Published on FamilyLawyerMagazine.com by Diana Shepherdon, June 11, 2020
The key is to find an objective divorce financial expert who is also a licensed financial and investment professional and has a solid understanding of financial considerations in a divorce. This can make all the difference when protecting your client’s investments in the face of divorce. Here are the rights and responsibilities of both your client and your client’s investment advisor.
By Molshree A. Sharma, Family Lawyer and Susan Templeton, Financial Expert
It is not uncommon for married couples to divide household and financial responsibilities. In many marriages, one of the spouses has mostly handled investments, management of finances, and interactions with the investment advisor. When people are married, they usually have common financial interests, but if there is a break-up or divorce, interests can conflict, and the role of the investment advisor can become much more complicated.
Imagine this: Your client, Joe, comes to you with plans to initiate divorce proceedings. He and his spouse maintain a relationship with an independent investment advisor. How do you advise Joe on any subsequent interactions with his investment advisor as well as on access to the assets managed by that advisor? As with many things in life, the answer is: “It depends.”
Protecting Your Client’s Investments During Divorce
Only One Spouse Signs the Investment Advisory Agreement
A financial advisor has a fiduciary duty to a client. While the advisor may have met both spouses and discussed their financial picture with them, it is important to remember that a financial advisor has a fiduciary obligation to the signatory (or signatories) of the investment advisory agreement. Therefore, if Joe’s wife signed the agreement but Joe did not, the advisor is obligated to act on his spouse’s directives.
This means that the advisor may provide Joe’s spouse with recommendations on how to split the assets in a way that is beneficial to her due to tax and/or liquidity implications, as well as follow her instructions on the investment and/or transfer of those funds. The financial advisor may not give legal advice, but they certainly can discuss which investments may be more beneficial long or short term, tax consequences, and ultimately must act upon the direction of the client.
In this case, you should advise Joe to add his name and signature to the agreement. When this is possible, the attorney and client should notify both the investment advisor and the manager of the brokerage firm that all future transactions made in the joint account must be mutually agreed upon in advance. Both actions should be taken immediately.
But this may not always be possible, in which case, depending on the nature of the issues and estate, it may be important to reach agreements with the other party and/or orders from Court that preserve the financial status quo and protect from dissipation of the marital estate. The financial advisor should be provided these orders immediately so that she is on notice.
I recently encountered such a client scenario. The client’s spouse had always managed both the assets and the relationship with the investment advisor. The account was jointly held. Six months into the divorce, account statements reflected cash flows out of the account that appeared excessive. The difficulty of following the transaction history was expensive, time-consuming, and would have been preventable had these steps been implemented right away.
Both Spouses Sign the Investment Advisory Agreement
If Joe and his wife both signed the accounts, each spouse possesses the right to direct the movement of assets. That said, both parties will also be required to disclose assets within their control during the divorce proceedings.
Furthermore, the advisor has a fiduciary responsibility to “sit it out” and wait for the divorce to be finalized. Not all advisors know this and have been known to give preferential advice to the spouse with whom they enjoy a stronger relationship. Some may know this but choose to overlook it in the hopes that will continue to be the investor after the divorce.
In the case of In the Matter of the Arbitration Between Sandra Hendricksen Martire and Delise Morgan Martire, Claimants v. Edward Jones and Troy Michael Nelson Respondents, the claimants successfully sued the broker, alleging breach of fiduciary duty, unauthorized activity, fraudulent transfers, supervisory negligence and breach of contract. (FINRA Arbitration Decision 15-00038). The claims arose during the parties divorce proceedings at which time the Respondent’s allegedly disbursed marital funds to the husband from a restricted account without authorization or knowledge of the wife, withheld access to marital funds awarded to the claimant and further was negligent in failing to terminate life insurance policies held in trust at Edward Jones thereby resulting in depletion of the cash value of the policies. Ultimately, Edward Jones was ordered to pay $500,000 in arbitration damages and fees. This is an important decision as it provides an award to a customer for transgressions unrelated to any investment performance.
I had a case where the husband had a long-standing social and business relationship with the financial advisor. They regularly golfed, met each other socially, and referred clients to each other. The husband wished to invest his bonus into a retirement account and a college 529 account, reducing his liquidity in the hopes of limiting income sharing for purposes of spousal support as well as forcing the wife to make a higher contribution to college expenses than she would have likely been ordered to do.
In this instance, the financial advisor first claimed that during the parties’ long marriage and the years the broker had worked with them, the wife was never a participant in any meetings or discussions. Therefore, he assumed that per the usual practice the husband was handling the financials and he had no reason to discuss any further with the wife, even though recall they both signed the accounts.
When it came to light during depositions that, in fact, the husband had told the broker that the parties were in the midst of a divorce, he then claimed that the reason he had not contacted the wife was because the husband had written his marital status to be “divorced, single” and therefore the wife did not need to be notified or to sign the waiver of spousal beneficiary section. Ultimately, we could provide proof that the broker had been notified in writing that the parties were in a dissolution proceeding and the husband and broker had to make some large concessions.
Protecting Your Client’s Investments in the Face of Divorce: Find an Ethical, Objective Divorce Financial Specialist
In summary, if there is any concern of preferential treatment, it is best for the divorce attorney to send notice to the advisor reminding them of their fiduciary duty to serve both spouses in a non-conflicting manner going forward. An ethical broker or advisor never wants to run into disciplinary action from the SEC or FINRA and should, therefore, be responsive to your warning.
It is also important – regardless of whether both parties signed or one – to make the broker aware the parties are amid a dissolution proceeding and be provided any court orders that speak to the treatment of accounts. Finally, unlike an attorney-client relationship, the broker-client relationship does not have privileged communication so anything discussed with a broker is discoverable and brokers can be deposed as well as must comply with reasonable and relevant subpoenas. So, it is important to discuss the amount and nature of the information provided to the broker. Also, it is important to note that brokers may provide advice that guides one to seek assets that they can manage post-divorce and derive commissions from.
The key to protecting your client’s assets in the face of divorce is to find an objective divorce financial expert who is also a licensed financial and investment professional and has a solid understanding of financial considerations in a divorce. Clients should check the broker’s disciplinary records/public record on FINRA, think ahead of important questions to ask the broker, and provide notice to any broker upon commencing a dissolution proceeding. These measures can make all the difference when successfully protecting and managing assets during a divorce.
Molshree “Molly” A. Sharma, a partner at Feinberg Sharma, is a savvy and accessible advocate for her clients facing the challenges of divorce. Her expertise is working with business owners, professionals, and individuals of high net worth who are grappling with complex financial implications that require her high level of financial experience. www.fsfamlaw.com
Susan Templeton is Vice Chair of Sebold Capital Management (Chicago & Naperville) a fee-only registered investment advisor. Susan specializes in divorce and retirement planning, investments, and tax management. Susan earned her MBA from the University of Chicago Booth School and her BSBA from the University of Denver. www.SeboldCapital.com.
June 11, 2020