30 Jan When should you engage a financial planner? Before it’s too late!
Generally, people first make contact with us due to a specific event which has a significant impact on their lives. Sadly, however, by the time someone seeks our help it can sometimes be too late.
A case in point was a divorcee who contacted us a couple of years ago. She had received a one-off settlement from her ex-husband of £25m, plus maintenance payments of £150,000 per annum until her two young children finished full time education.
On the face of it, that seems like a very generous settlement. Until, that is, you consider her stated requirements:
- Regular expenditure requirement of £850,000 pa
- Purchase home for her and her children – £9m, of which £6m would be funded by cash and the £3m balance by a mortgage (mortgage repayments to be in addition to the above regular expenditure)
- She did not want to eat into her capital
- She did not plan to work – wanting instead to provide stability for her children and be a stay at home mum, as she had always been
It doesn’t take a maths genius to see that her goals were pretty unrealistic. Net capital, after purchasing the house, of £19m was never going to produce an income stream of £700,000 (£850,000 – £150,000 maintenance payment) net of tax to fund regular expenditure, plus a further – say – £170,000 per annum to fund a 25 year repayment mortgage of £3m. That would have required a gross return of in the region of 7% pa.
She was going to struggle to meet the costs of her goals even if she had been prepared to eat into capital. She was only in her mid-30s so was looking at an extremely long time frame. Add the effects of inflation, and modest expenditure increases, into the equation and the position looked bleak.
What went wrong here? It’s hard to say. Clearly, the lifestyle she enjoyed pre her divorce was one she wanted to maintain, but equally clearly, the settlement she received was grossly insufficient to enable her to achieve that.
Might there have been a different outcome had she and her lawyer consulted a financial planner before the settlement was agreed? Again, hard to say – but at least doing so would have prepared her for the fact that she needed to drastically modify her goals to avoid running out of money, and that what she was expecting was completely unrealistic.
In the end, she did not become a client. Having laid out the reality of her financial situation to her, she was reluctant to explore modifying her goals. Undoubtedly the ‘reality check’ we provided came as a shock to her, and can’t have been pleasant, I’m sure. Hopefully, she did find a planner she could work with. She was definitely going to need one.