Husband and wife client are getting a divorce. They share a sizable brokerage account (~$800k) that needs to be split in the following fashion:
Cash settlement to husband: $60k
Education account for kids (jointly owned): $300k
Domestic Preserve 35/65 target
Current money market holdings go here
No international stocks
With remaining funds:
Individual account (Wife): 57%
Individual account (Husband): 43%
Both vs. Global Grow 80/20 target
Similar weighted cost basis required
How would you best handle this situation?
Our Approach
This is a special case of an asset location problem. We need to locate assets to separate accounts while trying to minimize aggregate tracking error of each account to its respective target. Below is a proposed implementation:
Run a tax-aware rebalance on current account—raising $60k cash in a tax-efficient manner
Set account capacities ($60k Cash, $300k Education, ~$251k Wife, and ~$189k Husband) along with their respective targets.
Set general constraints (allocated amounts must match account capacities, all current positions allocated, etc.) along with stated constraints (100% cash in Cash, all current money market (SNSXX) to Education, no International equities in Education, etc.).
Run multi-account optimization with primary objective of reducing the aggregate tracking error of each account to its respective target.
A key enhancement here is leveraging a risk model—not only in the rebalance optimization but in the asset location as well. Common asset location methodologies follow rule-based heuristics, which leads to a lack of personalization and inferior outcomes, particularly when a special situation arises. The resultant notional asset class weights of each account reflect the efficacy of balancing relative tracking error across accounts—while acknowledging user-defined constraints with no manual overrides.
The added wrinkle is the similar weighted cost basis of the individual accounts. This is a practical detail that becomes a blocker without intimate knowledge of the process. Here we took the available lots, sorted by cost basis, and then randomized the lot allocation to each account based on the results from Step #4. On average this should work out to “fair”. Of the individual account allocations, the wife’s individual account was 57.2% of the market value, contained 57.6% of the cost basis, and 56.8% of the unrealized capital gains.
Why it Matters
“…there is no manual that deals with the real business of motorcycle maintenance, the most important aspect of all.”
—Robert M. Persig, Zen and the Art of Motorcycle Maintenance
There's no single correct way to split these accounts. But the quality of the outcome doesn't come from the procedure—it comes from the attention and care brought to the problem. Let us own the complexity so you can deliver simplicity during difficult life situations.
Important Disclosures & Definitions
AAI001152