In this TeleSeminar Justin Reckers addressed:
Hosted By: Dan Couvrette, CEO, Divorce Magazine
Guest Speaker: Justin Reckers, San Diego based Certified Financial Planner. Justin A. Reckers (CFP®, CDFA™, AIF®) is Managing Director of Pacific Divorce Management, www.pacdivorce.com, Director of Financial Planning at Pacific Wealth Management®, and a Member of the Board of Advisors for the Institute for Divorce Financial Analysts™.
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Well, I think that the financial decisions that are made during the course of divorce often make up the largest financial transaction of an individual's life. They also happen to be set amongst the most emotionally chaotic time that most people will ever experience in their lifetime.
It is very critical that people are able to make, what I would call, economically rational decisions during the course of their divorce. Knowing what the emotional ramifications are, as well as what the very long-term and more intermediate term financial ramifications are, allows them to take advantage of the opportunities they have and to really make a financial difference.
Most people probably haven't thought of divorce financial planning. Can you kind of explain what that process is or what is involved?
Yeah, I kind of define divorce financial planning as a combination of a few things. Those things include certified financial analysis, meaning forensic accounting, financial planning in the traditional sense, meaning having people budget and plan for the long-term, and decision coaching with the unique financial circumstances and intricacies that are involved in divorces.
Can you tell us a little bit about what a, I guess the acronym is CDFA is, and how can they help you as you're going through your divorce?
A certified divorce financial analyst, or CDFA, is a designation that is granted to individuals who have taken coursework and examinations that are meant to be educational, as well as test people's aptitude, for the specific financial intricacies of divorce, such as tax ramifications, division of retirement accounts and things of that nature. The CDFA designation is actually granted by the Institute for Divorce Financial Analysts, an organization I am a board member of. It's a great entity. They look for people who have a specific background in financial advisory or financial planning already and have the ability to work really closely, one-on-one, with parties. As I've said, this is one of the most difficult financial decision making circumstances a person will ever experience.
CDFAs generally will be certified financial planners or certified accountants. They really will start looking at those people to help build a complete data gathering process. You'll find that one of the most powerful things in the process of the divorce, especially when it comes to finance, is really the control of information, because knowledge is power, for want of a better term.
The CDFAs will often teach their clients a lot about money during the course of the proceedings. They'll help teach them about complicated things, like in California we have separate or community property, and in some states there is separate or marital property. Clients need to understand the difference between these things. They need to understand how personal property and other illiquid real property type assets might be divided in transferring titles and how you might offset those with other pieces of property. They need to understand the difference between things like defined contribution or defined benefit plans, which are simply two different kinds of retirement plans for most people, but they have very different ramifications and very different uses for the future. The CDFA will often help people understand complicated tax circumstances and complications or things like spousal or alimony and child support and putting things like esoteric tax planning ideas like alimony recapture and child contingency rules.
I think, most importantly, what a CDFA is going to do for an individual or a couple going through a divorce is help people understand the short and long-term impact of every single financial decision they're going to make during the course of their dissolution proceedings. They're going to help brainstorm strategies and creative ideas for how to separate assets and untangle the web of the marital estate, and then they're going to help them understand what the pros and cons are of different possible ways to do it. During the course it's going to be a one-on-one relationship most of the time, although there is also the opportunity for a CDFA to work in a neutral role, either in a collaborative divorce or a mediated setting, where they will work as an advisor to both parties. There'll be no alignment either way, but it works in a circumstance where a couple is trying to divorce on their own without the help of lawyers and they just need some financial advisory assistance to go through.
I think that the bottom line for what a CDFA does is to offer objective viewpoints during the emotional period that these people, individuals, are living through during their divorce, and help people make economically rational both short and long-term financial decisions. The CDFA is there to help people avoid common financial mistakes that are made in divorce and choose the best settlement options for themselves and for the long-term comfort, security and safety of their families.
