6 tips for advisors to help clients plan around gray divorce

August 6, 2023 6:00 AM

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When divorce strikes, it's increasingly likely to hit clients who are older — and likely richer.

But helping them handle this bend in the road can be tricky for advisors, given the complexity of assets and relationships involved at that point in clients' lives.

"This is truly the only segment of the population where the divorce rate is actually exploding, and expected to even triple by 2030," Lili Vasileff, the president of the Association of Divorce Financial Planners, said of older Americans in an interview. Vasileff, a certified divorce financial analyst (CDFA), is a published author of books on divorce planning. She is also a CFP and the president of Wealth Protection Management, a registered investment advisor based in Greenwich, Connecticut.

Divorce at any age is hard and expected to shrink clients' net worth, but so-called gray divorce, defined as a divorce with adults aged 50 or older, is the "perfect storm" as it often hits clients right as they are "on the cusp of retirement," Vasileff said.

The share of American divorces that are gray divorces has rocketed to an estimated 36%, according to a 2022 study that calculated divorce rates for older Americans using 2019 data from the U.S. Census Bureau. While the divorce rate for younger Americans is in decline, said to be the result of younger generations marrying later in life when they're more financially established and mature, the American gray divorce rate has roughly doubled in recent decades, according to the Pew Research Center.

Several rich high-profile older couples have divorced in the past few years, from billionaire Amazon founder Jeff Bezos — who was 54 when he announced the news of his divorce from then-48-year-old novelist MacKenzie Scott in 2019 — to Bill Gates, who was 65 when he announced his divorce from then-56-year-old Melinda French Gates in 2021. More recently, earlier this year billionaire Porsche executive Wolfgang Porsche, at age 79, filed for divorce from his wife Claudia Porsche, who was 74.

Given that most wealth management clients are older, sudden divorces within this demographic could especially impact financial advisors. A recent industry-wide survey by Arizent, Financial Planning's parent company, found that 73% of clients across surveyed wealth management firms were ages 45 and up; 43% were ages 60 and up.

Everything can change for a client when they divorce, from drastically altering one's standard of living to ripping up estate plans and redoing retirement calculations.

"People who get separated after age 50 can reasonably expect their wealth to plummet by an astounding 77 percent," said Mitchell Kraus, the owner of Capital Intelligence Associates, a wealth management firm, in an email quoting from a newsletter he sent out in May to clients.

But such times of turmoil also present an immense opportunity for advisors to provide value to clients, if they do it right.

Financial Planning spoke with advisors and experts from across the industry on how to help clients through a gray divorce. Below are several common challenges they see in this area and tips they shared for successfully helping your clients navigate them.

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Curb a client's impulse spending

Many clients try to self-medicate during divorce with retail therapy, according to Renee Hanson, a private wealth advisor and CDFA at national-regional firm Ameriprise Financial. But that's exactly what their advisor should warn against doing, even as they approach from a behavioral finance perspective of understanding the stress their clients are responding to.

"It's not just the affluent. Retail therapy is a common self-treatment for the emotional components of divorce," said Hanson. "When we think about overspending, it's very common, and we would anticipate seeing it happen."

Some clients, in a similar vein, might want to invest aggressively to make up for lost time on their newly halved retirement savings, even if that's not the right fit for their risk tolerance levels.

If a client is talking about large purchases or investments, or reaching for any specific treasured assets in the divorce settlement, this is when an advisor can step in and put the situation into perspective, reminding them of their holistic financial future, Hanson said.

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Proceed with empathy

While advisors should always seek to demonstrate empathy for their clients, a gentle touch is especially important during what is likely one of the rawest and most vulnerable periods of their lives.

"As financial advisors, we often underestimate how isolated and vulnerable our clients feel when going through a divorce," said Tamara Durbin, a CDFA at CS TOMASI Wealth Management, an RIA based in the greater Los Angeles area.

