Tom Palecek: Divorce Is Tough. How to Help Clients Navigate It.

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Hello and welcome to Barron's The Way Forward. I'm Greg Bartalis, and my guest today is Tom Palachek, founding partner and advisor at Summit Trail Advisors. Tom works with an elite group of entrepreneurs, VCs, real estate families, finance professionals, business owners, and foundations, providing holistic advice on investments, tax matters, and estate planning. And today we will discuss divorce and really all aspects of it and how advisors can help ultra-high net worth and high net worth clients navigate that. Tom, welcome to the program.

Thank you for having me. Glad to be here.

Excellent. So tell me how you got into this business, how it's changed, and what's really happening right now. What are some key points to consider?

How did I get into this? Well, first, I guess getting into wealth management, this is post-business school, 2005, and it was a career counselor, quite honestly, at Stanford that placed me into wealth management. I'd never heard of it before. But then as it relates to divorce, it was the late 2000s. I was asked by a really well-known and well-respected divorce attorney to essentially come in and help them in a mediation for a divorce that they had, a big Silicon Valley, you know, kind of venture capital type situation. I was recommended by the tax counsel that was representing on that case as well. It was actually pretty intimidating. I'm showing up to this thing wondering, why are they asking me to come help on a mediation? I'm not an attorney, right? I don't mediate. And what I'd realized when I got there and spent the afternoon and the day with them and the judge and the mediators was, you know, the tax folks are really good at taxes. Lawyers are really good at being lawyers. There's not somebody there that understands the financial element of what's happening, what's happening with these balance sheets, and really bringing all those three pieces together for ultimately the client who's about to, you know, is hopefully gonna mediate to a conclusion that they have to live with for the rest of their life. It's a very important moment. And that was clearly missing even with the best attorneys and tax accountants. And that's really kind of where it started. That was the aha moment for me when I walked out of the room that day and I was, you know, They're essentially kind of everybody's high-fiving. And I didn't think I really did that much. It was just, I was just doing what we do.

And how has the landscape changed since then?

You know, I don't think it's actually changed that much. I think the, whether you're going through a divorce or you're selling your business, right? And so forth. There's a lot of these kind of life events that happen where we serve a very particular role as do the attorneys or the tax accountants. But to bring all those things together and, you know, reduce maybe some of the emotionality that comes with these life events, which is really difficult. These are really hard situations that these folks are facing. And for someone to come in and be really reasonable and lay all the cards on the table and come up with a plan, I don't, you know, it's the same as it was 10 years ago. It's still, it's a divorce, right? It's not easy. They look the same.

Right. I mean, splitting assets in any divorce will be fraught. It'll be contentious often, but with ultra high net worth, high net worth people, there can be even more implied tension given the dollar amounts and also just these complicated balance sheets and assets you could have, you know, restricted stock, options, et cetera. I mean, there's so many moving parts and you could at any given moment in time in theory have certain assets that are spiking in dollar to dollar, but that may not really be representative of the intrinsic value. And it's really a snapshot in time. Like, how do you navigate all that?

Yeah, it's a good question. I mean, it's complicated, right? And you have to separate it from like the emotional elements. So sometimes we're like an emotional or psychological kind of counselor of what's reasonable. Like, hey, the other side is being reasonable here, or they're not being reasonable. Like, what battles are we going to pick? It's really taking a step back and understanding like, what are the needs, right? Let's start there. 'Cause it's so emotional and it's fraught with conflict and you know, you want to nitpick every single line item. So it's kind of like, let's just take a step back and let's understand like, what are the needs that we need to come out of this thing with, right? To where ultimately when we have a settlement, like what do we need? Like how many kids are there? How old are they? You know, what are our expenses before they get to college? So it's a financial planning exercise. To begin with, to understand, okay, well, what type of a portfolio, what's our goal? What type of a portfolio do we need to end up with that should sustain that lifestyle and your level of withdrawal for the rest of your life? Assuming that you can't have a paycheck, right? It could be very different if you're just like, listen, I'm going back to work. I still have a job, right? That's very different. But if this is a splitting of assets and you happen to be the individuals that's been at home and you're past your prime earning years, this might, you know, you need to live off this portfolio forever. That is a scary situation. No different than if you're going into retirement, right? You're never gonna have a paycheck again. I have to find a way to live off this portfolio. So it's, we try to simplify in that way and create, right, that kind of step one. That's one way to look at it.

When you try to establish common ground or areas where both parties agree on, do you, approach it from that perspective of first focusing on areas where there is a common goal, may it be providing for children, et cetera, or is it more that you speak separately to each party and say, what's most important to you? And then you go to the other one, what's most important to you? And almost like a Venn diagram, you see where there's overlap and begin there. I'm just curious, or is it a third option or something altogether?

