When things don’t stack up: family clients and dealing with market volatility in a COVID-19 climate

We continue our series of hot topics in family law in a COVID-19 climate. Manders Law Managing Partner, Mary-Ann Wright, speaks to Katie Waite and Amy Pethers, wealth managers at 1762 from Brewin Dolphin, on the market volatility that family law clients are concerned about in the current crisis. If you are currently engaged in proceedings, or are contemplating proceedings at this challenging time, the information and practical guidance below will be of relevance to you.

About the Interviewees

Katie Waite and Amy Pethers are wealth managers who provide financial advice for clients at 1762 from Brewin Dolphin on accumulating, growing and protecting their wealth.  Experienced in working closely with family law clients on matters, they often provide information, expertise and support around asset valuations, cash flow modelling and pension sharing to ensure that optimum financial settlements are achieved.

Question

What is the key thing to be borne in mind by clients if they are currently engaged in settlement negotiations following the breakdown of a relationship/initiation of divorce proceedings at the current time?

The most important point to remember is that during times of market volatility asset valuations can quickly become out-of-date. Some investments may fluctuate in value dramatically from minute-to-minute, let alone day-to-day and if you are working off data that is six months old, you could be at a serious disadvantage.

Having a good understanding of the marital assets and their unique characteristics will enable you to properly consider appropriate division. For example, clients may have shares which form part of the assets and recognising the difference on ascertaining share values between publicly listed companies and private companies will be important. The former are listed on the stock exchange and therefore it is generally easy to ascertain a recent price, however the valuation of private or family company shareholdings may be more difficult and might involve the instruction of a forensic accountant as a single joint expert in some cases.

Clients should also be mindful of the tax treatment of different types of accounts like pensions and ISAs. It may not be as straight forward as simply sharing assets on divorce and there may be personal allowances or tax benefits that should be considered when deciding how they should be allocated. If in doubt, seek professional advice from a wealth manager.

Question

How easy is it to obtain up-to-date and accurate valuations at this time of pandemic?

Wealth management firms usually only provide a paper valuation every quarter and a pension statement may well only be issued annually. However, bear in mind that many of the investments within these portfolios will likely be priced at least daily so it is vital to ensure you are working from the most up-to-date information possible. An investment manager will be able to provide valuation information on specific investments. Usually an email or phone call will be sufficient to obtain a recent report.

Question

What are the important tax considerations?

Where investments are held, and consequential tax implications, are always important considerations and even more so during periods of market volatility. Selling investments at a loss within an ISA wrapper, for example, extinguishes the ability to use that loss to offset against any existing or future capital gains.

Pensions and life assurance policies are complicated, especially given all the recent legislative changes regarding pension rules. We would recommend seeking both tax and investment advice if life assurance policies or pension schemes are affected by a divorce. For example, pension sharing may have consequences for both annual allowances and lifetime allowances, so it is best to speak with an adviser so that these implications can be understood.


Question

Liquidity is often a key consideration in settlement negotiations on marital breakdown. How does market volatility affect this issue?

How quickly and easily you can dispose of an asset is a major consideration where there is an intention to liquidate in favour of cash. In exceptional market circumstances, some investment funds can ‘gate’, which essentially means that the managers have a right to limit or halt redemptions (sales). A recent example was seen when a number of unit trusts investing in commercial property had to ‘gate’ as they were unable to sell properties within the fund quickly enough to meet the withdrawal requests of investors. An investment manager will be able to provide guidance as to the liquidity of specific assets, for instance, what price might be achieved and how quickly sale proceeds will be received.

Question

Is there a “golden rule” to follow to reduce market volatility risk?

There certainly is. One of the best ways to reduce volatility risk is to diversify your investment portfolio. The benefit of a diversified investment portfolio should mean smoother, more consistent returns over a medium- to long-term time horizon. By ensuring a mixture of asset types, you reduce stock specific risk and reliance on a particular company, sector or geographic region, which might be especially vulnerable in the current crisis. For example, at Brewin Dolphin we run multi-asset portfolios which spread clients’ investments across different asset classes (equities, bonds and alternatives like gold or commercial property) to reduce correlation and ensure a suitable range of exposure to different sectors and countries, which will likely perform differently at times in the business cycle.

Question

What are your top tips on planning and cash flow at this time?

“Cash is king” during periods of market volatility. It ensures individuals can meet near term requirements and may enable them to take advantage of attractive opportunities in stock markets. To arrive at a suitable cash reserve level, we recommend that family law clients work closely with their solicitors and wealth managers to carry out detailed cash-flow forecasting in order to understand and extrapolate how income and expenditure might change over the coming years.

For an initial FREE consultation on any aspect of family law, call Manders Law on 01245 895 105 or email us here.

Note: this blog is intended to give an overview (rather than comprehensive guidance and advice) on your legal or financial position and is provided for information only. It is not an endorsement of any product or service provider.