The Ethical Dilemmas of Your Clients


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The Ethical Dilemmas of Your Clients' Divorce
(Apr 07, 04:37 AM)
News Archive :: Consulting :: Torn: The Ethical Dilemmas of Your Clients' Divorce
By Rattiner, Jeffrey H
You consider them friends. You like them very much. Now, choose sides... or can you?
More frequently than we care to consider, planners run into situations in which they have worked with a married couple for many years, have become personal friends with them, and find themselves in a dilemma, now that their clients are splitting up. As a financial advisor and trusted professional, what do you do? Whom do you help? Do you do anything at all? What ethical and confidentiality issues arise? This article will focus on the dilemmas that planners face when their clients’ divorce and the ways in which they handle divorcing clients professionally.
Among the advisors we interviewed, some have set parameters for just such a development, while others analyze it on a case-by-case basis. Some say they cannot work with either party, while others say they can work with only one spouse, while still others state that they can work with both.
"Representing both parties in a divorce is a conflict of interest," contends William B. Burns, Jr., CFP, CLU, ChFC, REBC, of Burns Matteson Capital Management in Corning, New York. "I could not work with either one. I couldn't sleep at night knowing I was taking sides, since I like them both."
Fadi Baradihi, CFP, CDFA, ChFC, CLU, echoes that sentiment. As president of the Institute of Divorce Financial Analysts (IDFA) in Southfield, Michigan, Baradihi says members, who earn the designation of Certified Divorce Financial Analyst(TM) (CDFA), may represent one party after the divorce if approached by one of the spouses. But a CDFA should not work with either party during the divorce if both the husband and wife are clients. Baradihi states that since everything is shared among both parties, representing one side during the divorce would be a conflict of interest.
Not everyone shares that opinion, however. Mark McGaunn, CPA/ PFS, CFP, of MJM Financial Advisors LLC in Acton, Massachusetts, concedes that he's not sure if you can serve either spouse effectively. "It's tough to be fair," he says. "However, if both clients are okay with me working with either one of them, I could conceivably serve one of the spouses. But it must be a special situation. I analyze it on a case-by-case basis, not as a blanket policy."
Susan Miller, CPA, CFP, CDFA, of Aurora Financial Advisors LLC in Wellesley, Massachusetts, will work with one or both parties, but only after having a candid conversation with both of them and requiring them to sign off to that effect. "If both the husband and the wife agree to my working with either one of them, then I would continue that type of relationship with the one spouse. I have a moral obligation when working with both clients." On the other hand, says Miller, "If one of them was unhappy that I was working with the other after the divorce, I would resign the engagement."
Steve Silver, CFP, CDFA, CLU, of Wealth Strategies Group in Cordova, Tennessee, has a different take on that situation. Says Silver, "Not all soon-to-be exspouses need to sign off on a working relationship. Even if one spouse was uncomfortable with it, I would still work with the other spouse. Trust is most important. There is a fiduciary relationship with the client. I follow the CFP Board's Code of Ethics and Professional Responsibility. As long as I am representing the best interests of the client, I can sleep at night. But ultimately, the decision rests with the client. Once they are divorced, I keep each spouse's issues extremely confidential to avoid any potential conflict of interest."
Defining Conflicts of Interest
Those we interviewed define conflict of interest as the perception of working with and favoring one spouse over the other. Where the conflict of interest issue fades for advisors depends on whether both parties thoroughly understand the issues in advance of entering the relationship.
Jamie S. Lapin, CFP, CDFA, of Risk Management Group Inc. in Rockville, Maryland, whose practice consists mainly of divorced clients, will bypass the conflictof-interest issue and work with both or either one individually if a contract is signed. Says Lapin, "I will represent both the husband and wife together or individually if both sign a contract knowing full well that I am representing both of them during the divorce process. If both sign on, then my job is to walk a fine line and be neutral in the process."
If only one spouse signs the contract, Lapin will work as an advocate for that spouse. When asked about the potential conflict of interest, Lapin's response was swift: "There is no conflict of interest in that setting as long as both parties understand up front. Instead there is a clear representation of interests."
If the divorce issue is presented to the planner by one of the spouses, the planner's response may be different. Advisors may tend to dismiss the conversation with the client for fear of being misinterpreted or favoring one party over the other. "If one spouse comes to me stating that he or she is contemplating divorce, that's the end of the conversation," says Sheila Miller, CFP, of Outlook Financial Services of Anchorage, Alaska. "I tell that spouse that I will only speak to both of them together."
