Using a Certified Divorce Financial Analyst

After reading my page about the various professionals who want to help people going through divorce, Financial Advisor Leslie Margolies challenged me on some of my statements. At my request, she wrote this page about using a Certified Divorce Financial Analysts and has generously agreed for me to share it with you.


I can appreciate Lee’s point of view. It’s true that sometimes much of the marital estate may be eaten up by legal expenses and expert witness fees when the divorce proceedings becomes adversarial.  So if the parties can work things out through collaborative divorce, certainly everyone would be much better off.  But the reality is that many times the issues must and will be hammered out by the adversarial legal process because the parties cannot agree on one or more points important to them. In those cases, I believe it is in the client’s best interests if the attorney consults with expert witnesses necessary to prove their case or produce a better outcome. One such important expert witness is a Certified Divorce Financial Analyst (CDFA).  I cannot agree with the statement that the “majority of us who are reasonably savvy can’t justify paying a financial planner to tell us what we probably already know”.  In general, many of us do need financial planners and in the divorce process there are a multitude of reasons to use one.  In most cases, the attorney does not have the financial knowledge or expertise to analyze the financial issues presented. The services a CDFA performs are different than those of a forensic accountant.  The forensic accountant can prepare a net worth statement, can perhaps identify some hidden assets by looking at the tax returns and analyze the tax implications of keeping or selling certain marital assets.  A CDFA can do those things and more.  The CDFA can additionally analyze different retirement and pension plans, perform a lifestyle analysis to create a spending plan for your future independent life post divorce, as well as analyze the long term effects of different settlement proposals.  Some property settlement agreements may seem equitable at first glance, but further analysis reveals that over the long term one party will be in a more advantageous position than the other.  And in cases where the dependent spouse has no one to provide financial advice, it is comforting to have a CDFA to answer the myriad of questions which arise around financial issues.

As for the rest of us, who are not involved in an adversarial divorce, I would argue that most people need the help of a financial planner and financial advisor to help us reach our most important life goals.  Here are the reasons why:

For one thing, not everyone needs to save and invest at the same rate of approximately 10%.  It depends upon when you are starting to actually save and invest at a diligent and consistent pace and what your short-termintermediate and long-term goals happen to be.  Financial planning is more complicated than most people realize.   For example, multiple goals of vacations, cars, college education for children of varying ages and retirement  can mean that perhaps savings and investing should increase and decrease during certain periods (usually due to college education schedules and other short and intermediate term goals).  And retirement means so many different things to so many people.  Some choose to travel and live a very active lifestyle (which requires more savings) and others may choose a more sedate lifestyle during retirement.  If you have some interesting plans for your retirement and you didn’t start any real financial planning until after the age of 40 years old, then a 10% savings rate won’t cut it.  Also to account for taxes and inflation (which varies depending upon the state you live in) will vary the amounts needed.

Secondly, some people don’t have the discipline to do the planning even if they could decipher all the information on the Internet and in books.   You could represent yourself in a legal matter as well, since all the information is available on the Internet and in books, but that doesn’t mean you would WANT to do it or do it as  competently as someone who has received the education and training and certification. There are nuances that the layperson will not understand such as  taking advantage of all possible tax-saving strategies available in terms of the types of accounts which can be used for a variety of different situations and tax loss swaps, etc. And even if someone has the discipline to do the actual planning, many others do not have discipline to put it into action— financial advisors often have a coaching role in the lives of their clients.

Third, most financial planners these days are not just making plans–they are also investing the clients money–so the consumer is getting two services for the price of one .  Maybe 10 or 15 years ago you might have one person who identified himself as a “financial planner” who would charge you a flat fee to do a “plan” and another person who identified himself as a stock broker who would invest your money.  Now, since securities regulations have changed and laws that have been on the books for years have been reinterpreted that’s all changed (for the better from the consumer perspective).  Under the Investment Advisors Act of 1940, the financial advisor (as he or she is now called) has a fiduciary duty to the clients, so the dual roles have merged into one person.  The traditional stock broker is a disappearing breed.  The only ones left are from the old school.  And the brokerage firm they work for may call them “financial advisors” now but we call them “traders” or transaction-oriented because they still walk and talk like an old-fashioned stock broker.

Most financial advisors from the “new school” operate a fee-based business which means they charge clients an annual fee based upon a percentage of assets they manage (usually 1% – 2%).  The more money they make for the client the more money they make for themselves so there is no conflict of interest.  The client can feel confident that a “buy” or a “sell” is in the client’s best interests and not just to make a commission for the financial advisor.  Most financial advisors who have a fee-based practice put their clients into “managed money”.  That means professional portfolio managers are managing the client’s money and the financial advisor is acting as captain of the financial ship charting their  course.  Professional portfolio managers may mean separately managed accounts with institutional grade portfolio managers similar to those who manage pension funds.  Or if the client’s assets are under $400,000, the advisor may recommend mutual funds to keep the portfolio adequately diversified (unless the client’s tax situation requires them to hold individual stocks so that they can take advantageously designed tax losses).

Most good financial advisors who have a fee-based business will invest the client’s money far better than they could invest it themselves and thus the annual fee will pay for itself. For one thing, the financial advisor is more likely to be choosing a more disciplined and objective strategy then the client.  The advisor will watch the portfolio managers and track their performance.  Moreover, most clients react emotionally to the markets and make decisions which put their asset allocation out of whack.  That’s why so many people lost so much money when the tech bubble burst–because they did not have a disciplined asset allocation strategy.  If they had, then they would not have had so much money in tech!  If their portfolio was adequately diversified, then the losses would have been more bearable (and as some stocks started to come back, the total losses calculated would have been minimal).

Moreover, I believe that those financial advisors who choose a tactical strategy and actively manage clients portfolios are going to do even better.  By tactical, I mean taking advantage of what is going on in the marketplace to make short-term adjustments to the asset allocation in order to make some short-term gains for our clients.  And by active management I mean watching the markets and monitoring the performance of portfolio managers and making adjustments to the asset allocation more often then during one’s annual portfolio review.  Just to give you an example, our team has one advisor whose job it is to screen portfolio managers and vigorously track performance data.  During 2006, the rate of return on client portfolios exceeded the market indices.  When you have returns like that, then I think its worth it to pay the 1% that you paid on those gains.  That’s when clients are thankful they have financial advisors.  Even more important than doing well during a bull market, however, is how your portfolio performs during a bear market.  If your portfolio is still making progress during a bear market when all your buddies are losing money, that’s when you will be extremely grateful for professional guidance.  And during each annual portfolio review, when financial advisors are able to show their clients statistically(not merely based upon a hunch) how they are still on track to meet all their goals every year (given all the inflation and tax and bear market variables the computer software takes into consideration), no matter what kind of economic environment there happens to be at the time, that kind of peace of mind is priceless.


Lee’s note: You can find out more about Leslie if you want to.