It's a good question. I mean, that's what the mediator's doing, right? Going back to both parties. I mean, typically, if you're at the table and you're coming to a mediation, The communication is broken down to the point, like, that's why you're there. You clearly couldn't figure this out on your own, right? Together. And so that's, yeah, that's difficult.

Tell me, in terms of conventional wisdom, to the extent people are aware of this dynamic or the area, what's something that maybe people are not thinking about that's a tip or something that you wouldn't get from a Google search, let's say?

Communicate, right? I think the hardest divorces are the ones where both spouses have just not been involved in finances, in my experience. And so, you know, making sure, like I encourage, for instance, prenups. They are, people shouldn't, like a lot of people think, oh, that's a really bad thing. And they are, it forces disclosure upfront. It forces the conversation upfront. Like, what are we looking at? It's the surprises where it becomes that much more emotional right down the road. And making sure that regardless of what your role is in the family, making sure that you are involved enough for you to understand what the family is doing, where are we making our big expenses, how are we choosing to live our lifestyle, can we afford that? That's gonna empower you so much more when, if you do get to the point of, getting to a divorce. It's all about communication and disclosure.

Yeah. Yeah. In terms of prenups, I mean, is there— and I acknowledge that this really, the answer first of all is it perhaps depends, but would you recommend one for everyone? I guess what I'm saying, because there's certain people who might not have much at stake in terms of income. And there's some people will be like, oh, you know, it's not romantic and this and that. So is that a blanket endorsement or would you say really it depends or more for high net worth people? I mean, I'm just trying to get a sense of that.

Like you said, it depends.

Yeah. Yeah.

You know, if you're two individuals that didn't come from money and you get married really early in life and neither one of you have anything and you get married in a community property state, it's pretty clear, right? What you, there's just gonna be an equal division of the assets. I think what most people don't know, right, it's super common, for instance, in legacy families where there's legacy assets, multi-generational, sometimes it's like the family rule. Like you don't get your inheritance unless you have a prenup in place. Like that's what the family has done to protect this. That's why this money is still here, you know, 50 or 100 years later. The same could be true If an entrepreneur or a business owner, right? If I don't have a prenup and this leads to a divorce, our family's gonna be forced to liquidate this business that we've grown, right? This needs to be there. It's there to protect all of us because quite frankly, that business will be there to support whatever agreement we're gonna have post-divorce. So it does depend. I think that what the prenup is really good at, whether you kind of have a prenup just amongst each other and you don't do it legally, it forces disclosure, right? It forces transparency. And so, you know, kind of what you're entering into, right? These are the, right? These are the rules that if it's an inheritance, these are the rules that my family has in place and I need you to know about them, right? Because that, that's the partnership that we're entering into. Those are the rules that my family has. And if we want to partake in that, that's, you know, maybe we both decide not to do it, but let's talk about that now. I shouldn't be surprising you. In 10 years with that.

Right, right. Whatever is being debated will be in a much more specific context. So that's right. Yeah, that's right. Tell me a little about life insurance policies and how some of the dynamics there. Let's say someone who's an executive and has a big policy, $10 million, $20 million, and they might be the one divorcing and they may want to have a new beneficiary, et cetera. Like, I don't know, tell me a little about some possible outcomes there.

Yeah, so it's an asset, right? Like anything else, if you're gonna go through disclosure and you know, you've got stocks and you got bonds and you got cash and guess what? You're gonna have this value of a life insurance that needs to be disclosed. And that's gonna be one of the things that's included, right? In the complete list that'll be contemplated of what do we do with that? One individual could keep it, that you might not be able to change the policy, right? And the beneficiary, in which case, if it's gonna stay the way it is and you can't change it, well, guess what? That's just an asset that you're gonna leave on one side and it needs to be made up in a fair and equitable way on the other side. But it's just another asset. It is, it's a good example of that could be something that for whatever reason, one person really wants to fight over. And it's like, we need to see the forest for the trees, right? It's one of many assets and everyone's gonna have their own emotional attachment to different things and they're gonna, value things different ways. And it's really just, it's important to just try to understanding the emotional charge and where it comes from, because it's real. And you need to, if you're not going to get to a good conclusion, right, or have a productive discussion unless you understand where those individuals are coming from.

Right. What does that represent in a bigger context? Is it something you'll fight to the end over? Or it's like, ah, just let it go. Yeah. That's right.

Like an inheritance, for instance, if it was my family, like if it was a family's money and it's been around for 200 years, that is, it's gonna be, that's gonna be a really hard thing to overcome. You know, conversely, you know, to a business, I started it, I founded it, I'm still the CEO. That would be a really tough thing to just give up control of.

