Making a couple’s investments work together

(June 2008) A wedding takes a lot of preparation — flowers, food, venue — but one type of planning that soon-to-be newlyweds often overlook is their finances. Many couples, especially if they’re getting hitched for the second time, come into the marriage with separate investment accounts and their own homes, so figuring out what to do with overlapping assets is key to wedding bliss.

If both spouses are avid investors, it’s important for advisors to look at their portfolios as a combined entity — not as separate, unrelated investments. “I look at the thousand-foot view,” says Ottawa-based CIBC advisor Jennifer Hooper. “As long as people are happy sharing information, I combine all investable assets and do my analytics from that perspective.”

What she’s doing is looking at the big picture. If one person is an aggressive investor and the other is conservative, the overall household portfolio objective could be considered balanced.

That approach will likely work better than getting one of the spouses to alter his or her investment style. “You can’t change one person to invest like the other,” says Ron Harvey, an advisor with Ottawa-based Independent Planning Group. “Each person may be uncomfortable with the other party’s choices, but it’s incumbent on the advisor to marry those two together to create a comprehensive financial plan that works.”

It’s important for advisors to get clients to look at their “collective dreams and goals” in order to get out of the individual mindset, says Harvey. Once the spouses decide how they want their financial future to look, they can start making reasonable adjustments to their portfolio.

But what if the partners share the same investment style? Advisors will need to pull out the financial planning basics and talk to their clients about diversification. Harvey says dealing with the aggressive-investing couples is easier than with the risk-averse ones. “I try to bring them back down to where aggressive stuff means they’ll either hit a homerun or strike out,” he says.

More The Wedding Planner

• Making a couple’s investments work together • Tax matters when your client gets hitched • Get your newlywed clients on the same financial page • Premium Advice — using insurance to ensure a happy second marriage • Do you take this pre-nuptial? • More Wedding Planner stories • Template letter: Your marriage and your financial plan

Back to Wedding Planner mainpage

“I have a trade-off conversation with them,” adds Hooper. “I say if you’re both going to sit there, this is what will happen if the market tanks. If you love the adrenaline, you can do that, but here’s the trade-off.”

As much input as the advisor can have, though, it’s really up to the clients to decide if they should alter their investment styles. “I want them to come up with their own solution on how to accommodate each other,” says Harvey. “It’s amazing how that can really work.”

It’s not just investments that married couples need to synch up. Today, it’s commonplace for couples to come into a marriage each owning their own piece of property. Some clients might naturally think to sell one of the houses and move into the remaining place, but it’s not that simple.

If the couple gets married and then sells the house, the first property that’s sold becomes the secondary residence. That means they’ll have to pay tax on the realized capital gain. The other house becomes the primary residence, so the couple won’t take a capital gains hit if they later decide to sell it.

To avoid that happening, it’s best if the spouses figure out their living situation before they tie the knot, so one house can be sold capital gains-free. However, Harvey says he’s never had clients who have done that. Most of them either sell the second home after they get hitched, or they keep one as an investment property. “People aren’t sure which one they want to keep, so they can use one as an investible property,” he explains. “Typically, people will hang onto a home with the perception that it will significantly increase in value and they’ll make more down the road.”

Generally, paying off the capital gains on a second home is manageable if the couple is living in another house. That’s because the spouse can pay the tax bill with the sale proceeds, since he or she is not likely to be looking to buy another place.

Hooper says whether or not a couple will sell the second house is largely motivated by cash flow issues. “Can they afford to have a rental property?” she asks. “Do they want to be landlords? Can they carry two mortgages and have emergency funds?”

She adds that advising a couple on whether to keep or sell a home can be challenging. “They’re never just talking about money,” she says.

Children, or the issue of living in the same house where a spouse previously resided with an ex, can affect important financial decisions. One of Hooper’s married clients actually kept both houses and they live separately. The clients don’t live in the same area and they have older kids who go to nearby schools, so they don’t want to disrupt their children’s routine. “It’s fine to talk about the money,” she says. “But a lot of the dynamic is going to be about the families.”

Hooper says another reason some people keep both houses is because one spouse doesn’t want to let go of an asset in his or her name. “They’re not ready to join assets completely.”

While it’s the advisor’s job to help with the financial planning side of a couple’s affairs, you may need to be prepared to take on another role: marriage counselor. “Sometimes this is like therapy,” says Hooper. “For people young and never married, they’ve never talked about money because they don’t know what the conversation should be. For second marriages, the issue can be so overwhelming that it’s the proverbial elephant in the middle of the room. You’ve got to figure out where to make the first cut into this topic.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(06/04/08)

Bryan Borzykowski