25 April 2024

Divorce & Advisors’ Fiduciary Duty Of Loyalty

#
Share This Story

When a client couple divorces, their adviser relationship must change too. What was once a singular fiduciary duty of loyalty splits in two. "Success" in these situations requires the adviser to serve the best interests of the separated clients, a goal that is complicated by the collapse of the couple's shared vision for the future, which must be recast to address the individuals' needs.

About 40% to 50% of married couples in the U.S. divorce. While the overall rate of divorce has been edging down for decades, the rate has been going up for older couples.

According to the Pew Research Center, "gray divorce" — involving couples over 50 — now occurs at twice the rate it did in 1990. Given that the typical retail client is middle-aged or beyond, an adviser's odds of having to navigate this tricky and emotionally charged situation at some point in their career is high.

There are specialized training programs to help financial advisers better understand and serve this large market segment. For example, the Institute for Divorce Financial Analysts grants the Certified Divorce Financial Analyst, or CDFA, designation. The organization bills itself as the authority on divorce planning theory and application in North America, with more than 5,000 CDFA designees. That's a small fraction of the total adviser population.

The "right" advice to give divorcing clients depends upon the facts and circumstances of the situation. It takes sound decision-making processes and clear articulation of the reasons for the advice provided to meet fiduciary obligations. Faulty advice, or even the perception of it, can lead to accusations of negligence or malpractice in court or in disciplinary proceedings brought before professional organizations.

Many adviser mistakes on this topic are procedural, generally stemming from a lack of experience and expertise in working with divorcing clients. The fiduciary duty of care requires professional-grade competence.

Unfortunately, advisers may not know what they don't know when it comes to dealing with divorce; they act without adequate understanding and preparation.

Anonymous case histories provided on the CFP Board website are replete with stories about the types and consequences of procedural problems that can trip up advisers.

One example of how far astray an adviser might venture involves a financial planner who agreed to draft a property settlement at the request of a divorcing couple. He was censured by CFP Board and received a letter of warning by the state bar for the unauthorized practice of law.

Other cases run the gamut from improper disclosure of private information between the estranged parties to confusion over changed roles and responsibilities that results in a search for where to place the blame when things go awry. Whether it's through acts of commission or omission, advisers face compliance, reputational and business risks when they act imprudently.

The cardinal sin in delivering advice to divorcing couples is to favor the interests of one spouse over the other. That's a clear breach of the fiduciary duty of loyalty and one that invites rage and recourse by the disfavored party.

Recognizing this, some firms immediately assign separate advisers to the separated couple to avoid the risk of favoritism. Others allow conflicts but require them to be managed through rigid policies and procedures.

Stacy Francis has worked with hundreds of divorcing clients. She describes three key ways her firm, Francis Financial, navigates conflicts when providing advice to couples during and after divorce.

The firm will not work with either former spouse after a divorce unless consent is received from both parties.

If a couple was a financial planning client before the divorce, they can continue in the financial planning relationship during divorce proceedings; however, all communications will be with both parties, any emails received from either the ex-husband or ex-wife will receive a reply to both, withdrawals and changes require consent from both, and attorneys for the couple will be consulted as necessary.

Francis Financial will not undertake divorce planning for a couple that is receiving financial planning, nor will it provide advice on competing settlement proposals. (Divorce planning is offered by another department of the firm that's separate from financial planning services.)

Ms. Francis cautions that plunging ahead to provide advice to divorcing clients without special expertise and experience is unwise and unethical. She urges colleagues to do more than earn a designation; engage an experienced CDFA as a consultant to help with divorce cases and develop professional competence. Knowledge and preparation are critical for success.

Click here for the original article from Investment News.

Join Our Online Community
Join the Better Way To Retire community and get access to applications, relevant research, groups and blogs. Let us help you Retire Better™
FamilyWealth Social News
Follow Us