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Unlike buying a house, going to school or even death, divorce is not often something people broach with their financial advisors until the event is already taking place.
Yet, advisors have a critical role to play in helping clients prepare a plan when dealing with these cases. That’s because clients need to know what their finances look like today, the potential cost of the proceedings, and what kind of budget they will need to have to afford their lifestyle after the divorce.
“It’s also a very emotional time for most, so this can add an extra layer of stress,” says Angela Oddo, certified financial planner (CFP) with Fiducia Financial Solutions Inc. at Sun Life Financial Investment Services (Canada) Inc. in Regina.
“Divorce is so emotionally challenging, we all know that, so the first thing I ask is, ‘Are you okay?’ and do they need the name of a counsellor or someone they need to speak to.”
Ms. Oddo’s next advice to clients is to go for mediation and opt for an uncontested divorce rather than going through the courts because a contested divorce can escalate both the stress and financial hardship.
“If they can come to a proper agreement or something that works for that couple, I encourage them,” she says. “A contested divorce can have financial impacts on both spousal and property support, but the primary implication is the costly resolution process.”
Indeed, the legal fees surrounding divorce are a big part of the expense incurred throughout the process.
In a Canadian legal fees survey published in 2021, divorce fees charged by a lawyer for an uncontested case varied from a low of $1,000 to a high of almost $3,000 with an average of about $1,500 per case. However, the fees charged for a contested case vary from a low of about $6,500 to a high of $87,000 with an average of about $15,500 per case.
How to take account of all the assets
While no one wants to enter a relationship thinking it might end someday, it makes good financial sense for clients to know one another’s assets when entering a relationship for a variety of reasons, including in the event of a breakup, Ms. Oddo says.
“You want to have a detailed understanding of what are the assets and liabilities? What was brought in or built prior to the marriage? How about during the marriage?” she asks.
Having this clear picture of the client’s financial situation can help make things smoother in the event of a divorce.
“If someone’s actually going through the process of a divorce, then they need a plan on how to survive that family division with the least amount of pain, cost and, if possible, disruption,” Ms. Oddo says.
“No one really comes out as the winner from a financial perspective when you’re splitting up your assets.”
A client’s house is probably the financial asset that “is worth the most” and holds the most significance emotionally, which means it requires a clear budget to see whether it’s something the client can truly afford on their own “because sometimes they simply can’t,” says Wendy Olson-Brodeur, CFP at The Financial Divorce Specialist Inc. in Calgary, whose practice collaborates with both parties in a divorce.
“Clients are better served if they can get somebody to look at their financial picture and help them to see what it’s going to look like,” she says.
“Most of the time when we do budgets with people, they’re doing the work and they’re the ones that ultimately will go, ‘Oh, you know what, this doesn’t feel right. This doesn’t feel good. I need to think about this more.’”
While Ms. Olson-Brodeur has been working with divorcing couples for more than 15 years, she says there are definitely some areas of how divorce laws consider financial assets that were unknown to her when she started out, particularly around exemptions on inheritance. That’s why she says advisors who deal with divorcing clients should ensure they have a working knowledge of divorce law and how it pertains to certain assets.
“I usually use this example with my clients: if my mom passes and she leaves me $100,000. Then, I take it and I put it into a [guaranteed investment certificate (GIC)] in my name and that GIC has grown now from $100,000 to $150,000 – that’s $50,000 in growth,” she explains.
“Now I’m getting divorced. Typically, the law could allow me to take the $100,000 off the table and not share it, but we would have to negotiate the $50,000 because it’s the growth on the original investment.”
Be ‘practical’ in the situation
When a client is going through a divorce it’s all about the paperwork, says Jillian Bryan, senior portfolio manager and senior investment advisor, TD Wealth Private Investment Advice in Vancouver.
“I tell clients first to gather their documentation,” she says. These include bank and investment statements, mortgage details, credit card statements, pay stubs for the past year, three years of income tax returns, and a list of assets and debt brought into the marriage and those accumulated since.”
She also advises them to change all of their passwords and “start photocopying madly” if they think the divorce might turn messy.
This is also the time for clients to update their will and come up with a budget that takes into account those household expenses that may have been split between two incomes but are likely now being carried by one.
While Ms. Bryan also advocates for amicable and uncontested divorces, she says it’s always best to be prepared for the messier side and advise clients about how to avoid losing out from a financial perspective during the process.
“I don’t think a lot of people think of the practicality of the situation until they’re almost in it – which can be a problem – so it’s important to talk to the experts,” she says.
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