standard of care for their clients. In other words, as long as the security is considered "suitable" for the client (even if there are better or cheaper alternatives), they can sell it to clients. Registered Reps can only provide advice that is incidental to the products that they sell to clients (but cannot charge for it).
At the other end of the spectrum is Fee-Only Registered Investment Advisor firms (RIAs). Individuals that work for an RIA are known as Investment Advisor Representatives (IARs). RIAs can only charge fees for either investment advisory work (managing your investments) or for preparing financial plans. Typical fee structures may be a percentage of assets they are managing for you; or in the case of financial planning, either an hourly or fixed-fee rate. RIA firms (and the IARs that work for them) have a fiduciary responsibility to clients. This means that they are required to always act in the best interest of the clients regardless of their own compensation. So for example, if the BEST thing for a client to do is NOT invest their money (but maybe rather pay down debt), then it is the Investment Advisor's obligation to advise their client accordingly (even if it means foregoing a management fee).
Finally, there are "hybrid", "dual-registered", or "fee-based" advisors. These terms are synonymous, and essentially are advisors that are both Registered Reps of a brokerage firm as well as also Investment Advisor Representatives of an RIA firm. In this case, the advisor may act in either capacity - receiving commissions for selling products, or providing advisory work for a fee. It is critical that you understand what type of advisor you are using (a broker/registered rep or investment advisor), and how your advisor will get paid. They should be able to easily explain and illustrate their compensation for you.
One way to do a little background work on your advisor is to check their "BrokerCheck" report. This is available through FINRA or the SEC websites. FINRA provides reports on Registered Reps, while the SEC provides reports on Investment Advisor Representatives. These reports will show work history, disciplinary actions and how the advisor is registered.
There are definitely some red flags to look for. The first would be excessive job-hopping. If an advisor has worked for numerous different firms in the past 10 years, that could be indication of internal disciplinary action. The second red flag would be looking at client complaints and/or terminations for-cause (regulator and/or employer reported disciplinary action).
Before heading into your first meeting with a financial advisor, what sorts of information should you compile? What questions should we be prepared to answer?
As a potential client, a good advisor is going to want to understand three things:
1. Why are you there? What type of advice or assistance are you seeking?
2. What is your current financial situation? Income, expenses, assets, debts, etc. It's not important to have all of the details, but it IS important to have a reasonable idea.
3. What are you trying to accomplish with your assets?
A good advisor will want to take stock of your entire financial picture to make sure they are providing you the best possible - and most appropriate - advice for your situation.
What would you love to see all your clients doing with their money?
Taking a more active role in managing their finances and better managing debt. I find too many people put blinders on with respect to their finances, and then find themselves too far in debt with no conceivable way out before retirement.
What is Divorce Financial Planning? Why did you want to offer this as a service?
Divorce Financial Planning is the process of advising clients and/or divorce attorneys on the financial aspects of divorce and at different stages of divorce. I sort of fell into this specialty four or five years ago. I had helped several clients through difficult divorces and then began getting more divorce clients referred to me. I was spending a lot of time researching divorce and its impact on clients (particularly women) that I decided to formalize it as a specialty. I obtained the Certified Divorce Financial Analyst (CDFA) designation, which is the primary divorce finance designation in the industry. My calm demeanor with clients and analytical background (I was a corporate controller in my past career) made this specialty well-suited for my practice.
What do you think are the biggest financial mistakes couples going through a divorce make? How can they avoid them?
I see the same mistakes over and over again
1. Not keeping good records. If you are contemplating divorce, it is advisable to get yourself educated on what assets you have and the debts that you owe. I spend a lot of time helping clients "re-create" their financial inventory because they had no idea what they had prior to divorce.
2. Taking the house. This often creates problems for a mother when they want to keep the children in the family home. But unfortunately, the house is a marital asset which is no different than an investment account. Often, there is not going to be enough income to maintain the house, and the wife ends up shouldering a much larger financial burden. It's important that each party develop a post-divorce financial plan to ensure they can afford the lifestyle that will exist post-divorce.
3. Not taking the right assets. It's great to receive a large settlement in the form of a portion of your ex-spouse's retirement account. However, if those are assets you need to live on, you need to consider the tax implications of withdrawals - especially if you are under 59.5 years of age. Likewise, with ordinary taxable brokerage accounts, make certain you understand the cost (tax) basis in the assets being delivered to you. If you need to liquidate assets, you may be in for a large tax hit due to taxable gains.
4. Fighting for every last penny, or fighting over every small detail. Each spouse should certainly receive what they are entitled to. But spending $350/hour on two lawyers is a very poor use of resources if you are fighting over immaterial items or insignificant details. Sometimes once the "big picture" details are worked out reasonably well (asset division, spousal support, child support, etc.), continuing to fight over small details just takes money out of your own pocket.
How does divorce affect a couples' retirement savings?
Well, clearly the biggest challenge is now one pool of assets supporting two households in retirement. This is not as difficult if you had two "financially equal" spouses in terms of income and savings. But it can be a bigger problem when only one spouse was saving for both. You can also run into problems with pension incomes that can be difficult to value, issues with survivor benefits, and problems with portability. Some pensions simply cannot be split, so it may require exchanging other assets. But all of these needs to be worked out before a settlement is reached.
What special considerations do divorcees need to make when planning for retirement?
Beyond what has been mentioned above, it's important to take stock of ALL of the benefits that will be critical in retirement. Life insurance, social security, health insurance, long-term care costs, the costs of paying for college for kids, etc. all need to be worked out and planned for in advance.