Know where to draw the line in client divorce

“This is about helping clients move to the next page of their life,” said Hartzman. “This type of planning is not for the faint of heart because you do have to steer your clients away from the emotional turmoil that they are going through.”

The challenges and pitfalls of such planning are numerous, but the benefits are rewarding and worthwhile.

“When people decide to go their separate ways, the first thing that comes to people’s mind is I’m going to call my lawyer,” said Hartzman. “It’s our job to help them retain their assets, (so) if they contact you in anticipation, you direct them to someone who specializes in family law.”

There is, however, more to it than family law. The legal profession has identified the fact that family law doesn’t as well as it should and, therefore, such aspects as mediation, collaboration, negotiation, arbitration and litigation are being added, said Hartzman.

“Mediation is (not only) the least expensive way to settle a dispute, but also the most effective, because people take ownership of their decisions and are likely to stay committed to the agreement they make,” she said.

Mediation can go sour, though, if there are underlying problems, like an imbalance in the power dynamic, child custody issues or any kind of abuse. An alternative to mediation, though not infallible, is collaborative family law, a relatively new way to settle matrimonial dispute.

Under this regime, a team of professionals—lawyers, financial advisors, child coaches, etc.—work with both parties to help resolve parenting and financial issues in a respectful manner. It’s done under an agreement that neither party would go to court.

Another option, arbitration, is becoming increasingly popular among high-net worth individuals. This process involves retired lawyers and judges who are specially trained to arbitrate matrimonial disputes. Some of these professionals could charge upwards of $750 an hour; on some occasions doing little more than sitting outside the courthouse waiting for a hearing call, said Hartzman.

Litigation, perhaps the most expensive and agitating way to settle a dispute, is the only recourse left to many warring spouses. Hartzman points out that most of these cases settle on the courtroom steps, rather than the full legal drama playing out. Given that litigation is often a lengthy and emotionally painful process, she advises clients to “take those issues off the table that can be resolved easily and quickly and reserve the court system for those issues that can’t be.”

An advisor can play an important role in managing the clients expectations, using sound financial advice. Many clients have expectations that are unreasonable and unrealistic. Developing a budget helps clients understand the new reality that lifestyle changes will have to be made.

It is equally crucial for advisors to know what is beyond their expertise. “You cannot determine what assets belong to each client,” she said, as that falls under property law and is therefore in the hands of the lawyers. “You also cannot help the client determine the amount of support that might be required in family law, because the minute you say that, it’s going to go to the lawyer,” said Hartzman. “The lawyers hate that.”

Determining the valuation of assets is another no-go area for advisors, because this too falls under property law. The same goes for the valuation of client pension, which must be valued by a pension evaluator for the purposes of family division.

Pensions can be an emotional issue. Clients often argue that their partner played no role in building that asset and, therefore, it shouldn’t be split. “People just cannot get their head around parting with (a portion of) that pension,” said Hartzman. “It’s one of the hardest things for clients to emotionally accept that they are going to have less in their retirement.”

Advisors must also steer clear of most child support issues. “That’s not our job; our job is to help the client understand what this support means and how it’s going to work for them financially.”

Another common concern is the lack of clear spousal support guidelines. “You can’t have a client negotiate a way to keep all the kids and all their extracurricular activities to use up net disposable income so that there’s no money for spousal support,” said Hartzman. Although advisors can’t give any direction on what the spousal support should be, they can direct the client back to their lawyer for detailed spousal support guidelines.

Then there are issues around the most emotional asset: the matrimonial home. There may be a huge disadvantage for a client to accept the matrimonial home as their equalization payment because of the inherent risks involved, said Hartzman. “Many times clients say I will walk away from the pension because I really want the home.” It is extremely rare where it makes sense to trade the matrimonial home off for the pension.

(11/17/2010)