"We can solely focus on the division of assets, the future cash flow, etc., forgetting to acknowledge and address the other factors in play," Durbin said. Instead of behaving like it's just a matter of business, advisors should seek to "provide a calm, stabilizing force and be that trusted advisor helping our clients navigate their way to financial independence," she said.

Paul Monax, a financial planner who is the founder and owner of RIA Agile Wealth in Littleton, Colorado, agreed that the "emotional undertone" to a gray divorce is the "biggest component to be mindful of" for advisors, who should be prepared for clients to act out of character.

"Even if the surface seems amicable, and even more so if it is a contentious situation, that undertone will seep its way into every aspect of the process, but especially the money side of things."

Similarly, Vasileff said, there can be immense anxiety and shock for clients as they go through the process. "The anxiety is pervasive. Advisors need to be aware that it could encompass not just anxiety, but also depression and a lot of emotional attachment," she said.

"There's a huge wave of anxiety with this, even for the individuals who have managed finances all along — sometimes projecting that their ex-spouse won't be able to manage themselves. And will they be held accountable in the future if their spouse goes bankrupt or has other issues?"

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Help less financially literate spouses play catch-up

Divorce entails not only the loss of a client's relationship, household and financial status, but also in many cases the loss of certain comforts — including relying upon a spouse to manage financial affairs.

"If you haven't been responsible, or held accountable for planning, investing, and saving and managing spending, all of a sudden you hit the fan and you're like, 'Oh my God, I'm on my own. And I'm, like, 61 years old. How do I do this?'" Vasileff said.

"There's always a concern about spending, and there's going to be probably a need to either downsize or limit the discretionary spending that people were just coming into expecting as their leisure part of retirement life — which is a big awakening for a lot of people."

Part of the advisor's job will be helping the less financially savvy spouse get up to speed. They may need help creating a new budget for themselves, establishing their own line of credit, reentering the workforce or learning how to project realistically down the road what their future expenses and needs will be, Vasileff said. The process might also involve pushing back against the other spouse's unrealistic demands and clarifying what debts or financial secrets one side might have hidden from the other, she said.

"The biggest misstep I see in gray divorce is the failure to understand the short- and long-term effects on cash flow, net worth and taxes," said Durbin. "What may seem fair or equal at the time of settlement, many times, is not when looking from a long-range perspective."

Durbin said she frequently sees, for example, spouses who forget to consider the tax-free benefit of a Roth IRA when dividing retirement assets, the inequality of the Social Security benefit for a lower-earner spouse and "ensuring the survival benefit on a pension is non-modifiable."

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Seek a team of specialists

Advisors with clients facing divorce should strongly consider partnering with a specialist financial advisor who is skilled at handling divorce, Hanson said.

"Divorce is a specialty area. It's one thing to guide your clients into dividing the assets, that's in your accounts," she said. Going it alone "exposes your clients to potential mistakes that are avoidable with specialty, and it exposes the adviser to liability."

In addition, "both parties should have consulting attorneys to ensure their rights are protected," said Sallie Mullins Thompson, the principal and managing member of Sallie Mullins Thompson, a business consulting, tax compliance and divorce financial planning firm.

Apart from a competent attorney and specialist divorce planning advisor, it's also good to have the right accountant or tax professional, Durbin said. "From a tax perspective there may be depreciation, long-term carryover losses, passive activity losses that need to be negotiated."

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Revisit estate plans

It's "really important to update ancillary documents. Things like power of attorney, health care proxy … this is often overlooked" in a divorce, said Katie Carlson, the head of wealth strategy at Bank of America Private Bank.

Linked closely to estate planning documents like wills are the various financial accounts a client or their spouse might have, which they will need to change the beneficiary designations for.

"Oftentimes, assets will be divided during a divorce, but updating your account beneficiaries during the process seems like a 'small' detail and can get missed," said Caleb Pepperday, the founder and CEO of Advanced Practice Planning, an RIA based in Missoula, Montana.

"Reviewing your beneficiary designations on all of your assets, life insurance policies, etc. is essential because you often list your spouse as your primary or contingent beneficiary, which will most likely need updating following divorce."