How can our advisors help our clients make decisions that will save them time, money, and heartache?
by Billy C. Peterson CFP® CDFA™ with contributions from retired judge and mediator The Honorable Jon Memmott
Once the decision has been made to pursue a divorce, many people fall back on their primitive instincts of fight or flight – the automatic impulse brought on by our subconscious mind to protect us at all cost. It is both healthy and costly to allow these emotions to come out. On the one hand, we should express our feelings to avoid inner rage and anger. On the other hand, suppressing our feelings can cause much pain down the road. Many interesting and alarming studies show a correlation between repressed emotions and various physical symptoms such as chronic pain, illnesses, migraine headaches, acid reflux, fatigue, and depression. Dr. John Sarno of the Rusk Institute at New York University was a pioneer in the psychological concept known as Tension Myositis Syndrome (TMS) whereby our unconscious mind produces physical pain, like chronic back pain or neck pain, to divert our conscious mind from the real issue – bottled up emotions. A close friend with a good listening ear or therapist skilled in divorce issues to talk to can be extremely helpful in avoiding these long-term complications. However, allowing these emotions to take over our financial decisions during a divorce can lead to unfavorable consequences – especially over the long-term.
During a divorce, people are at their most vulnerable both emotionally and financially. Most family law planners have found themselves in the middle of emotional dramas with clients who want to carry on about their inner feelings of hate, sadness, anger, and anxiety. Lawyers are forced to play the role of a therapist. Unfortunately, many family law attorneys feed their client’s desire to drag things out. According to The Honorable Jon Memmott, a retired judge and current family law mediator who has witnessed thousands of cases in and out of the courtroom regarding attorneys who drag cases out, “they project the bulldog mentality. You deserve this or that and I’ll get it for you.” In the end, this approach seldom leads to a successful resolution for the parties involved. Family law attorneys are compensated for their time – a retainer up front, plus hourly billing until the case is closed. The more time spent, the more money to be billed. Oftentimes, the bill is settled for a fraction of the total because parties simply cannot pay. Getting some payment is better than no payment at all, as might be the case in the event of a bankruptcy. If family law planners strive to efficiently settle a divorce case and provide good sound advice as to what resolution provides a client with the most desirable long-term outcome, everybody wins. The client is happy the divorce settled within his/her desired budget and even happier that his/her lawyer and team of divorce planning experts took the time to understand his/her long-term needs and charted the best course of action to take. The lawyer and team of divorce planning experts are happy to have been of such value and, as luck would have it, karma steps in; the happy client refers a cousin to the lawyer and the cycle continues.
Road blocks to the resolution
When the Peterson Wealth Services (PWS) team begins a divorce plan, the first thing we do is obtain a list of client priorities. We want to know the current mindset of both parties. This allows us to better understand if the client is dealing with his/her situation rationally or if we need to take on more of a psychological role. It is imperative that each party assess their financial positon realistically. There are several issues that we believe clients should address and consider to improve their chances for a successful resolution:
- Prepare a complete and accurate financial affidavit
- Get current values for all assets and understand how each should be valued (i.e., pensions, business, home)
- Realize that the family home may not be a desirable asset to retain
- Create a budget for all expenses and find places to cut back by 20-30%
- Understand the importance of retirement assets, especially pensions
- Engage with us as a CDFA partner along with the attorney to consider both short and long term effects of various settlement proposals
- Explore alternatives to litigation, i.e. mediation or collaborative divorce
It’s important for people going through divorce to think financially, not emotionally. While anger and sadness eventually fade, it is typically too late by then to re-negotiate an unfavorable divorce settlement.
Most clients and attorneys do not know, for example, that they can negotiate for the cash value in a life insurance policy without losing the death benefit; the spouse’s insurance death benefit is probably strongly desired at the on-set! But is the death of a spouse really necessary for financial survival? Perhaps only for peace of mind. Another area posing lots of confusion revolves around spousal and child support. What mix of each provides the highest after-tax benefit to each party? What terms should be set and how can those terms be structured to avoid alimony recapture? Many clients sacrifice future well-being for short-term satisfaction without even knowing. To really advocate for your clients, look not only at today’s value, but also consider the value in the future. Involving a Certified Divorce Financial Analyst (CDFA) in a divorce case from the beginning, aids in gathering, organizing, and presenting the information to make resolutions easier to reach. CDFAs are trained to evaluate the impact various resolutions may have on long-term outcomes.
Getting on the same page
In my experience, mediation and collaborative divorce can be smart approaches to a divorce settlement. Mediation provides representation for each side where both parties can negotiate a resolution, while considering all the facts with their respective professional teams. Collaborative divorce allows for one professional team to represent each party equitably. In either case, the professional teams and parties involved benefit from being educated on all client circumstances and remaining realistic, logical, and unemotional throughout the process.
