21 Jul Divorce: The benefits of working with a financial planner (and the potential risks if you don’t)
I read this report recently, stating that there is a shortage of financial planners available to help lawyers dealing with determining divorce settlements for their clients. I have to say I find it hard to understand why this should be the case, as we’re easy enough to find – there’s a whole database which can be found with a quick Google search. It seems most divorce lawyers aren’t working with financial planners who engage in comprehensive financial planning incorporating lifetime cashflow forecasting, which is a shame as it would assist greatly in helping those lawyers to negotiate meaningful settlements for their clients.
Sadly, with divorce cases, by the time someone seeks our help it can 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.
This kind of problem, is pretty easy to avoid, if lawyers and financial planners work together. I know that websites are available which contain simple calculators, such as this one from The Money Advice Service, and some lawyers offer a calculator for working out how much maintenance should be paid, but neither of these methods will be as robust as the lifetime cashflow forecast which a financial planner can provide. The amount of the settlement and / or maintenance might not ultimately change, but at least the ex-spouse is going into the future knowing what is possible and what isn’t.