A few years ago, two longtime clients, both owners of their own businesses, announced they were splitting up. But each wanted to retain Koprowski, director of financial planning at Delessert Financial Services in Waltham, Mass., as financial advisor during the divorce proceedings and after. So they set about the task of dividing their assets. Both operated their own companies and had retirement assets in their own names. They'd also set up a trust for the children. Result: dividing up their property was a snap.
“They were very rational people,” Koprowski says.
A 50/50 Proposition
With about half of all marriages breaking up, most advisors have some experience in wading through the financial morass of a divorce, and for those who have not, it's only a matter of time. Divorces are, obviously, fraught with the potential for tension and conflict for clients, forces that can destabilize a relationship with an advisor.
But it doesn't have to be that way. Surviving the experience depends on a variety of factors, some of which the advisor can control and others, like the bitterness of the breakup, that he can't. But handled right, divorces can be a new positive for the advisor: In most of the cases Koprowski has encountered, she's ended up keeping both exes in the fold after the split-up.
There are a number of reasons why reps lose one or both clients. In some cases, the clients are afraid the advisor will share confidential financial information with their spouse. In others, the clients are following the recommendations of their attorneys, who have suggested hiring advisors closely aligned with the attorney's office. Sometimes it's because one spouse, often the husband, had more direct dealings with the rep.
“The husband may have made the investment decisions but the wife suddenly becomes angry about not being consulted and decides to leave,” says Kathleen Miller, an advisor with Miller Advisors in Kirkland, Wash., and the author of Fair Share Divorce for Women (Miller Advisors, 1995).
Or consider the experience of one financial advisor with a major brokerage firm. The only client who left his practice during a divorce was a wife who had been less involved in investment decisions than her husband and felt “that anyone connected to her husband was in his camp,” he says.
It isn't always the client providing the fuel for an advisor switch. According to Scott Downing, a divorce lawyer with the law firm of McCurley Orsinger McCurley Nelson & Downing, reps often do take sides — and they tend to go with the more affluent spouse.
“If the husband has the assets, he will expect the financial advisor to stay with him,” he says. “They go with the guy with more money.”
Bitter not Better
At the same time, if the breakup is highly acrimonious, advisors often have no choice but to step back from the business.
“The more bitter it is, the harder to keep both clients,” says Jolyon Gissell, a senior vice president at Morgan Stanley in Beverly Hills, Calif.
Koprowski agrees. A few years ago, six months after she started working with two new clients, a couple married 15 years, the wife voiced suspicions that her husband was hiding money from her during his frequent trips to Asia. Shortly afterwards, the couple filed for divorce, instigating a lengthy court battle, during which Koprowski was continually asked to produce financial statements for the court. Faced with a nasty, protracted battle between two emotionally charged individuals, she formally resigned from their account.
“It was too contentious,” she says. (The husband, however, became a client again when the divorce was over, after he asked to be taken back.)
Advisors who aim to keep both clients must lean heavily on the relationship they've formed before the breakup. The stronger the bond, the more likely both will stay.
Miller, for example, has never had any of the 30 divorced couples she's worked with quit her practice because of a marital split-up. She attributes that partly to how intimately she knows each person. Clients, for example, initially get not only an individual risk-reward profile, but also take a personality assessment to help her get to know them better.
As a result, during a divorce, “They say, ‘We trust you, and want you to help us determine how to divide these assets up’,” she says.
But a strong bond with the clients is only part of the battle. Advisors also have to go out of their way to show they're not choosing sides. That means everything from consistently emailing both clients about everything you do, to taking the same even-handed approach with both husband and wife.
For example, when two clients of Mark Murphy, a financial consultant and registered rep with Guardian Life Insurance in Roseland, N.J., filed for divorce, the husband, with whom he had a closer friendship, called to ask him not to talk to his wife. Murphy gently refused.
“I told him I can't pick sides,” he says. Shortly afterwards, the client called back and conceded that he'd made a mistake.
Downstream Pollution
Such an approach requires a lot of patience from the advisor — and from the support staff. According to Murphy, divorcing clients frequently take their frustrations out on other people in his office, something he teaches his nine-employee staff to expect.
“There's a lot of yelling and screaming,” he says. “But, if we're the people who help them get over the hump, we earn the right to keep their business.”
At the same time, the level of complexity can also help your case. Morgan Stanley's Gissell points to a recent situation in which both parties decided to stay with him, thanks, in part, to the nature of their portfolio. Their most valuable asset, a private business, was jointly owned, and splitting it up would have had painful tax repercussions.
Plus, he says, “The wife felt there was greater risk in changing the whole team. She felt it best to stay with the financial advisor who had been the architect of their overall financial situation.”
More often than not, however, if an advisor continues to handle both accounts during a divorce, he has to proceed with caution or risk facing a conflict-of-interest charge. This is especially true if husband and wife have radically different needs. A business owner, for example, who wants to keep his company might ask for help valuing it as poorly as possible, while his wife might want a higher value.
“[It] can be real dangerous,” says Downing. He advises advisors to stay out of the picture until the divorce is over.
The Protection Game
How best to protect yourself during divorce proceedings? Downing suggests advisors notify each spouse, in writing, that their representation could present a conflict of interest, and to ask husband and wife to acknowledge that fact, also in writing.
The advisor should also be careful about what information he discloses to whom — avoiding, say, discussing a mutual fund owned by one spouse with the other. And don't take any action until both parties have agreed to it, preferably in writing, always documenting everything that's discussed.
“We take notes on every conversation we have, indicating who said what,” says Miller. (Typically, firms will freeze a couple's assets as soon as they know a divorce is in the works, to prevent one spouse from, say, liquidating an account without the other's knowledge.)
Furthermore, before dividing up a couple's portfolio, make sure to understand what part of each person's assets were held before the marriage. Otherwise, the advisor can wind up giving one client too much or too little.
Lastly, advisors must always be prepared to deal with pressure from lawyers. Chet Marcus, branch manager for Raymond James Financial Services in Beverly, Mass., points to one case in which both sides' lawyers pushed for him to liquidate his clients' 10 accounts, to make it easier to split the assets 50/50. But, because he felt such a move would have dire tax consequences, Marcus refused.
It's also important to note that communications between an advisor and clients is not privileged information. That means every email or letter or conversation could be used in a court case. That goes for your clients communiqués, as well.
“I tell my clients not to write anything they don't want someone else to read,” says Miller. The exception is conversations between an advisor and his client's lawyers.
The Great Thereafter
Of course, once a divorce is settled, an advisor's heavy task is to devise a new financial strategy for each individual, based on his or her post-divorce circumstances. That plan tends to be very different from whatever you recommended before, of course. For one thing, a spouse whose income drops dramatically after a divorce settlement needs a financial plan that reflects his or her changed position — a smaller amount of potentially volatile stocks, for example. What's more, once they're on their own, each ex-spouse's risk-tolerance level may require a portfolio that reflects his or her specific philosophy.
Gissell cites two clients, an ex-husband and wife with radically different investment approaches. While they were married, their plan reflected the wife's aggressive bent, since she was the more active investor. After their divorce, however, Gissell put together a portfolio for the husband that reflected his conservative investment style and drew up a plan for the wife with an emphasis on high-growth stocks.
It just goes to show you: With a little bit of luck and a lot of savvy, after a divorce, an advisor — and his clients — can live happily ever after.