Help at hand

Divorce settlements can raise a host of questions from an investment perspective, which will require different answers for working and non-working spouses. It isn’t uncommon to advise both spouses following divorce, and rather than working in conflict, acting for both sides can actually aid understanding and create a harmonious approach.

Against this backdrop – and once the family lawyers have done their part – it is often the investment manager who does the ‘hand-holding’ and provides support as well as financial advice to their client. Investing the divorce settlement is often just the start of a long-term professional relationship requiring an investment manager to act as a kind of financial GP.

In such cases, it helps to have a
broad knowledge of, for example, property investments, pensions and
tax – particularly in relation to income
and capital gains tax and the complexities
of investing for a non-resident or
non-domiciled individual. It is important that any potential pitfalls can be highlighted and the client pointed in
the direction of an appropriate specialist.

Some divorcing parties may not have a great understanding of their income and capital requirements, let alone the impact of inflation on capital. It may be necessary to explain that cash investments alone are unlikely to provide an adequate return to meet their long-term financial needs and the risks and potential rewards of investing in more volatile asset classes, such as equities and bonds, may need careful
and thorough explanation.

 

Financial health-check   Assess the settlement: its size, how it’s made up, capital structure and potential for income generation. Review the client’s financial needs and priorities and agree a strategy based on this information. Asset allocation: consider the spread of assets including, for example, cash, bonds, equities (including managed funds), and alternatives. Monitor the portfolio: review the portfolio regularly in line with the agreed strategy. Adapt as necessary.

 

However, a long-term mandate
need not mean that capital is locked away irretrievably. The flexibility to make changes should conditions dictate is a vital part of any well-thought-out strategy.

The investment manager should work with the client to create a financial model, indicating the potential returns over the short, medium and longer term.

The starting point is establishing financial priorities, be it income generation, capital preservation, providing for the next generation or, simply, saving for a rainy day. The investment manager must work out how much money the client will need to live on, how much they are spending and the financial needs of any children as well as who is meeting these expenses. The individual’s age is obviously a major factor.

Undertaking this type of financial health-check to determine current and future liabilities – including, for example, school fees, mortgage and other financial obligations as set out in the divorce settlement – is crucial. It may also be the right time to decide whether the family home is still appropriate following the divorce, or whether it should be sold.

Diversification is the cornerstone of any investment portfolio. By investing in a range of assets, it should be possible to smooth the impact of sharp fluctuations in the markets.

We tend to think in terms of four broad asset classes, cash bonds, equities and alternatives. Each has specific characteristics and will perform differently at different stages of the economic cycle. To preserve and grow capital over the long term, the ability to avoid loss is often every bit as important as spotting winners.

It’s important to review the performance of any investment portfolio against the agreed strategy and benchmarks on a regular basis, particularly in the early stages of the client relationship. This means the client’s financial expectations can be managed, which is important if their aspirations are unrealistic, perhaps because the individual was used to a certain lifestyle prior to the divorce. In this way, it becomes clear whether the strategy is on target and appropriate steps can be taken in good time.

Above all, the keys are flexibility and the ability to respond appropriately to changes in the client’s circumstances and the broader economic backdrop.

Rohan Armes is a partner a Smith & Williamson

She writes a regular in-practice article on asset management for Private Client Adviser