Advisers and planners will help clients navigate some big milestones as they guide them through the various life stages.
From helping them onto the property ladder and getting their kids through education to dealing with the financial complexities of bereavement and long-term care, advisers can be by a client’s side through thick and thin.
Many advisers will also have worked with clients going through divorce. Those that haven’t done so already may well do at some point in future, with clear indications in recent months of the strain that the Covid-19 pandemic has placed on marriages.
A rise in divorce cases
The number of divorce cases started in the family courts increased by 7% and 14% in the first and second quarters of 2021 respectively, compared with the previous year.
It was reported in May this year that law firms had seen a 95% increase in divorce enquiries in the first three months of 2021, with financial pressures given as the main reason for the split in a fifth of those cases.
What it means
This is no doubt a trend that some advisers will have noticed. If clients haven’t raised the issue yet, there’s a chance that it may come up sooner or later, even if it’s just on an exploratory basis.
Not everyone will have the knowledge to properly deal with divorce matters (it is a specialist area of advice after all), so the first thing you might want to consider is referring the client to an adviser with expertise in the area.
Advisers with experience of helping clients with divorce will know the steps to take and the pitfalls to avoid. And there is a lot to know and understand here – it’s a challenging area, but also one in which clients value and appreciate calm, expert guidance.
That’s because divorce is a multi-layered and often complex process. For starters, where each of the partners in a marriage is a client the adviser should probably decide who to work for, given the obvious potential for conflicts of interest in the event of trying to work with both of them.
From the beginning there’s emotional anguish that tends to accompany divorce, especially where there are young children involved. There may also be the complication of the divorce being an acrimonious and bitter one.
It’s an issue that can be emotionally sensitive and which will often involve temporary or longer-term client vulnerability. In many cases, there’s little point in the adviser moving onto the practicalities until the client is ready in an emotional sense.
Where that’s the case, the best course of action for advisers is to ensure that the client has somewhere to go for emotional support before you begin grappling with the financial aspects of the divorce. That might be in the form of therapy/counselling, a divorce coach, informal support such as friends, charities such as Mind and Samaritans, or a combination of different outlets.
Starting the process
So, there’s plenty to get through before you even begin to consider practical issues such as property, pensions and other financial assets.
Most clients dealing with divorce will turn to a solicitor as well as their financial adviser, and will likely have taken legal advice before addressing the financial implications. But financial advisers and planners have a vital role to play in helping clients with divorce settlements; the earlier they are involved, the bigger the impact they can have.
While the solicitor gets the ball rolling on the legal process of getting divorced, the adviser addresses both the short- and long-term financial implications of what may well be a life-changing event for their client.
A client who is emotionally stable and able to begin dealing with the practicalities can be started off with a fact find. When you’re dealing with divorce and you’re in England or Wales this will likely involve gathering the relevant financial information for the Form E document that lawyers use (there’s no Form E requirement in Scotland).
This is the somewhat daunting questionnaire-style form on which the parties involved set out the details of their finances and provide the supporting documentation. It covers property, bank accounts, business interests, incomes, liabilities and pension and investment assets, among other financial disclosures that can be time consuming to provide.
Advisers can play a key role in helping clients complete this without too much stress. They can also point out the pitfalls to avoid and provide the details that make the difference, especially when it comes to wading through the various pension arrangements.
For instance, when it comes to getting pension and investment valuations, providers need to be told that the figures are required specifically for the purposes of divorce documentation.
Clients may also be unaware that if they withhold details of assets held only in their name (such as a pension) they potentially face a court order or even risk a fine or prison sentence for contempt of court.
Making sense of it
It may have become clear already that completing Form E and other aspects of the financial settlement would involve some detailed cashflow planning. After all, a cashflow model is essentially a snapshot of the client’s financial situation, showing liabilities, income assets and other details that need to be clarified in the divorce documentation.
In fact, good cashflow planning might even help prevent divorce in the first place, particularly where finances are the driving factor. By providing clarity over their finances and helping them make informed decisions, cashflow planning can actually take some of the money stress out of relationships.
It could also provide clarity for a couple who want to separate but feel unsure if they can afford to.
In reality, advisers will generally be working on divorce finances with clients who have made the decision and started the legal process.
It will often be the case that several different cashflow plans need doing, with models created at three stages in particular.
Keeping it present
The first stage is getting a sense of how much the client will need to live on and what their assets are. This is before any offer or settlement has been made, with the aim of setting out the state of play and the main objective of making sure all needs will be met. However, it is also important that the client realises that this is not guaranteed, and it depends on the assets and income available.
Clients will often have been operating on guesswork until now, without a full picture of their situation or an understanding of where responsibility lies within the joint finances. The longer that financial assets and responsibility have been shared, the harder it can be to envisage a settlement.
Advisers using modern cashflow planning software can build a visual model showing the income that might be needed in future, accounting for spending and expected costs, as well as factors such as inflation and interest rates.
That provides a basis on which the client can take the next steps in the divorce process. It can also help the client work out what their priorities and objectives are when it comes to the proposed settlement.
The second point at which to run a cashflow model is when the settlement offer is made, to provide more certainty. This may well involve referring to the Duxbury Tables. This is the calculation used to work out an appropriate lump sum for a financially dependent party (the former spouse) after divorce, and the instalments through which the money can be taken for the rest of the spouse’s life. The mechanism is based on a range of assumptions around factors such as life expectancy and inflation rates. At this point it can help test how the proposed settlement would play out in reality and where the possible shortfalls or difficulties might arise.
Setting out an updated scenario at the offer stage ensures that the model takes account of any new information or changes, effectively adding colour to the picture in the previous model. It also means the client can move forward with the settlement with a degree of confidence about the outcomes they can expect or, indeed, propose and alternative settlement.
Finally, it’s worth running cashflow plans again – and reviewing them regularly – once the deal has been agreed and you have a clear view of how the assets are being distributed. While the previous models have provided a certain view of how the client’s post-divorce finances will look, it’s essential to update them to reflect the reality of the agreement and to identify any actions the client needs to take.
For example, if the settlement includes a large lump sum, cashflow modelling can help work out how to use those assets tax-efficiently and in line with the client’s wider financial objectives.
Bridging the gap
Once the cashflow models have been run and the divorce settlement has been agreed, the next steps will usually include investment and pension planning.
It might be possible to go straight from the factfind stage of the process to the regulated-advice part. But without the detailed and updated pictures provided by cashflow modelling, it would be difficult to make informed decisions.
In other words, cashflow planning is essential when working with clients going through divorce. It can be a challenging subject to deal with, but the insight provided by cashflow models provides a vital basis for the planning and advice offered through the divorce process and beyond.