Richard Salmen, CFP, CFA, EA, of GTrust in Overland Park, Kansas, takes it one step further. He adds a conflict-of-interests clause in his engagement contract stating that in the event of a divorce, he must speak with the husband and wife together.
What happens in the case where the husband or wife started a financial planning relationship with the planner before they married? Some advisors say that if hired by one spouse, their allegiance is to that spouse only, while if both hire the planner, the playing field is different.
"If the husband who is already a client finds himself in a soon- to-be-divorced situation and I do not know the soon-to-be exspouse, I would act as an advocate for the husband," states Salmen. He adds, "If both were my clients before they married, however, I would have no issues keeping both as separate clients. But if the husband was my original client and both worked together with me once they became married, that changes everything. My allegiance would be to the both of them."
Avoiding Conflict-of-interest Perceptions
So if conflict of interest is an issue, how can you best serve your clients at that point?
"I encourage them to interview other financial planners during the process," says William Burns. "I give them names of other planners in town and I continue to manage their assets only for the short term until they have found that new relationship with a financial planner. I find it a conflict of interest to represent both."
Sheila Miller concurs. "If the couple wants to have planning done or be presented with recommendations, they have to go to another planner because it's a conflict of interest to work with them simultaneously. I will not represent one spouse or the other independently. Because I am contracted with both of them, I can't represent either party."
To illustrate the difficulty of trying to continue working with both parties, Sheila Miller cites a situation where a planner was representing during the divorce process each of the spouses, whom he'd had as a client couple before they decided to divorce. The planner was trying to get both sides to settle by acting as a mediator and he charged each side a retainer. But in the process, the planner overlooked a $200,000 present value defined-benefit plan that the husband had. The wife eventually came to Miller, claiming that the division of assets wasn't being done fairly. "An ethical dilemma was posed here as to whether the planner knew about the defined-benefit plan in advance," says Miller. "And if he didn't know, then how competent was the planner to begin with?" As a result, the wife got out of the planner's retainer relationship and hired Miller to finish the process.
If you do work with the clients, even for a short time, confidentiality is key. Says Diane Willis, CFP, CDFA, of Wilshire Financial in Charlotte, North Carolina, "The advisor needs to be really careful about keeping their clients' records completely separate from one another to avoid any confidentiality issue."
What about the possibility that one of your clients will want to work with you again after the divorce becomes final? Tread cautiously here, warn some of the planners. Sheila Miller, for example, typically doesn't work with either client after a divorce. "Many clients don't want anything to do with the advisors, attorneys, or exspouse after a divorce," says Miller.
But with the possibility in mind that one of them may want to return, Miller is careful to never even broach the subject of post- divorce work during the divorce process because of the inherent conflict of interest. "When someone is going through a divorce, that's not a good time to think about a long-term relationship," Miller says. "If I get a call after the divorce to work with that spouse, I may consider the issue. But if any planner thinks during the divorce process that he or she would work with one of the spouses after the divorce, it could hinder or dampen what the planner may say. You need to separate yourself."
Fadi Baradihi cautions that planners shouldn't "have a conversation with a client about what will happen to the client after divorce. There are liability issues, plus the client really doesn't know what situation they will be in. It will also disqualify you as an expert witness in testimony."
Deciding Whether to Work with Clients When the Big 'D' Is Announced
If the planner is sitting in the room and the client blurts out that they are getting divorced, how should planners continue the working relationship for the time being, knowing they may, or will, be out of the picture in the near future? In this situation, planners have undertaken the initiative that they have an ethical and fiduciary obligation to prepare each party for the upcoming divorce while both are still clients. In this area, planners generally work in collaborative divorce, others in mediation, and still others in an all-out neutral approach.
"I set up a decision tree before I enter the process," says Sheila Miller. "First I ask myself, am I going to be neutral or act as an advocate? If neutral, am I going to be a neutral expert or a mediator? If I make a decision to act as an expert, attorneys for each side must become involved as well. As a planner, this is what you need to do to be okay. If I am going to be an advocate, my role is to represent only one party. Once I get through the decision tree, then I don't have any conflict of interest issues since I know what my role is. It has been defined. Finally, if the couple is an ongoing client, I eliminate the advocate side of the decision tree," says Miller.
Sheila Miller remains neutral and assists both clients in analyzing the financial information only. She does this by pointing out the advantages and disadvantages on the issues. "I won't make any recommendations unless both parties agree that that is my role," Miller says. "And I would do that only if both parties have attorneys present."