Exactly. Now I'm curious about something. Now let's talk about an advisor who wants to be a neutral party. For both involved in a divorcing couple, how do they thread that needle to win the trust of both? Because in this context, invariably one, if not both, might think, oh, you're not being fair enough to me. And how do you— that I imagine is quite challenging to do effectively. Are there any general rules of thumb or recommendations for accomplishing that?

Well, it's like, that's a good— I mean, surprising question, because my rule of thumb would be no, you pick one side in that case, just because for exactly the reason that you mentioned. Regardless of, I think, if you could do a good job, which is really difficult, you're still going to— the one side is constantly going to be thinking, well, are you really representing my best interest or working with the other side? Right. So for the same reason with a prenup, you have two separate attorneys, one on each side. That's the way the law works. Same thing here. You should— both sides should get a separate advisor. Right, that's where a good mediator will come into play. And yes, you can all talk, but I don't want a client thinking that I'm conflicted, you know, in trying to serve, right, two, you know, two parties that really ultimately might have two different goals.

Got it. And tell me, what else do you— what are you seeing lately? I mean, you said a lot of the dynamics haven't really changed over time, but is there any new trends or things that you see more lately in recent years?

Yeah, I think, I think finally coming to the forefront, and we were just, we were on a panel earlier about really just planning. And you know, there's, when you think about, and this, it could be planning for divorce, it could be planning for a retirement, it could be planning for, again, somebody who's selling their business and financial planning, which really is kind of estate and tax planning. And most advisors out there typically lead with investments. That's just been the way, that's just the way it's worked for a very long time. You know, A lot of advisors still are brokers. People started calling themselves advisors 25 years ago. I think if you look at the academic research of what drives long-term returns, what can you do to maximize your outcome over a 10, 20, 30, 50-year period? Asset location being most important, followed by asset allocation second, and third by manager selection. And I feel like everybody always starts with the investments, manager selection. You gotta flip that around and start with asset location, which is a financial planning, right? Tax and estate exercise. You know, what kind of an entity is the family business held in? How are we moving that to the next generation or the third generation from now? How are we, right? How are we including charity in what we're doing, right? How are we really being smart around those assets? Figuring that side out, whether, again, if you're taking this back to a divorce, we gotta figure that planning out as it relates to what ultimately, what conclusion are we gonna come to and all agree to that fits into that plan, right? That'll ultimately, right, service you until you die, right? So I would say that the trend is more people are focused on planning a lot because the really good planners out there You know, if you're, you know, a wealthy client, you're walking around at a cocktail party and you run into me or another advisor that focuses on planning and we bring up some of these ideas, the other advisor's gonna get a call and say, "Hey, why didn't you mention this to me? This is actually a really good idea." That's the worst. That's the one thing you do not want to hear as an advisor. And I think that's really coming to light. It's becoming more and more important as taxes increase.

[Speaker] Right. Yeah. So that's interesting. So it's, you're very much approaching it first in a, with a macro framework, a structural framework, and then filling it in with the investments there, whereas a lot of the others are just rushing to a money manager, but kind of not seeing the forest for the trees, just leading with that.

That's right. I mean, what investment we choose or stocks or bonds or private equity, that's like the last decision that we're making. It's let's make sure that we're structuring the family estate appropriately. Let's talk about your goals. Where do you want this to be in 10, 20, 30 years? Let's figure all that out and then let's figure out how each of these entities should be investing.

We're almost out of time and I wanted to ask you for an actionable idea. So for anyone listening who might want to get a little more acquainted on the subject, learn something, do you have any?

Yeah, you know, I'd reach out to your local, you know, divorce attorney or specialist in whatever city you're in and offer these kind of wealth, offer this wealth management, financial planning, exercise or, you know, to be an expert witness to them as they go through one of their divorces, right? On a— it could be on a no-name basis. Send it to me. You know, I'll— you know, we, we're there to be very reasonable and to double-check on, you know, what's a reasonable rate of return to assume, right? What, what are the asset values that the other spouse, when they went and disclosed things, like, are those reasonable assumptions? The estate attorney's not going to know what's in that situation, what's reasonable, that's what's not. They're going to know what's reasonable in the eye of law. But, you know, we're there again to, to really help them shepherd that process. And we don't charge by the hour. We're happy to go do that work because that's the time you want to get to know the client because they're going to need your services, right? The attorney will go when the divorce comes to a conclusion. They don't need their services anymore. They're going to need our services, right? And so that's a perfect time to get introduced. And from my experience, the tax accountants and and attorneys out there will welcome, right, that type of a service. And so I'd reach out to those folks in your— and be that glue that really brings the team together.

Great. Well, that's an excellent piece of advice. I appreciate it. My guest has been Tom Palachek. For more advisor-specific podcasts, please check out barons.com/podcast. For The Way Forward, I'm Greg Bartalis.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.