What are illiquid assets?
In my practice I see a lot of people here in San Diego that have, they're involved in say the biotech industry where you have stock warrants or ownership interest in businesses that aren't making any money and therefore you cannot sell. So for things like that they're often very difficult to value and, well, how do you divide something if you don't even know how much it's worth.
So those are the kinds of things that individuals need very high level help to understand how you could potentially value it and, you know, also the risks and rewards of trying to do so. People need to be able to say yes, ten years from now if this is worth $10 million and I sold it for $1 million in my divorce, I can be okay with that. It's a difficult decision.
Does a CDFA look at or put together QDROs for people to determine what the value of pensions is?
CDFAs should be willing and qualified to take a look at QDROs, but not all will be willing to draft them. I'd say it would be the exception rather than the rule if you find a CDFA who drafts QDROs. Most of the time I, personally, will rely upon lawyers to draft the QDRO, as it is a legal document, but I most definitely review them with clients during the course of divorce as well as immediately afterwards if they're sent to me by their lawyer to review their settlement. That's another thing that's very common in my CDFA practice is lawyers will send their clients to me to review a pending settlement before it's actually signed.
That package will often have drafted Qualified Domestic Relations Orders which are used to divide retirement plan. There are a few things that you've got to look at and pay attention to in order to make sure they're done correctly and that they're not done in a way that's going to cost your client additional money.
Many people, as they're going through their divorce, rely on lawyers for legal information, but also rely on them for financial information to a certain extent. Can you explain where their role ends and your role begins, and how it's all connected together?
Most of the time, when I'm working as a CDFA, I'll be working with a party who also has a lawyer. How I work with them is in a couple of different sessions, either as an expert witness, where I would be brought in by the lawyer to testify on a specific issue related to the divorce in court or in a private trial, or I get brought in as a trial consultant by lawyers, often where they will pick up the phone immediately after they get a new case. I would say the reason why they pick up that phone to ask for my help as a trial consultant is that the good lawyers realise that there's a limit to what they know about money. They want someone who lives and breathes money, understands financial products, understands tax ramifications and understands how to do long-term planning to help their clients get good deals, as well as to make sure that the deal that they make is going to take care of them for the long-term.
To be honest with you, I've kind of got a little bit of an ego, and so sometimes I need to have that patted by going into court and being able to make my presence known. Working with lawyers is a very, very big piece of what I do and most of my clients, as I say, do have lawyers and I work one-on-one with them, as well as in kind of three-way meetings with their attorneys. We'll go to court and testify on their behalf, that kind of thing.
So there's not a really thin line as to where that line is drawn. I would just tell people to realise that the really good lawyers out there are going to recognise that people like me exist, and one of the first calls they make is going to be to somebody like me to help them make sure they've got their financial side of their case perfectly lined up by understanding risk, reward and cost benefit of making arguments on their clients' behalf.
Let's pretend for a moment that I'm a person who is considering getting a divorce. What do you think I should do first before I proceed with my divorce? Are there any recommendations that you would make to somebody who is just starting down that path?
I think the first thing is to understand that there are options for how you can proceed. Most people watch things on television and they think you've either got to go to court and fight it out or you've got to do it on your own. Before retaining an attorney, people need to understand their options, do homework, search around Google, and understand that things like collaborative divorce and mediation exist. There are ways that you can resolve your dispute outside of court in a more mutually respectful manner without resorting to fighting over things. Collaborative divorce, you will have lawyers; mediation you may not, you may just be working with a neutral facilitator.
Avoid, in this process choosing an option based upon the estimated cost, because no one can tell you what it's going to cost; it's 100% dependent upon the parties that are involved. You can arrange it in kind of a hierarchy of how cheap it's going to be to how expensive it's going to be based upon how complicated things are in a lot of circumstances, but nobody's going to be able to guarantee you.
