What is a Certified Divorce Financial Analyst, and Why Do You Need One?
Divorce is Hard
"I want to make sure that the settlement you sign works for you—not only for the coming years, but for the coming decades.” - Shawn Leamon, MBA, CDFA
During a divorce, you only get one chance to get things right. It is a messy, complicated, difficult process—emotionally, legally, and financially.
At its core, divorce boils down to 3 areas:
1) Dividing property
2) Spousal and child support
3) Child custody
An attorney will help you navigate the complex, confusing family law process. But who helps you make the appropriate financial decisions? It is easy to make costly financial mistakes during the divorce process. That is where a Certified Divorce Financial Analyst comes in.
What is a Certified Divorce Financial Analyst?
A Certified Divorce Financial Analyst (CDFA) helps you and your attorney understand the financial impact of decisions during the divorce process. A CDFA is an experienced financial professional like a financial planner or accountant, who has completed the training, education, and certification process from the Institute for Divorce Financial Analysts (IDFA). According to the IDFA, there are more than 5,000 CDFAs in the United States and Canada.
A CDFA can help you formulate a better divorce settlement agreement by:
1) Making Your Divorce Process More Efficient and Less Expensive
“The longer it takes for your divorce, the more expensive it will be.” - Shawn Leamon, MBA, CDFA
A CDFA can help you collect, organize, and prepare financial information for both you and your attorney and identify which financial information that is most important. You may have considered working through a myriad of financial details with your divorce attorney or (more likely) a paralegal, but generally, neither is a financial expert.
Therefore, you can save time and money on expensive hourly fees by having a CDFA handle routine financial details and many of the critical calculations. For example, A CDFA can help you prepare a marital balance sheet, which is an easy-to-understand summary of your assets and debts. Or a CDFA can help you complete the all-important financial affidavit or statement of net worth, which is required in almost every case.
2) Understanding Tax Consequences of Your Divorce Settlement
“In divorce, it is not what you get, but what you get to keep.” - Shawn Leamon, MBA, CDFA
In divorce, a dollar is not always worth a dollar. The equivalent amount of cash in a bank account is worth more than cash in a retirement account, which is worth more than a home at the same value. Why is that?
Every asset has its own tax liabilities when you use the money. Therefore, if you take money from a retirement account, you may have to pay income taxes and potential penalties for withdrawing the funds. Spousal support has tax consequences, while child support does not.
A CDFA can help you understand how much you get to keep when deciding between different assets.
3) Managing Expectations and Keeping You Focused on the Long Term
“Divorce may be the most important business deal you will ever make.” - Shawn Leamon, MBA, CDFA
Given the high emotions involved when facing the end of your marriage, it is helpful to have a neutral person help you make rational decisions. A CDFA can help you understand different divorce-settlement scenarios, including how they may impact you. They can also help you navigate potentially rash decision-making.
It is easy to want to fight too much or too little, or waste money fighting for something that is unimportant in the long run. A CDFA can help you keep the big picture in mind, so you make decisions that will put you in the best position for your future.
4) Creating a Post-Divorce Financial Plan
“Before you sign that settlement, ask yourself: ‘Can I afford it?’” - Shawn Leamon, MBA, CDFA
One day, your divorce will be over—even if it does not feel like it right now. Before you sign the divorce-settlement papers, are you sure that the agreement will make sense for you in the long term? Many settlements may make sense for the first year or two, but you can find yourself realizing that you made a major mistake later down the line.
A CDFA can help you prevent the worst-case scenario: Just a few years after the divorce, you could be scrambling for money or considering bankruptcy. A CDFA can help protect you from ending up asset-rich but cash-poor. Most of the time, divorce settlements are tough to change, so you must be sure you can afford the settlement when you sign on the dotted line.
Your Attorney Can Make Costly Financial Mistakes
"Attorneys often tend to feel they have the knowledge and experience to take care of many complex financial matters on their own, even though most do not hold any sort of business degree. This can create costly mistakes for their clients if they do not fully understand the complicated financial concerns at hand.”
