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The Role of the Financial Neutral in a Collaborative Divorce Case

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By Robert Nemeth, CPA, ABV, CVA, CDFA, CFE

Collaborative divorce is a form of alternative dispute resolution in which the spouses reach settlement without resorting to litigation. This process involves interest-based discussions as opposed the traditional position-based bargaining.

In addition to the spouses and their respective attorneys, the collaborative team often includes jointly retained third-party coaches as well as a financial professional.

The financial professional is often referred to as a “financial neutral” due to their impartiality to both parties in the process. The participation of a financial neutral offers several distinct advantages. Financial neutrals are not advocates for either party and they may not be engaged by either party in any subsequent litigation. This restriction promotes the free flow of information among all parties. There are no dueling experts in this process. The primary role of the financial neutral is to educate all participants in the collaborative process as to the financial implications of the divorce. 

As part of the process, the financial neutral can also help couples articulate their financial interests. These interests often include saving for the children’s college education, buying a new home, saving for retirement, or simply having the sufficient cash flow to meet future expenses. The interests of the couple form the foundation for all future financial conversations. 

Qualified financial neutrals should have significant training in the collaborative process as well as mediation training. Financial neutrals will hold various professional designations in their field and spend significant hours each year in continuing education. They may be Certified Public Accountants, Business Appraisers, Certified Fraud Examiners, Certified Divorce Financial Analysts or Financial Planners. Each offers a distinct skill set that should be matched to the complexities of the marital estate. Additionally, qualified financial neutrals must have strong listening skills and must be able to explain complicated and confusing financial concepts in layman’s terms.

Depending on the situation, the financial neutral can offer a wide range of services. Typically, the financial neutral will be the depository of all financial information. Having one professional gather and organize the financial information avoids duplication of efforts and ensures that both parties will receive copies of the identical financial documents throughout the process. Since transparency is critical to the collaborative process, the financial neutral can help identify missing financial documents and potentially overlooked assets and debts.  Often, the financial neutral will meet with the spouses separately as well as jointly to gather as much financial information as possible.

In addition to gathering and organizing the pertinent financial information, they will often work with both spouses to create individual budgets and cash flow analyses for their lives post-divorce.

For many people, this is the first time they have gone through this exercise, and it is often an eye-opening experience for one or both spouses. For example, many couples have not sufficiently considered the impact of saving for college or retirement. The realization that there may be future lifestyle changes is a difficult hurdle for many people to overcome. The reality is that the same income level must now support two separate households. Difficult decisions must be made. A financial neutral can lead this conversation in a non-confrontational manner and suggest ways to improve future cash flow. 

Often, a detailed review of historical expenditures is required just to begin the budget process.  In many households, it’s not uncommon that one spouse has traditionally maintained the family’s basic financial duties, such as paying the bills and reconciling the bank accounts. The financial neutral can provide significant guidance and education in this area especially to the spouse that is not as experienced in dealing with financial issues. The exercise of reconstructing historical expenses can be tedious, but a worthwhile and enlightening experience, especially for couples that don’t have a good understanding as to how their money was spent in the past.

The financial neutral can also prepare the personal balance sheet for the couple. This document is critical to the process since it includes the current values of all the assets of the spouses and all their debts. As with budgets, many couples have never created such a document. Most couples have no idea their true “net worth” (assets less debts). Many have said that they had no idea that they were worth so much. Unfortunately, many have also noted that they didn’t realize that they were worth so little. The financial neutral must often explain a big difference between the value of the couple’s assets and the couple’s net worth.

The personal balance sheet is the foundational document when discussing property division alternatives. Different property division scenarios can be presented by the financial neutral for discussion. They can also offer guidance as to the tax and cash flow implications of various alternatives. The potential sale of the marital residence and the division of retirement assets are often significant financial discussion topics.

In the most complex cases, the financial neutral can assist in asset tracing to help determine marital and separate property. This process can be extremely document intensive and time-consuming. An experienced financial neutral can offer guidance to the couple and their attorneys as to how to approach this type of analysis.

The financial neutral is often asked to prepare multiple spousal support calculations based on different scenarios. The calculations can be presented so that the maximum after-tax cash is available for both spouses.

Other complex situations may require the financial neutral to prepare an independent business valuation of a couple’s ownership interest in one or more privately held businesses. Often, a privately held business makes up a significant portion of the couple’s net worth. In many cases, the business is the most valuable asset a couple owns. Hiring an experienced professional to perform an independent business valuation using valid business valuation approaches and methods is critical to the process. “Rules of thumb” or other industry formulas should only be used as a reasonableness check and not as the primary valuation method. Since most ownership interests are highly illiquid, a financial neutral can assist is structuring property settlement alternatives that provide liquidity to the non-business owner spouse without jeopardizing the stability of the business. 

Determining the true cash flow from a privately-owned business can also be tricky. Cash flow can consist not only of salary and bonuses but may include such items as distributions, personal use of a company car, country club dues, and non-business travel and entertainment. The financial neutral can dig into the accounting details to reconstruct the owner’s actual cash flow.

For employed executives, a review and analysis of their stock options may be needed.

Using a financial neutral on the collaborative team will help the divorcing couple make informed financial decisions throughout the collaborative process. They can help provide critical information regarding various financial alternatives. The financial neutral will participate in 5-way meetings with the couple and their attorneys and lead the discussion of the financial issues. However, the financial neutral does not make the ultimate decision as to which financial alternative is chosen. 

To work most effectively with a financial neutral, there are a few points to keep in mind. A financial neutral should be brought into the collaborative process as soon as possible. Having all team members identified at the start of the process helps identify issues early on and allows for smoother completion of the process. Communication throughout the process is vital. The most successful collaborative engagements involving a financial professional occur when all team members communicate frequently. A short, ten-minute phone call on a periodic basis can keep the team on task and reduce uncertainty as to the next steps in the process.

“Pre-meets” and “Post-meets” with all professional team members are also recommended when involving a financial neutral in the collaborative process. Pre-meets can be used to develop an agenda for a 5-way meeting and to allow the attorneys an opportunity to advise the financial neutral of any specific client concerns or areas of emphasis or explanation that is required during the 5-way meeting. A post-meet with all professional team members is also an opportunity to identify critical issues that arose during the 5-way meeting, as well as the required follow-up needed by the financial professional. Additionally, the financial neutral should review the meeting minutes from prior 5-way meetings to ensure the financial discussions are documented accurately.

The collaborative divorce form of alternative dispute resolution offers couples the opportunity to create a financial settlement that meets the interests of both spouses without resorting to traditional positional bargaining techniques. Financial neutrals can be valuable team members in the collaborative divorce process. Their role as non-biased financial educators will help divorcing couples make informed financial decisions when concluding their marriage and planning for the next phase of their lives.