Financial neutrals play an essential role in the collaborative divorce process. This article will first briefly describe the process itself and then detail the specific role of the financial neutral.
THE COLLABORATIVE PROCESS
Collaborative practice is a voluntary dispute resolution process in which parties settle without resorting to litigation. As described by the International Academy of Collaborative Professionals (IACP), in collaborative practice:
- The parties sign a collaborative participation agreement describing the nature and scope of the matter.
- The parties voluntarily disclose all information which is relevant and material to the matter that must be decided.
- The parties agree to use good faith efforts in their negotiations to reach a mutually acceptable settlement.
- Each party must be represented by a lawyer whose representation terminates upon the undertaking of any contested court proceeding.
- The parties may engage mental health and financial professionals whose engagement terminates upon the undertaking of any contested court proceeding.
- The parties may jointly engage other experts as needed.
Collaborative practice provides the parties with the support and guidance of their own lawyers without going to court. Additionally, collaborative practice allows the couple the benefit of coaches, child specialists and financial specialists all working together as a team.
In collaborative practice, core elements form the parties’ commitments to the process, which are to:
- Negotiate a mutually acceptable resolution without having courts decide issues.
- Maintain open communication and information sharing.
- Create shared solutions acknowledging the highest priorities of all.
THE ROLE OF THE FINANCIAL NEUTRAL
A premise of collaborative practice is that clients are best served by working with people who are trained experts in their field. A divorce involves “uncoupling” in three areas:
- Emotional / Family Restructuring
Rather than having one professional who may or may not have competence in all aspects of a divorce, the collaborative process works better, is more efficient and can be less costly in the long term by adding specialists in each area to the collaborative team.
In the collaborative process, “financial neutral” refers to a financially trained professional whose functions are primarily to:
- Independently verify financial information on behalf of the clients and lawyers.
- Help clients to financially uncouple from a nuclear household to a binuclear household.
- Help the clients create a financial base on which to support the realities of a new family structure.
Unproductive conflict and/or unresolved emotions regarding finances are some of the most difficult issues to address in the divorce process.
The financial neutral helps clients to understand in a clear, concise, and unemotional manner what assets, liabilities, and incomes they have, and illustrates for them the impact of different possible solutions on the future financial well- being of them and their children.
Working with the rest of the collaborative team, the financial neutral helps parties articulate options for property division and income sharing.
The collaborative financial neutral has extensive knowledge of finances relating to a divorce and/
or legal separation, is focused primarily on helping clients reach a financial settlement and is the team member who will be most familiar with finances. They are the go-to person to get financial questions answered and to help the clients work through the financial considerations that will ultimately go into the financial resolution. The input of the financial neutral is essential to help the clients define and address the financial considerations and questions that go into their financial settlement, incorporating as many of their high-end financial goals as possible along the way.
YOUR FINANCIAL NEUTRAL’S EXPERTISE
The IACP’s minimum standards for collaborative financial practitioners require that the financial neutral have a license or designation in good standing in one of the following areas, or such other equivalent license or designation that requires a broad-based financial background and continuing education and that is regulated by a governing body under a code of ethics:
- CFP® (Certified Financial Planner)
- CMA (Certified Management Accountant)
- CPA (Certified Public Accountant)
- CGA (Certified General Accountant)
- CA (Chartered Accountant)
- ChFC (Chartered Financial Consultant)
- CDFA® (Certified Divorce Financial Analyst)
Your financial neutral may have education or experience in:
- Financial aspects of divorce
- Cash management and spending plans
- Retirement and pension plans
- Income tax
- Property division
- Individual & family financial planning concepts
- Business valuations
- Employee stock plans
- Real estate
YOUR WORK AS A FINANCIAL NEUTRAL
Financial neutrals have their own fee agreements which need to be signed prior to commencing work. Once retained, the financial neutral can give clients a list of source documents to provide and forms to fill out that outline their financial background, which may include a budget of current expenses and anticipated post-divorce budgets. The financial neutral lets the clients know how to deliver documents, whether by hard copy or through a secured electronic portal.
Once the documents are delivered, the financial neutral will meet with the clients to review their documents, ask questions and identify any additional financial information that is needed. This meeting is also an opportunity for the clients to find out more about the role of the financial neutral in the collaborative process and to inform the financial neutral of any issues or concerns that are specific to their situation. The clients should come away from this meeting with a work plan and deadlines for getting tasks accomplished.
The second meeting with the clients will be during a full team meeting with their attorneys for the purpose of reviewing the financial neutral’s initial property and budget report and making sure that each asset and liability is listed, accurately identified by account number and assigned a placeholder value. It is essential to establish the accuracy of the property and budget report for the clients before progressing to the next steps. The financial neutral will attend all team meetings related to financial issues, other than the first four-way meeting.
Once the financial information has been compiled as part of the information-gathering phase of the collaborative process, the financial neutral helps the clients to identify their financial interests—namely, what they are solving for. This is where you get to help the clients articulate what is most important in their financial life. For instance, it might be most important for the clients to be financially self-sufficient, to keep the family residence, to save for retirement, to have cash for a down payment on a new home, to have the children go to private school or any number of other objectives.
Knowing what the couple is solving for is an essential part of the financial uncoupling which may not be solved with a simple 50/50 division (or other percentage division) of assets.
As an example, the clients may not want to buy a residence if it does not give them the flexibility they want in other parts of their life. Or they value retirement assets over other types of assets.
After identifying each person’s financial interests, the financial neutral will model different scenarios, showing the impact of various allocations of assets, debts and income on each household. Through running these scenarios, the clients get a better idea of what works and what doesn’t until they find the scenario that works “well enough” for each of them— the goal being that each person achieves as many of their financial interests as possible.
HOW A FINANCIAL NEUTRAL HELPS CLIENTS THROUGH THE COLLABORATIVE PROCESS
The financial neutral stands on equal footing with the clients and other professionals in the collaborative process. Each professional brings necessary information to the collaborative process. All professionals have appropriate training, and while there is some crossover in what each brings to the table, everyone wears a main “hat.” Here are just some of the ways that a financial neutral may be of assistance in the collaborative case:
- Regardless of how financially astute the clients are, the financial neutral is able to provide independent verification of the financial information and can help the clients understand their current financial situation and what it might look like in the future.
- In many relationships one person takes on the task of managing the finances, meaning that the other may need to be brought up-to-speed and gain the information or skills to manage their own financial resources.
- The financial neutral may bring to the collaborative process resources
that are otherwise not always taken advantage of in the legal process, including information about the use of vocational rehabilitation experts, pension valuations, business valuations, tax issues, Social Security information and other ways for the clients to use their assets and incomes to make informed decisions based on good information.
- Finally, the role of the financial neutral complements the work of the coach and the attorneys, who are responsible for other information relevant to the collaborative process.
In any legal proceeding, high emotions and a lack of information have a direct correlation with the cost of the process and ultimately the quality of the resolution. The clients bring into the divorce process a broad range of emotions, fears and skills (or lack thereof). The collaborative process is designed to address those issues by giving the clients information to help alleviate the impact they have on the process.
The financial neutral has special training to most effectively address what comes up for the clients on issues related to finances and financial decisions.
The collaborative process works better—and is more time- and cost-efficient—when clients are working with the professional most qualified for the task. There is no hierarchy on a collaborative team. The clients are reminded that their attorneys are the most expensive part of the process. They deserve to work with the specialists that can best provide them what they need to make the decisions necessary for them to navigate and complete the process.