- Joseph E. Cordell, Partner at Cordell & Cordell (the largest family law firm in the United States)
Your divorce lawyer is essential for advising you about the legal aspects of your divorce. However, most divorce lawyers are not financial experts, and your attorney can make costly mistakes that could end up hurting you for many years after your divorce is over.
Here are just a few common mistakes divorce lawyers can make:
1) Errors dividing investment accounts
Investment accounts are one of the most complicated financial assets in the world. There are hundreds of thousands—if not millions—of different investment options. After a decade of exclusively working in the financial services industry, there are some areas that I still find complex.
How can you expect someone who studied law to make the proper decisions about investments and finances for you? Numerous times, I have seen even the highest-rated family law attorneys make easily preventable mistakes when dividing investments during divorce.
For example, a common mutual fund may come with risks that your attorney may not consider as you negotiate with your soon-to-be ex-spouse. Is the money in a taxable or tax-deferred account? Is there is a high-portfolio turnover in the fund? In other words, is there frequent buying and selling of the investments associated with it?
If the answer is yes to any of the above questions, there could be a large, unexpected tax liability that you will not discover until the end of the year. Furthermore, there are hundreds of different strategies and structures of mutual funds, so you should be very selective about which ones you fight to keep.
What if you are thinking about keeping an individual stock? Do you know its cost basis? If you sell the stock, the cost basis will have a huge impact on calculating future taxes. If the stock is a big portion of your overall assets, do you know how to hedge it or diversify the risk? Regarding stocks, there are some incredibly complex considerations, and many books are dedicated solely to this subject. Taking the word of your family law attorney—or worse yet, your spouse— without getting specialized help could be an expensive mistake.
Are you trying to split a hedge fund or private-equity fund? Do you even know what these assets are? Be very careful. Many of these funds cannot be sold for up to 10 years. Therefore, if you need the money, you could find yourself in a tough financial position.
2) Failing to search for hidden assets
You may have suspicions that your spouse is hiding money from you. Sometimes it is obvious, but other times it can be difficult to tell. When your marriage is on the rocks, it is a very common for money to start disappearing. If you and your spouse own a business, then hiding money becomes much easier.
Given the financial complexities of identifying red flags, many divorce attorneys often inadequately search for hidden assets (secret money that you may be entitled to receive). Your spouse may transfer money to friends, report lower income or higher business, create fake or inflated debts, withdraw money in cash and hide it, overpay the IRS and keep the refund, or mislead you about the value of assets.
Since finding hidden assets may require you to employ a forensic accountant or private investigator, it is complicated, and it could be expensive. That said, failure to examine this kind of misdeed could cost you a lot of money.
3) Neglecting to secure support payments with insurance
What happens if your spouse unexpectedly stops making support payments (child or spousal) because they die or become disabled? These payments may be an essential income source for you, and a sudden loss of them could cause a host of financial complications.
Many attorneys fail to advise this cost-effective way to protect you: getting insurance to make support payments should the unforeseen happen. The specific implementations can take many forms, but if you are the beneficiary of the policy, you will be protected.
However, you should make sure you own the policies, and that any premium payments are kept current. Otherwise, you will find yourself at a loss when you need the funds.
Conclusion: A CDFA can help level the playing field during divorce.
Attorneys handle the law, while financial experts handle the math. Divorce is a legal transaction with important financial implications for your future. Although your attorney is an expert in your state’s laws, they are not necessarily a financial expert. In fact, most attorney’s service agreements will have you disclaim any financial responsibility. Therefore, if your attorney discourages you from hiring a CDFA, that is a red flag.
A CDFA can serve an essential addition to your divorce team, regardless of whether or not you are going through litigation, mediation, arbitration, or a collaborative divorce process. As The Wall Street Journal identified, a CDFA can help "watch out for tax snafus, help clients obtain health insurance after a split, and demystify tough-to-value private-equity or hedge-fund investments.”
If you have any financial questions or considerations, consider hiring a CDFA to help you.