On Choosing Your Advisors During a Divorce

 

August 17, 2005:  Weston, Florida – Very, very early in the morning….

 

Got up before five this morning, thanks to an unexpected nighttime visit from Jack Lockwood, our oldest son and recent 1^st grader.  Seems that Jackie boy’s sleepover with his 4 year old brother, Harry, turned ugly when Harry whacked him in the face while sleeping next to him in bottom bunk in their room.  Mercifully, our two girls are still asleep in their respective rooms (they each get their own rooms, of course – they’re girls!).

 

Anyway, once I’m up, my mind starts working overdrive on mortgage related issues, especially stuff that’s been bothering my subconscious for a while.

 

As previously discussed in this Blog, divorces are almost always stressful.  Contributing to the stress is conflicting advice from friends, family, co-workers and professional advisors.  That’s why it’s so important to choose your advisors carefully.

 

I have a client, whom I’ll refer to as Mona, who is a case in point.  Her husband decided to leave her after being together for 18 years, and informed her of this decision while she was recovering from her C-section after giving birth to their second child.   It’s embarrassing to be a male when I hear stories like this.

 

I spoke to Mona a few times on the phone to determine her needs.  As a newly single mom on a severely reduced income, Mona needed a cash cushion as emergency reserves, but had significant limits on what she could afford in mortgage payments.

 

Because she had excellent credit, but no provable income or employment, Mona qualified for a no doc loan.  I recommended a 7 year ARM, interest only to keep her payments low for what we both felt was a long time.  A lot could happen in 7 years, including getting re-married, she’d be well underway in her new career with a higher income, etc.

 

As I always do, I asked Mona if she had a financial advisor that she was currently working with whom we might bounce ideas off of.  She put me in touch with her neighbor and “friend,” whom I’ll call Dirk.  This is where the story gets a little dicey.

 

But first, a few words on Dirk.  I’ve run across plenty of Dirks in my 13 years in law and finance.  I think he wanted to impress upon me how much he knows about my business at least as much as he wanted to help Mona.  Dirk works for a national financial services firm. He used to be a compliance associate (i.e. he spent his day making sure his brokers didn’t break any rules and documenting any transgressions) but recently made the transition to sales after 20 years, according to him.

 

After I called him a couple of times to introduce myself, Dirk returned my call and apologized for being “slammed” with client business.  Then, it didn’t take long before he started challenging me on the interest rate I offered Mona.  He told me that he saw lower rates online and in other advertisements, in billboards, newspapers and television.

 

I spent a little time explaining to Dirk that frequently, those rates were “teaser” rates that were offered as an enticement to get people to respond.  More importantly, those rates were for borrowers who could verify their income, were putting 20% down, had good credit, etc.  Our mutual client, Mona, could qualify for a No Doc loan only, because she didn’t work anywhere and her verifiable income was too low to support the loan payments. 

 

I wasn’t sure if I got through, particularly because Dirk kept reminding (bragging?) how he got his personal mortgage online at 5.0%, no points, 30 Year Fixed over a year ago because his income, assets and credit were perfect, thank you very much. 

 

Up until now I was vaguely annoyed, but here’s where the conversation took a turn for the worse.  Dirk told me that, instead of borrowing 65% of the value of the home, Mona needed to borrow 80%, which represented almost $80,000 more. 

 

That was news to me!

 

I explained to Dirk that the higher the percentage of the appraised value (what we call the Loan to Value), the higher the interest rate and obviously the higher the monthly costs of the mortgage payments.  The payments under his plan would be well beyond what Mona told me she could afford, according to our initial mortgage planning session.

 

Dirk reassured me that he would be investing the difference, so Mona could make money on the “spread” between what it cost her to borrow (the interest rate) compared to the outstanding returns Dirk expected to obtain for her.

 

Whoa Nelly!

 

I paused and chose my words carefully – this guy was a friend and neighbor of Mona’s for several years, I didn’t want to create a stir by insulting him and lose an opportunity to help Mona.  I asked him kind of returns he thought he’d achieve.  “Well, in any 20 year period the stock market has averaged no less than 9% per annum.”

 

“But Mona has short term needs for this cash – she’s completing her degree and won’t be earning a good living for 3 years,” I said.  “This money needs to be kept safe in liquid, short term investments, not riskier long term products.”  Look at the S&P 500 over the last 4 years – it ain’t pretty!

 

Dirk replied, “Hey, I’ve been in this business for a long time and I know how to manage risk.  I’ll put her in short term Treasuries.”

 

I noted, “Last time I checked, and I’m not a money manager, you couldn’t do much better than 3-4% in those kind of investments.  If it costs Mona approximately 6% to borrow, she’s losing 3% per year with your strategy.  This doesn’t make sense to me.” 

 

I tried to bite my tongue, which is a major undertaking if you ask anyone who knows me.  I suspected that Dirk, who is compensated by a percentage of the assets he brings under management, was trying to gather Mona’s assets into his firm.  No, I didn’t say that to him, luckily our conversation concluded soon after my last comment.

 

Four days later, I met Mona face to face for our final planning session.  First, I noticed that she’d have no problems getting re-married, because she was quite fetching, a lovely lady.  So that reinforced my recommendation of a 7 Year, Interest Only ARM.  More important, her divorce attorney, Deb Byles, previously had a heart to heart with her about her financial “advisor’s” advice.

 

I explained to Mona that I could do whatever she wanted.  In fact, the more money I lend, the more money I make!  But, as a fiduciary of hers, I would not recommend something that was not in her best interests.

 

At the end of the planning session, Mona decided to borrower the lower amount, so she wouldn’t strap herself needlessly.  Although much of the post-decision visit was taken up by a vigorous, impromptu man-bashing (and male lawyer bashing) free-for-all between Mona and my assistant, Gwyn, I still felt great that I was helping Mona do the best thing for herself given her circumstances.  I fled the scene for lunch to protect my tender ears.