Why do I need a financial planner after my divorce?

In this blog, FLiP Director James Pirrie analyses the importance of engaging with a financial planner after divorce. 

Family lawyers manage a transition – to sort out who has what as a couple move forward with their lives. But it is the financial planners who provide the year-on-year analysis to enable couples to reflect on developments and make plans to best manage these times of as yet unrealised uncertainty and insecurity. So as you emerge from the challenges of divorce and separation with the associated realigning of financial resources, we would do well to connect up with the best financial planners. A financial planner will enable you to review annually on the sense and stability of your financial arrangements and your financial fitness for what may be coming in the future.

A recent Government report suggests the following:

The latest number I can find estimates the UK’s property market as being worth around £7.93 trillion.  Despite the seemingly stable and vast progress of this market, I am still reminded of the time that I asked a room full of financial planners at a conference a few years back ‘so where in your numbers and in the advice you are giving your clients is the collapse of the property market factored in?’

My point was that the forty-year-olds who might now come to consider buying my home had nothing like the buying power that we had when my wife and I bought it back in the 90s. In no small measure this is because the thirty-year-olds coming to buy the property they would be selling have nothing like the buying power that either of us had in our 30s. And this runs on down to the twenty-somethings, many of whom have far less appetite than any of us did to leap onto a property owning escalator at all (even if they had the means to do so, no doubt questioning whether it is escalating quite as resolutely as it always has).

We all know the South-Sea Bubble and Dutch tulip stories – and marvel (with the 20:20 vision of hindsight) at the short-sightedness of everyone piling-in with investment beyond what was safe. These sources also discuss how much Sir Isaac Newton lost in the bubble (the equivalent of £20m seems a common estimate). I suspect many of us would have been happy to follow the choices of someone with an IQ of (apparently) 192 … we might have been less wise at the time.

The reality is that no values are absolute. We operate on a collectively adopted fiction that things have value as the means to go about our lives and we use currency to strike finely-tuned deals, which in this industry of matrimonial finance find their expression for example in finely-balanced spreadsheets, often targeted at meeting needs way over the horizon of what can be accurately predicted.  Our Duxbury calculations, converting future income needs into an immediate capital sum and, in particular, make assumptions about tax and realisable values that may come to look foolish as events unroll.  Whilst we have cash flow modelling (from our financial planner colleagues) as a significant upgrade on that methodology, these too also make assumptions – more finely tuned but assumptions nonetheless and neither deals with unexpected vicissitudes or windfalls that may happen as the realities of our lives arrive.

However, unsatisfactory all of this may sound, we have no better alternative. In family law, we still have the task of separating out finances. We must do that task against the backdrop of some pretty firm steers from our courts as to how it is done.  And all of this should make us realise that we are negotiating to avoid consequences rather than on the basis of any sort of fundamental truth: we assume that inflation will happen and that incomes will continue and that properties can be sold at certain levels, because without those assumptions, we can’t complete the tasks that the court requires us to do.  However, just making these assumptions does not transform them into certainties or truths. So, we need constantly to remind ourselves that our decisions are generally made in the shadow not of the realities of the coming decades but on the more short-term expectation of what a court or arbitrator will decide in the coming months and how much it will cost (in terms of stress, time and fees) to get there. We are left negotiating against ‘what is likely’ rather than ‘what is true’.

Higher property values were surely significantly accelerated by Conservative government policy during the Thatcher years and the vast mortgage borrowing on offer during the 80s and 90s, when lurid multipliers of income were available – in some cases on the basis of imaginary incomes that simply needed completion on a mortgage application form to exist. Those values are now perhaps less-securely balanced on government-provided netting, with for example CGT breaks for home owners and high IHT concessions (which of course means encouragement to over-housing for the older generation and under-supply for those with dependent children). Whilst the government manages the economy generally to provide further support, with a £400bn bill to meet for Covid (on top of Brexit), it may be unrealistic to expect business as usual in the coming years.

So we should all ponder what load that netting is now having to bear. We have a much more cautious lending industry, taking away the high borrowing possibilities that previously enabled us to meet the high prices proposed by estate agents.  The steady incomes of steady careers is shifting for the gig economy.  We have the upheaval of Brexit and reduction of foreign investment, the removal of many of the tax breaks for landlords and home working, which is changing what we now look for in property, all alongside the changing attitude in the upcoming generation to property-ownership generally.

It is against that backdrop of uncertainty over bricks and mortar that particular care might be taken with our pensions.  Anticipated research will show the unrecognised value in our pensions (greater for many of us than the value of our homes, especially away from the high-cost homes of London and the South East) … but then we pause to remember that even these pension values are based of course on what can be realised for the underlying investments … so much of which is piled into commercial property … and the reshaping of that market and those values as we emerge from Covid with wrecked businesses and increased home-working, will be, if anything more profound than the residential one.

So where does this take us?  Well simply to remembering that the assumptions on which we make our deals are not predictions of the future.

So just as my financial advisor colleagues seemed to have no great answers as to whether their plans were long-term proof against any financial collapse, nor do we in the family law industry have answers for those managing the challenges of separation and divorce.  Just because so many of us are invested in what might be termed “the artifice of values” does not make what we do reliable nor the stuff that we share between our clients inherently valuable, beyond what anyone may be willing to trade for them when we come to the market to seek a thing’s conversion. These are simply predictions of what we may be able to secure and we should be vigilant to continue to monitor and manage our futures for the best.

Whilst a financial planner may be no guarantee against catastrophic financial change, it may be the best that we have.