Handling divorce requires a challenging combination of being sensitive to a client’s distress and providing straightforward, rational advice that many don’t want to hear.Visual Generation/iStockPhoto / Getty Images
Cindy Viner’s recently divorced clients often arrive at her office with one goal.
“They want the house,” says the executive financial consultant at IG Wealth Management Inc. in New Minas, N.S.
Unfortunately, the news for them usually isn’t good. Ms. Viner often tells clients that if they keep the house, they won’t have the cash flow to support it and will likely have to get another job.
“It’s about showing them choices,” she says.
Handling divorce requires a challenging combination of being sensitive to a client’s distress and providing straightforward, rational advice that many don’t want to hear.
Advisors need to examine the client’s new financial situation, identify sources of cash flow and fill any holes related to estate planning, retirement and insurance.
Ms. Viner says the process, which she admits is highly upsetting for many clients, can have a happy outcome.
“For a lot of people I see when they’re in the midst of a divorce, it feels like a financial ending,” she says. “But, oftentimes, it’s actually the beginning of their first fully intentional plan.”
New goals
A client who’s thinking of getting divorced should approach their advisor as soon as possible, says Kurt Rosentreter, senior financial advisor and portfolio manager with Manulife Wealth Inc. in Toronto.
“In a perfect world, I would connect with them before they got divorced,” he says.
A pre-divorce financial analysis can have a big impact on asset division and child support, giving clients an opportunity to consider the pros and cons of different settlements.
More often, his clients contact him post-divorce. Mr. Rosentreter examines legal agreements, determines a client’s new income and identifies potential sources of cash flow. Next, he looks at their goals.
“I still like to start with what they’re hoping for versus just taking the [divorce] deal data and forcing it down their throat,” he says.
Once this analysis is complete, advisors need to help clients fill the holes in their financial picture. Here are five steps they may need to consider:
1. Bring in more money
A divorce can lead to a permanent income shortfall. When a client doesn’t work or has a low income, difficult conversations need to be had, Mr. Rosentreter says. He often asks clients whether they feel comfortable working past the age of 65.
2. Free up cash
Selling the matrimonial home is usually inevitable, Mr. Rosentreter says. Even with affluent couples, the cost of carrying a home alone often isn’t possible.
As a result, he’ll ask his clients whether they would consider buying a smaller home, such as a condo, or moving outside the city to save on costs.
Faisal Karmali, senior wealth advisor at CIBC Private Wealth Wood Gundy in Calgary, says he often mentions selling unused items.
“A typical post-divorce analysis I’ve done shows that people end up holding onto about $5,000 to $10,000 worth of stuff in their home they don’t need,” he says.
Mr. Karmali says clients should sell those items and use the proceeds to pay off debt or supplement their income.
3. Review estate documents and insurance
Newly divorced clients have to redraw how they’ll protect beneficiaries. That includes updating legal documents, wills and powers of attorney, Mr. Karmali says.
“You want to make sure they’re protected and also review the legal document of the divorce to see if they have any legal obligations that you need to insure for,” he says.
Clients may need life insurance to secure court-ordered child support or spousal support, protect beneficiaries, or cover shared debts such as a mortgage or loan they’ve co-signed.
4. Cover health care costs
Many people lose benefits from a spouse’s plan when they divorce, Mr. Karmali says, including dental and extended health care coverage. “How are we going to fund that in the future?”
Clients may opt for critical illness insurance, disability insurance, or regular private medical and dental insurance if they don’t have an employer that provides those benefits.
5. Examine investment strategies
Ms. Viner tests the client’s investment knowledge, risk tolerance and new investing goals post-divorce and shows portfolio projections.
“We may have to reevaluate and make changes, but that’s not always the case,” she says.