COMPLIANCE CORNER
Considerations in Serving Divorcing Spouses
By Scott Snipkie
Divorce is unpleasant, and as a result planning for divorce isn’t something most folks do; most people don’t walk down the aisle with divorce top of mind. Advisers, though, do have to prepare for the inevitability of divorce because an adviser who works with enough married couples is likely going to work with divorcing clients at some point, and that means being prepared for the compliance implications of divorcing clients. What does that look like and what can you do to navigate it? The best way to answer that question is to look at things from the perspective of your legal obligations.
To begin, it’s important to consider the core of an adviser’s job because those principles will guide you in these situations. You already know you’re a fiduciary to your clients but let’s break down those duties into components to clarify what it means to be one.
The duties of a fiduciary are the “duty of care” and “duty of loyalty.” The duty of care is about how you do your job for a client, and we’ll talk about that more at the end. I wrote “client” just now, though—singular—and divorces involve two people, which centers us on the real first big consideration, for whom are you doing your job, and that implicates the duty of loyalty.
The duty of loyalty is, essentially, about acting in clients’ best interests. So, who’s the client? To begin figuring that out, you have to pull out the agreement and determine if one or both spouses are signatories to it.
If only one spouse is a signatory to the contract, that spouse is the client regardless of whether the other spouse has been coming along to meetings with you all along. Your obligations as a fiduciary run to that spouse. That means the duty of loyalty runs only to that spouse, and you’re bound to take instructions only from that spouse and act only in their best interests. If both spouses are signatories to the agreement, both are clients. You are a fiduciary to both spouses. Being a fiduciary to both spouses means you owe each a duty of loyalty, which complicates things.
Naturally, you’ll play a role in the divorce because divorces involve the division of property, and you’ve been a trusted advisor to your clients in that regard. The question, though, is how involved you’ll be. Some divorces are amicable and involve clear prenuptial agreements; in those situations, the couple might choose to work out that division on their own but as a couple’s combined net worth increases, it seems less likely they’d take a DIY approach. Whether the division of assets involves lawyers and the courts or not, folks are going to ask you for documents (or order you to produce them if it does involve lawyers and courts), and it might even mean you will be called to give testimony.
As if orders, testimony, and hunting down documents isn’t enough, you may find yourself pulled aside by one or both clients informally for help too. Clients may ask for documents or information about their estranged spouse’s finances. Clients may assume you’re a fiduciary to them when you’re not or not a fiduciary to an estranged spouse when you are; they may even seek legal advice from you. Just thinking about you in that position gives me anxiety, and for you, the outcome could be even worse: complaints to you, complaints to regulators, complaints to professional associations, lawsuits, who knows?
Another potential problem might crop up naturally. Maybe you’ve been dealing with one spouse for years even though they’re both on the agreement. Maybe one spouse seems unreasonable. Anything could cause you, accidentally or deliberately, to favor one spouse over another when you’re a fiduciary to both, and that’s dangerous. So, how can you avoid the pitfalls and smooth the road ahead?
There are few hard and fast rules on this topic in the law but there are best practices and process considerations as well:
- Talk to the spouses and explain the situation. When applicable, explain you’re a fiduciary to both and what that means, and when it’s not the case, make that clear too. When you’re a fiduciary to both, talk about the problems and pitfalls of working together with you, ensuring they still want that. If the clients terminate the relationship, follow your procedures for that and facilitate the relocation of their assets. If only one chooses to leave, consider getting consent from the other to work with the spouse who’s staying, because while it isn’t a regulatory requirement, it's a best practice that could help save you trouble down the road.
- If the clients choose to stay, and your firm is large enough, consider splitting them up. If it’s feasible, appoint each spouse their own investment adviser representative; it’s a good step in avoiding favoring one spouse over the other and managing that conflict. Remember, though, even if each client gets their own representative, the firm still owes both a duty of loyalty.
- Whether or not you’ve separated the clients, if they remain, make sure it’s clear to them—and this may already be in your advisory agreement—that communications will be between all parties moving forward. Both spouses will be on all emails, receive copies of letters, be present at meetings, etc. This prevents the incongruent distribution of information and helps to avoid favoring one spouse too.
- Ensure everyone knows you aren’t taking a unilateral direction. Sometimes one spouse historically gave all of the directions but it should be obvious why that can’t work here. It may even be necessary to require that directions on the accounts come from the spouses’ attorneys or even the court.
Once the divorce is completed, one client or both may want to remain with you. While there’s no specific regulatory requirement to get consent from the divorced spouses, doing so may save you trouble down the road.
Now, back to that duty of care. Not all married couples are the same, and not all divorces will be the same. Divorce can be unpredictable, and it’s obviously stressful for those involved; that means it can be unpredictable and stressful for you too. Consider whether you can commit the time and resources, professionally and emotionally, to working through the divorce with your clients. As we mentioned, you owe clients a duty of care, which essentially means taking care to give them your best using your best judgment. If you can’t serve divorcing spouses to the best of your ability, in a professional manner, don’t be their adviser. There’s no shame in knowing when you can’t do a job, and understanding that is in your clients’ best interests. There are financial professionals who specialize in divorce and receive specialized certifications in it—Certified Divorce Financial Analysts; consider recommending the divorcing spouses to them.
Because divorces can be unpredictable, there isn’t really a set playbook for dealing with them. With that said, thinking through your duties as a fiduciary is a great start, and the considerations discussed above are helpful tools to have in your toolbox for this eventuality.
Scott Snipkie, a Mizzou (JD, MA) and Penn State (BA) alum, joined Adviser Compliance Services in 2019. He keeps busy away from work by boring his wife, son, and dog with baseball and compliance soliloquies while watching Penn State football. Reach him at scott@advisercompliancesvcs.com or 573-416-8076.
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