The Honorable Jon Memmott had this to say about divorce resolution. Rarely as a judge did I see both parties walk out with a smile. However, as a mediator I see approximately 80% of cases resolved with good results.” When asked about the primary reasons divorce cases end up in court, Memmott said, “by far the biggest reason is unrealistic expectations from the clients. And oftentimes those expectations are brought on by the attorney. Sometimes attorneys take on a personal agenda in these cases and I ask myself, am I officiating between the attorneys or between their clients? Oftentimes even very successful people lack the financial skills or basic understanding to manage their financial affairs. Having recently worked a case with a CDFA planner involved, I appreciated the level of expertise and how well the data was presented. I felt the CDFA’s involvement in that case made my job as a mediator easier, provided the attorneys with more clarity, and delivered a better outcome for all parties. Of the couple thousand mediations I have been involved with, I would rank this meditation up near the top from a standpoint of data presentation and future outcome planning”.
Divorce mediation has two distinct parts: Property division and child custody. With regard to property, getting a value that is agreeable to both parties can be very difficult, especially for small businesses. Appraised values can vary dramatically. A judge can make the decision, but the big drawback to allowing a judge to make that call is that he/she can only sit and observe. A judge cannot ask questions to gain better insight. A judge may not be provided the input necessary to make an informed decision. On the contrary, a mediator can ask the important and necessary questions, allowing them to better put things into context and help parties negotiate to their needs and wants. I believe it is best if all parties can agree to an independent party or mediator for valuing assets. Ethical standards require fair and non-partial valuations.
Regarding children, there are basic questions like, who gets the children and what are the legal custody arrangements? During this negotiation, it is imperative to understand the long-term consequences to the children. They did not ask for this situation, but now find themselves dealing with the wreckage. They want and need stability as well as peace through this uncomfortable process. It’s quite hard on children when their parents want to engage in class warfare and drag out the process for months or even years. This is simply another reason why mediation is preferable to the litigation process.
Tools that are helpful
Memmott recommends a book published by The Arbinger Institute titled, ‘The Anatomy of Peace, Resolving the Heart of Conflict’ as a great tool for any divorcing client. Memmott believes more people should develop the attitude that mediation is the resolution instead of going to litigation. Courts are not the resolvers, they are simply the last stop on the road of serious conflict. Those with the unfortunate mindset that they will win in court are quite often disappointed with the results.
To help develop a realistic resolution, both parties should propose a settlement; one in which they are attempting to meet their own priorities for asset division, cash flow, and the stability of their children (if applicable), while at the same time remaining genuine. The PWS team asks clients to take a step back and examine the proposal as if they are viewing the situation from a 3rd party perspective of someone they had never met. Would they feel their proposal was honest, fair, and justifiable? This approach saves time once the real negotiations begin. In addition, it is critical to not breach the other parties’ trust during these negotiations. If they feel you are trying to pull a fast one, the boxing gloves come off quickly and resolution is made difficult.
In preparing a proposal, a CDFA can be a valuable asset. With the aid of specialized analytical software, divorce proposals can be evaluated to assess their benefits and long-term impact. Multiple ‘what-if’ analyses can be created to compare various combinations of asset splits and income payments. Taxes can be measured to determine net cash flow effects of spousal support vs. child support and what combination makes the most sense for the parties involved and their priorities. Further, complicated proposals involving business interests, present value of future pension payouts and asset buyouts can be modeled and clearly illustrated in a visual and graphic display.
Divorce is never easy and resolutions are rarely perfect, but working to create agreements that are equitable and serve to avoid critical financial mistakes can be accomplished if these ideas are followed. Having a network of skilled professionals should be a priority for every family law practitioner. Therapists, forensic accountants, mediators, appraisers, business valuation experts, and financial planners versed in divorce issues can provide critical expertise in any given divorce case. Couples considering divorce can benefit by using the services of a planner who possesses the tools and credentials to help them understand every possible scenario. The hope is that clients also benefit in their post-divorce life because of careful considerations and informed decisions. Mediators and attorneys who collaborate with other professionals have the potential for more satisfied clients, more equitable agreements, and a uniquely qualified practice.
About the Author
Billy C. Peterson is the President and Owner of Peterson Wealth Services Inc., an independent firm with advisors providing holistic wealth management in South Ogden, Utah.
He has worked in the wealth management industry for almost 20 years beginning in 1996 with PaineWebber in Long Beach, CA. Prior to becoming a financial planner, Billy was a professional jockey and led the country in purses earned in 1995. He obtained his CFP® in 2004 and his CDFA in 2011. The professionals at his firm put financial planning at the center of all client engagements whether that might mean retirement planning, estate planning, or divorce planning.
He started a foundation in 2010 called Livastride – a suicide awareness non-profit serving to help youth become more engaged in their communities, more financially educated, and motivated to live life to the fullest.
Billy lives in Morgan with his wife and five kids. When Billy is not in the office, he enjoys trail running, hunting, fly fishing, coaching, and racing horses.
Contact information: email@example.com or 801-475-4002.
Peterson Wealth Services
1523 East Skyline Drive – Suite B.1
South Ogden, UT 84405
Raymond James is not affiliated with and does not endorse the opinions or services of Jon Memmott.
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The experiences described here may not be representative of any future experience of our clients. Past performance is not indicative of future results. Raymond James has not verified and does not endorse nor guarantee that the foregoing information is accurate or complete. Information should not be considered a recommendation of the advisor’s services or abilities, or indicate a favorable client experience. Individual results will vary. While we are familiar with the tax provisions of the issues presented herein, as Raymond James financial advisors, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Any opinions are those of Billy Peterson and not necessarily those of Raymond James.