Richard Salmen provides them with the pros and cons of keeping assets and the tax consequences of those decisions. "I have them each take it to their attorneys, who take it from there. I may or may not remain in the process at that point. But it only works if both spouses remain civil to each other."
Steve Silver says his role is to educate the clients as to what their options are. In his practice, the women of the divorcing couples have been the least financially educated in the relationship and he makes sure that they get up to speed before any decisions are finalized. Silver brings in a social worker to get involved in the discussions. The social worker goes through a thorough questionnaire and gets into the meat of what makes that person arrive at certain decisions.
Making the Best of a Bad Situation
No matter how planners approach the situation once a client couple announce that they are divorcing, planners will likely find themselves in a tough situation that's difficult to avoid.
"You have a moral obligation to be fair to each," says Mark McGaunn. "For example, assume the husband receives a humongous bonus and he doesn't want his soon-to-beex-wife to know because then she'll try to apply it toward the child support. One spouse calls me up one day and then the other one calls me the next day. Ideally, I'd like to disassociate myself from the divorce process, but that's not a reality," says McGaunn.
Richard Salmen spoke of a situation where the husband was more involved with the household finances than the wife. "She had much distrust of him. She didn't want the divorce but the relationship was going badly. She was less financially educated and sophisticated. I made a special attempt to make sure her understanding was there and increased her level of trust with me after the divorce. Sometimes during these sessions it would get so ugly between them that I had to call time out, regroup, and start again. I'd say, 'Let's stop right here for this session and regroup in one to two weeks.' You don't want the appearance of frustration."
Another difficult situation for Salrnen involved a client couple who divorced, where the ex-wife did not remain as a client after the divorce but the husband did. Later, the man told Salmen he was thinking of remarrying his ex-wife. Salmen told the man that "if he remarried her, my planning relationship wouldn't work with both of them because I felt that her taking another planner after the divorce showed that she didn't trust me. Ultimately, the client got remarried and I fired them."
Diane Willis found herself in a difficult predicament when her client was considering divorce and still living with the spouse. "The spouse was verbally and physically abusive. I was told never to phone their home or cell phone, never to send anything in the mail, and all contact had to be relayed through a friend or neighbor. It was difficult to follow up, to say the least. Even then, the abusive spouse found notes that were taken during our meeting, which had my name and phone number, and the address of my office on it. The abuser called my office and hung up on me, then confronted his wife about our meeting. Since he easily could have blamed me for putting ideas into her head, it made me rethink my office security system. On a more positive side, having me involved, with the projections I can run, has resulted in a dependent spouse receiving more alimony for a longer period of time than she would have, simply because neither side realized each would run out of money so soon otherwise. And the outcome was still fair to both sides."
Not every situation is unreasonable. Sometimes ex-spouses can join together for a common purpose. Says Burns, "I have divorced clients who remain good friends. They come to me together for their daughter's benefit, which is a joint goal of theirs. Since the ground rules are already established, we can proceed in a constructive manner."
When approached with current clients divorcing, planners need to be fully aware of what their existing client arrangements are before determining if any immediate obligation, future responsibility, or commitment is justified. Deciding to remain involved with the client is a testament to how the planner feels about whether any conflict- of-interest situations exist or if moral and ethical dilemmas can be satisfied sufficiently to the planner's liking. In the end, the planner simply has to feel right about it.
"There is a fiduciary relationship with the client. I follow the CFP Board's Code of Ethics and Professional Responsibility. As long as I am representing the best interests of the client, I can sleep at night."
-Steve Silver, CFP, CDFA, CLU
Do You Have What It Takes to Be a Divorce Planner?
"Not all planners are cut out for divorce work," says Sheila Miller; CFP. "Divorce is one of the most emotionally wrenching processes of people's lives. If you can't deal with people acting crazy then you don't belong in divorce work. Our job is to balance the power in the relationship between the husband and wife. If there is a substantial imbalance of power; neither party will opt for what may be considered a fair deal.
"In addition," Miller continues, "anyone who works in the divorce area should also work in the prenuptial arena. When clients decide to remarry, we can be of great value to them. Sometimes in a remarriage, I will work with one spouse and the other spouse has a different planner; and I find myself working closely with that planner"
Adds Jamie S. Lapin, CFP, CDFA, "In divorce work, you are dealing with people who are not at their very best. It's a meltdown to less attractive people who are not acting rational or reasonable all of the time."
Steve Silver CFP, CDFA, CLU, feels good helping clients in these special ways and finds it a very gratifying and rewarding experience. But, he says, "it is too emotionally draining for me to do this 100 percent of the time."
