In this PODCAST
Transcript
Will: Welcome back to our second session on ultra-high-net-worth divorces. My name is Will Amerine. Joining me again is my colleague, Martim Oliviera.
In our last session, we spoke about the importance of assembling a great team. In this session, we’ll talk about incorporating the right strategy and financial planning methods during the divorce process.
Let’s jump right into it. Martim, in your opinion, what defines the financial planning and strategy work in ultra-high-net-worth divorces?
Defining financial planning and strategy Work Specific to Divorce Between Ultrawealthy Clients: Modeling Complex Assets
Martim: Thanks again for having me. I’m really pleased to be in this second session with you, Will.
There are two considerations here, and both considerations must work in tandem, hand-in-hand. One is legal, the other is financial. These are two areas that have to work together from a planning perspective.
The legal component is one that is predominantly centered on strategy and negotiation.
As we discussed in the last podcast, a divorce is often seen as a legal negotiation against a backdrop of both established law and established case precedent. What is often ignored is the financial planning aspect that divorce negotiations require. We’ll go into more detail, but what’s involved in the financial planning is, of course, modeling various outcomes that help to inform an individual on what the negotiating strategy should be.
Will: Martim, regarding the modeling, it is such an important part of negotiations. When we spoke on our previous podcast, I brought up the concept that a dollar is not always just a dollar in divorces. Can you go into more detail about how, as financial advisors, we examine things and work to define the terms and the outcomes we’re trying to achieve in a settlement?
Martim: So, let’s talk a little bit more about modeling. Modeling is another term that’s often used to describe financial planning. Modeling and financial planning are essentially taking into account all the resources that you currently have, the resources you project to have in the future, and determining whether the resources are sufficient to meet your future financial needs.
Obviously, what you’re doing in a modeling exercise is a fair amount of prediction and assumption. However, from a balance sheet perspective, the result that you’re seeking to understand is “What does my net worth need to be?” This is also your starting point for outlining how to achieve your financial objectives.
Next, we put that data set, those assumptions, and the objectives through a number of planning iterations to see if the desired effects are achieved under a variety of different circumstances.
But you’re right, Will, a dollar isn’t just a dollar in divorces. And what we must understand here is that when working with ultra-high-net-worth individuals you are dealing with complex assets.
Complex assets are typically illiquid. Some of these could be non-marketable assets; assets that you own, but don’t have a majority ownership of; assets that have different cash flows; or even assets with different capital call obligations associated with them. All of this gives way to the financial planning and modeling that you do, which is significantly more complex than it is for simple assets, such as marketable securities.
when divorce means potential disruption to the family business, work to preserve the integrity of the business
Will: As with many ultra-high-net-worth families, there’s often a business that’s involved, and that business can be an ongoing entity. Those businesses can sometimes become the most complex asset in a divorce; a healthy, operating, very successful business as part of the balance sheet. What are your thoughts on that?
Martim: That’s a great question. As you mentioned, in most of the cases that we come across, there is some form of operating business, be it an industrial company, a technology company, or a property management company that’s managing a portfolio of stabilized properties. The decision about what to do with these assets is a complicated one.
I’ve seen a variety of instances where the divorcing couple decide that it’s in their best interest to remain as co-owners to avoid any disruption to the business. There’s potential for that to lead to a variety of issues in the future. It may be a suboptimal solution, but nevertheless, it is a choice that can be made.
Sometimes, one party buys the other party out. That can, yet again, be a complex negotiation because the way that buyout is financed by the acquiring party can sometimes be in exchange for other assets on the balance sheet. It can be in exchange for a note.
There is also the issue of being in the middle of a divorce, while there are other family members who also work in the business. This can provide a significant amount of disruption, again, not only to the family, but to the business overall. One point that is critical here is that as you go through the process it is absolutely essential to maintain the integrity of the business as a well-operating and functional business—for lack of a better phrase, you want to avoid destroying the business in the process.
Parting Advice for Financial Advisors New to Supporting Families of Wealth during Times of Divorce
Will: Yes, so important. Such great points there.
As we wrap up this episode, I’m reflecting on when I started my career and was working on my first divorce case and just how overwhelming it could be sometimes. Granted, that was back before we had access to the financial instruments that are used today, but even with today’s tools, as a financial advisor to a client going through a divorce, you deal with some very serious things. There are large values in private businesses at stake, and quite frankly, there are nuances and very real implications in dealing with the other financial complexities and emotional components that are part of working with a client going through an ultra-high-net-worth divorce.
Do you have any advice for financial advisors working in this industry? If they come across things that they may not completely understand, but they’re being looked to as a trusted advisor, what should they be thinking about?
Martim: Yes, I think that we go into this career—actually, I call it a vocation—because we want to help and be a resource to our clients.
It’s not uncommon to step into engagements and projects that end up being a little (or a lot) outside our area of expertise.
My advice in those cases is to avoid doing that.
Be an asset where you can be an asset, and bring in resources where you feel you can’t add value or where you feel it’s an area that you’re not an expert in. Also, understand that this is not only a technically complex area, but it’s also an area that comes with a lot of emotional and other types of, I’ll say, non-technical aspects.
Because of this, it’s important to stay in your lane. If you feel that you need help, seek help. And above all, always be honest and truthful with your client about what you can and can’t do.
Will: Couldn’t agree more. Martim, thanks again for joining us today.
This wraps up our second session in our three-part series about ultra-high-net-worth divorces. Our next conversation will be about honoring the emotional component when working with clients as they go through a divorce. We look forward to you joining us at that time. Thanks everyone.