Doing it yourself is by far the cheapest. Mediation would potentially be the second cheapest, but if it goes wrong and you aren't able to finish things that way it can get very expensive since you will ultimately have to go and litigate.
And then collaborative divorce and litigation, collaborative should be a little bit cheaper than litigation, but it is a fully represented process so it's going to still cost a sufficient amount of money. Another thing I'd say is that you've got to think about where the information is. As I mentioned earlier, information is power in divorce. If you worry that your spouse, your accountant or your financial advisor is not trustworthy, go and get as much information as you can from the beginning. Make files, gather up account statements, tax returns, pay stubs, all that kind of stuff. Remember the law of diminishing returns: you've always got to think about what it’s going to cost you to fight over something. If you're going to spend $5,000 fighting over something that's worth $1,000, the law of diminishing returns should tell you not to do it.
Do you have any suggestions for someone in the midst of a divorce who has already retained a lawyer or a mediator, or even if they're doing it on their own?
Absolutely. Avoid making decisions on a piecemeal basis; make financial decisions based upon the big picture. A lot of negotiators will try and divide and conquer and split things up into one issue here and one issue there. If you get into a negotiation that way and you understand the details, that's fine, but avoid making piecemeal agreements if you can, because it's got to be all about the big picture and the financial divisions here.
Number two, do not allow your former spouse to use financial data as a weapon against you. As I keep saying, information is power here. Some people will play hide the ball or just simply make it hard to get the information that you need in order to basically make you run up bills, or make your life more difficult. You need to understand that somebody like a Certified Divorce Financial Analyst can work well with your attorney to get the information that's needed to level the playing field.
Number three, budget, budget, budget. You'd be amazed how many people come into this process that didn’t have a budget while they were married and have no clue how to create one after. Oftentimes, people have to live on less money during and after their divorce than they had when they were married; it's just the way it works. You've got to split the initial marital standard of living up into two households; that means there's half the amount of money to go around, so budget, budget, budget, before, during and after.
What are some of the financial mistakes that you see people make as they're going through the divorce process?
I see a lot of people who fail to investigate their concerns. Ultimately, if you've got concerns about whether somebody's being upfront and honest about financial information, you owe it to yourself, your family, your lawyer and everybody involved to put it out there and say ‘I need this to be researched or else I will never be able to live with my agreement’. Because that's the problem; if you make an agreement without feeling like you have all the information, you might regret it in the future. I also see people that will end up being too generous for the sake of getting it done. People have feelings emotionally about how their divorce may have transpired; it might make them feel like they need to be generous, and that's fine, but if you're doing it for the sake of just getting it done and getting past this, then you're doing it for the wrong reasons. Almost everybody uses the word ‘fair’ to describe what they want from a financial settlement. What they need to understand is that their idea of fair is not the same as their spouse's idea of fair. A husband's idea of fair might include him getting his entire pension; and the wife's idea of fair might include her getting the house; that's the kind of the cliché. Now, from a financial perspective, that division is not often equal or equitable, which leads me directly to my next point: property division. Equality doesn't always mean equity, meaning that if you think you get 50% of an asset, that doesn't mean that it's an equitable distribution of funds. In some places, in some jurisdictions, a supported party (i.e. a person who hasn’t worked), might get a larger chunk of the assets because that's what they believe is equitable. Sometimes you just don't understand the tax ramifications or transaction costs, things like that, in a specific asset.
If you have a brokerage account that has large capital gains in it, as soon you sell the assets inside there it's going to create taxes. If you don't understand that, then you're going to end up getting the short end of the stick because you will have paid for that asset at 100% of its value. Another one of the cliché things that comes out all the time when I meet with clients is keeping a residence that you can't afford.
People for whatever reason, whether they've created memories, done renovations, etc., they've endowed themselves in the ownership of the home emotionally and financially to such a great extent that they simply can't imagine life without it. I call this the ‘endowment effect’. Part of my job as a CDFA is to show them what the other options are, to make sure that if it doesn't make financial sense for them to do something, then they shouldn’t do it and we'll find some other alternatives.
