A fundamental fact of divorce is that it realigns relationships. When their clients divorce, financial planners must make sure they promptly and clearly redefine their own relationships with those clients.
"This is an area of practice fraught with conflict-of-interest issues," says Stewart Koesten, chief executive of KHC Wealth Management in Overland Park, Kan. Financial planners "have to face the fact that married couples and partnerships split up," he says.
Indeed, the CFP Board's Standards of Professional Conduct contain a few provisions that would apply indirectly to clients' divorces. One provision requires a written financial planning agreement that defines who the client is.
Frequently, agreements include termination provisions that deal with a divorce. Other rules require disclosure of conflicts of interest. When a CFP professional is notified of a divorce, a board spokesman says, there may be a conflict of interest in continuing to represent both parties because they now have adverse interests.
"We hate it when clients get divorced," Koesten says, "but it is a reality that has to be dealt with. At the beginning of each client relationship, we tell both parties that we will keep nothing said by one person secret from the other. Both are clients, so they will have equal loyalty and respect from us. Therefore, if a divorce occurs, we have already explained that nothing is private between them, as far as we're concerned, until our agreement with them ends."
Typically, KHC Wealth Management will terminate the relationship with both parties when clients divorce. "Of course, any information we have prior to the termination of the client agreement is available to each party's attorney," Koesten says. The firm asks divorcing clients to direct their attorneys to hire planners to represent them. In most cases, KHC is retained by one of the spouses.
A firm might keep a couple if each divorcing spouse has a different planner within the practice. Marlis Gilbert, a partner with Gilbert & Cook, a planning firm in Des Moines, says, "We provide the same information to both sets of attorneys for divorcing clients. Frequently, during the divorce process, one of my partners will be the advisor for one spouse while I am the advisor for the other spouse. All of our clients know the members of our team and have been used to working with more than one advisor."
This division, says Gilbert, who holds a Certified Divorce Financial Analyst designation, allows each spouse to vent any frustrations, but allows for friendlier and more equitable division. "Up to this point," she says, "all of these cases have successfully divided the assets before or during mediation without going to court. We frequently do 'what-if' scenarios with various division options to reflect liquidity needs, tax impact, etc. After the divorce, we help clients divide the assets and plan for their futures with their new decreased portfolios. So far, we have retained almost all of the clients after their divorces."
Married couples who are satisfied with their financial planners may welcome the chance to stay with the firms even after a divorce. "We've only had a few clients get divorced," says Cheryl Holland, president of Abacus Planning Group in Columbia, S.C. "In most of those cases, the couples were long-term clients. They came in and said that they both would like to keep working with our firm after the divorce."
When that happened, Holland immediately terminated her firm's old agreement with the couple. "We set up new agreements with two single clients," she says, "and we make it clear that we will share information between the two of them."
Planners must be wary when divorce lawyers are involved. "This gets dangerous for the advisor very fast,'' says David Jacobs, president of Pathfinder Financial Services in Kailua, Hawaii. When spouses use lawyers, advisors should make sure they are comfortable with their role and find out what lines they don't want crossed.
Jacobs recommends that advisors remind couples that any communications with one spouse will be shared with the other automatically. "Follow through," he urges. "If the advisor gets a phone call, summarize the call and send an email to both. If the advisor gets an email, forward it and the response to both parties." Once a couple is divorced, Jacobs says, an advisor can re-sign them as individual clients and start giving advice again.
Holland says her firm has succeeded in keeping all the clients who switched to individual from marital planning agreements due to divorce proceedings. "I wouldn't say these divorces were amicable," she says, "but the couples were able to make decisions in an adult manner. In one case, there was no easy way to divide an investment property owned by the couple. Now they're divorced, and they still co-own the property."
If planners advise divorcing clients, do they run the risk of overstepping their bounds and practicing law? No, says Violet Woodhouse, who runs a family law practice in Newport Beach, Calif.
"Financial planners have their role," she says, "just like CPAs. Simply because clients are getting divorced, there's no reason that planners can't provide financial advice. In fact, it's fair to assume that most lawyers don't have financial expertise. I encourage clients who are getting a divorce to talk to their financial planners, to utilize the planners' expertise on subjects such as how to divide assets."
Woodhouse, who is a CFP as well as a divorce lawyer, lists several cautions. "Ethically, you have a duty to both clients," she says. "In a divorce, they will have adverse interests, and you can't show a preference. Remember that there is no privilege between a financial planner and a client, as there is between an attorney and a client, so there's no confidentiality. That should be disclosed to your clients." Woodhouse also suggests that planners get a conflict waiver. Such a document, signed by both spouses, essentially says the parties agree to keep working with the firm without raising conflict-of-interest accusations.
"In one recent situation, we were retained by both individuals going through a divorce, using a no-conflict letter," Koesten says. The couple signing the no-conflict letter understood that his firm would try to preserve their individual privacy.
"We worked with each one to negotiate a reasonable settlement," he says. "Both spouses were represented by separate attorneys and each was represented by separate wealth managers within our firm. This was not what we'd typically do, but this was a rather amicable split. Our work was to help each party understand the other and to arrive at a reasonable spousal support level and period of maintenance."
If treated with care, Holland says, a divorcing couple may be able to reach a reasonable division of assets, avoid an expensive legal dispute and even remain solo financial planning clients. "So far, things have worked out," she says. "We'll see how things go once new spouses come into the picture."
Donald Jay Korn is a Financial Planning contributing writer.