Richard Salmen, CFP, CFA, EA, points to the psychological aspects of working with divorcing clients. "Psychological training is probably most important in dealing in this arena. It's about the skills rather than the formal education. If I don't feel like I have the requisite skill set to deal with the issue well, then I decline the engagement. The key is to be sensitive to the issues. Ultimately, if it doesn't feel right for you, don't do the engagement."
The Institute for Certified Divorce Analysts educates CFP certificants on how to work with clients and how to apply financial planning knowledge through a divorce. According to Fadi Baradihi, CFP, DCFA, ChFC, CLU, president of the group, "the big thing is that no two divorces are created equally. Today there is little consideration for what the needs are after a divorce becomes final. What are the long-term needs of both spouses? Planners need to be ready for post-divorce lifestyle issues and do their homework to find out what makes the most sense for the spouses."
Diane Willis, CFP, CDFA, says that working with clients through the divorce process is at least 75 percent psychological. "Be prepared for the emotional consequences of working with divorce. Clients sometimes need to vent for long periods before they can think clearly enough to provide factual information. And they will revisit their upset over and over again.
"One of the best things you can do for them, when they are ready, is to get them to see the positive side to their future, and look beyond this trying period of their lives. And remember that you are providing a positive service. Mistakes made during the divorce process can be expensive and difficult to repair If you can prevent those mistakes, and provide a ray of hope in otherwise trying times, you can provide a service that goes beyond just crunching numbers, and it can be very rewarding."
Divorce Planning Options for Planners
Here are two ways to get involved in divorce planning.
Collaborative Divorce
Some financial planners receive training in collaborative divorce procedures. Collaborative divorce is a process where attorneys work with the divorcing couple. If the couple settle issues, great. If not, the attorneys must resign the engagement.The attorneys are prohibited from representing any of the spouse's interests subsequent to the collaborative process or even once they get divorced.
The same holds true for financia! planners. "You are part of a team during the divorce process and cannot represent either spouse after the divorce," says Diane WiIlis, CFP, CDFA. "Most collaborative cases get settled right away."
When performing collaborative divorce services, Sheila Miller; CFP, states that her responsibility is to stay in her role and not go beyond it. "I don't act as a mediator during the collaborative process," she says. "My clients are hiring me to perform a very neatly defined function and nothing more."
In Maryland, collaborative work is a relatively new concept. Jamie S. Lapin, CFP, practices in Maryland. "There have been only nine collaborative cases, since it is relatively new," states Lapin. "The planner is neutral during the process. She must remain credible and walk down the middle line."
Other planners work in mediation. Susan Miller CPA, CFP, CDFA, has worked as a mediator States Miller; "Rarely will I go to court. No one wants that. The spouses must have a desire to accept the recommendations; otherwise, no progress is made. In the end, if the process works, everyone leaves a little unhappy."
Steve Silver, CFP, CDFA, CLU, finds most clients going the mediation route if they know about it. "I have my clients go toward mediation first as long as each side doesn't have it in for the other"
Richard Salmen, CFP, CFA, EA, uses mediation to divide divorcing clients' assets. Says Salmen, "My role is to talk the husband and wife through the issues concerning the pros and cons of keeping various assets. At that point, they each take it to their attorneys, who take it from there. During the process, I may or may not be consulted."
Salmen continues, "It's not just about dividing the assets equally. It's about one asset being worth more to one person than another such as a house or the retirement plans. It should make sense and be what the client wants. Part of my value is that I help the clients work through the logic in order to help them make educated, well-informed decisions. I try to use technical and people skills to help clients through difficult times. Ultimately, the clients 'get it.' It's not just about dollars and sense. You must be involved in the bigger picture."
"I will represent both the husband and wife together or individually if both sign a contract knowing full well that I am representing both of them during the divorce process. If both sign on, then my job is to walk a fine line and be neutral in the process."
-Jamie S. Lapin, CFP, CDFA
by Jeffrey H. Rattiner, CPA, CFP
Jeffrey H. Raffiner, CPA, CFP, is president and CEO of Financial Planning Fast Track Inc. of Centennial, Colorado, an accelerated boot camp for financial planners aspiring to satisfy the CFP Board's educational requirements. His most recent book, Getting Started as a Financial Planner, second edition, by Bloomberg Press, has just been re-released. He can be reached at [email protected].
Copyright Financial Planning Association Apr 2006
(c) 2006 Journal of Financial Planning. Provided by ProQuest Information and Learning. All rights Reserved.