A lot of people come into a divorce process, if they're going to litigate it, believing that a judge will get it right after they hear their side of the story, meaning they're the one to listen to and the judge, as soon as they hear it, will make a decision that benefits them. The judge just doesn't have the ability to work that way. They have to hear both sides of the story and give equal weight to each party. And a lot of people feel ripped off by that process but that's one of my jobs too, is to help people understand what they should really be expecting from that process.
Is there any particular reason why a lawyer wouldn't suggest working with a CDFA, and if they don't what should the person do?
Well, I'd say there's probably only two reasons why they would not suggest it. Number one, they don't know what we really do. Over time more and more lawyers are beginning to understand what we do and using CDFAs in every case they operate in. The only other reason that I ever see people not hire CDFAs is because they're hiring a forensic accountant, so somebody who does nothing but backward-looking, also known as forensic evaluation of financial issues. Those types of accountants will not help people make financial decisions. They're only there to look backwards and offer up some degree of testimony to the court or to the lawyer.
Other than that, there's no good reason not to hire a CDFA. Everybody could benefit from one, whether it's just an hour sitting down to go over your agreement to see if it makes sense, or it's a complete engagement from beginning to end where they attend meetings and mediations with you, go to court with you, all that kind of stuff. Everybody can benefit from using a CDFA during their divorce.
Some estimate that somewhere between 75% and 80% of people in California are doing their own divorce. Should they also consult with a CDFA?
Absolutely. I will always recommend that people who are doing what's called ‘pro per’ or representing themselves in their divorces ultimately have a lawyer at least draw up their agreement and review it for them before they file it. But there are many people that are out there doing their divorce on their own, either because they believe they can't afford a $10,000 retainer for a lawyer, or because they think they don't need the help. Some people are able to actually resolve their differences amongst themselves and that would be obviously the ideal way to do it for everybody involved. But, for those people who don't hire a lawyer and do their divorce pro per, a perfect way for a CDFA to be involved with them is to help them build potential proposals for settlement, as well as understand what's being offered by their spouse in a settlement, understand what that means, and understand what the short and long-term ramifications of that settlement are.
Is there anything that a CDFA can do for a client after their divorce is final?
Absolutely. I find a lot of people kind of procrastinate after their divorces. They've gotten through the emotional and financial chaos of the divorce and they recognise there's a mountain of stuff they've got to do as part of their transition and long-term planning after they finish the agreement. This often leads them to procrastination.
That means that things like Qualified Domestic Relations Orders won't get done; a QDRO needs to be drafted and answered with the court, and that needs to be followed up by everybody involved to make sure that each party has their share of a retirement account. Titles need to be transferred to homes; that requires a lawyer most times. I see people who come two, three years after the divorce and still have their former spouse's name on the title of their house. Mortgages need to be refinanced, joint bank accounts, brokerage accounts, credit cards all need to be closed and new ones opened. They need to change beneficiary designations on life insurance policies, on retirement accounts. People need to go out and get their new health insurance in a lot of circumstances. Estate planning needs to be redone, people need new wills and new trusts, assuming they don't want their former spouse to inherit their assets anymore. They need to go out and redo those documents.
One of the most important things, I think, is for people to understand immediately after their divorce that they've got to sit down and go through their cash flow. Too many people come to me two or three years after and they've racked up $50,000 of credit card debt because they didn't understand the tax consequences of the support they were going to get. They didn't understand the bills that they were going to need to pay on their own, and they didn't understand how to manage their own financial circumstances because in the past it had been a joint effort.
A CDFA after a divorce can be that person on their team to help them make sure that they're dotting their I’s and crossing their T’s on all of those items that I mentioned and help them kind of transition into their post-divorce life with comfort, security and financial independence, which is the most important part of this.