Financial Planning for Attorneys in Manhattan - Part Two
My first blog post in this series focused on financial planning for attorneys and the risks they face. In it, I examined Company Town Risks® and how a Total Wealth financial planning approach can reveal previously hidden concentrated risks.In this post, I continue my analysis using the example of a 50 year-old AmLaw 100 partner, living and working in Manhattan. Her total wealth is comprised of the following:
- Human Capital: $17.3M;
- Pensions: $5M;
- Real Estate: $5M;
- Financial: $10M.
Financial Planning for Attorneys - Company Town Risk® Exposures
As can be seen in Table 1, below, our attorney has a number of large, overlapping, Company Town Risk® exposures.Table 1: Company Town Risk® by Type
I will first unpack these risks exposures by type and then by asset class.
U.S. Capital Markets
Almost all of our attorney’s assets are exposed to U.S. Capital Markets risk. Her human capital is heavily exposed to the health of the financial markets; the firm is similarly exposed as most of its business is transactional and thus this risk extends to her firm pension; most of her real estate is exposed from her apartment; and her equities are directly exposed.
There is a large and direct exposure to the firm through human capital and the pension.
Our attorney specializes in healthcare sector M&A and is thus directly exposed to any events that affect it, she is also exposed through the healthcare sector equities she owns in her portfolio.
Two exposures exist for Manhattan, one from the apartment our attorney lives in and the other from the New York City municipal bonds she owns.
Company Town Risk® by Asset
For our attorney, the largest component of Total Wealth is Human Capital. This is true for most AmLaw 100 partners until they get to between five and 10 years of retirement. Our attorney’s income is highly exposed to the U.S. capital markets in general and the healthcare sector in particular.Furthermore, if there were a large, disruptive event in the healthcare space, such as the implementation of a single-payer U.S. health insurance program, the transactional work might shift to the bankruptcy group. In such a scenario, the M&A work could spike and then die out.Of course, the M&A skills from one sector are generally transferable to other sectors, but those other sectors are already serviced by specialists. Our attorney has a lifetime of industry contacts and highly specialized knowledge that could be lost. Her general legal skills are not worth as much without twenty-five years of contacts and industry knowledge behind them.
The firm provides our attorney a defined benefit pension plan that comprises her retirement assets.These cash flows are tied to the health of the firm. They are currently fully funded, however, there remains some risk exposure to the firm.
Our attorney has an apartment in Manhattan worth $4 million and a country house in Connecticut worth $1 million. Both are owned without a mortgage.The New York City apartment’s value is correlated to the capital markets. It is also exposed to all the risks of Manhattan. Hurricane Sandy caused approximately $10.4 billion in damage to New York City infrastructure and approximately $50.5 billion in total damage to New York City, Long Island, and New Jersey. It was a Category 1 hurricane, the least powerful on the five-point scale. If a more powerful hurricane were to hit Manhattan, the damage would be much higher and the impact could be felt at the firm as well.If Manhattan were to experience a more prolonged interruption in basic services such as power, water, transportation, and telephony/internet, it would have a significant effect on the value of the apartment, as well as the functioning of the firm. Indeed, the firm might be forced to relocate to a contingent office outside of Manhattan, at great expense and disruption.Another risk is that of cybersecurity. Recently, Atlanta was subject to a cyberattack that crippled the city government’s ability to function. This attack lasted at least five days and required the use of handwritten notes, physically delivered, to continue government functions.This took the Atlanta government back to 1970’s era technology. If New York City were to be hit by such an attack, the consequences could be more significant and directly related to the capital markets. To put this in perspective, in 1980 New York City Tax Revenue was $7 billion, in 2016 it was $54 billion.
The liquid assets are moderately invested with a 50/50 allocation between broadly diversified blue-chip stocks and high quality municipal bonds. The municipal bonds are all New York bonds split equally between city and state issuers.There is also an investment in a private equity fund from a firm our attorney represents. The fund is focused on spinoffs of smaller divisions from large pharmaceutical companies. The fund is in its third year with $500,000 invested and another $500,000 in capital commitments due, most likely over the next two years.The public equities are essentially in the S&P 500, which has an approximate 14 percent weighting in the health care sector. This exposure equates to about seven percent of her financial assets, or roughly $700,000.If the U.S. healthcare sector were to be significantly disrupted, our attorney’s private equity fund and healthcare stocks would likely decline. While taken in isolation, these would be survivable, however, this scenario could coincide with her losing her job. That would greatly reduce her human capital at exactly the time when she needed her financial assets to be non-correlated.The municipal bond portfolio is heavily concentrated in New York City issued bonds. If a significant adverse event were to befall Manhattan, these bonds would decline in value and the city would likely face credit downgrades. At the same time her apartment would likely decline in value as well.
Our attorney’s Total Wealth is replete with Company Town Risks®, which are not obvious from a traditional financial asset focus. (This is true for most investors, including the ultra high net worth.) In my next post, I will show how these risks can be diversified.
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______Notes: New York City General Obligation Bonds, Fiscal 2018 Series E, Subseries E-5 Official Statement (CUSIP: 64966QAA8); Available at: https://emma.msrb.org/ES1117337-ER881180-ER1281915.pdf; Accessed April 15, 2018; 68. New York City General Obligation Bonds, Fiscal 2013 Series I and J Official Statement; Dated Date May 24, 2013; Available at: https://emma.msrb.org/Home/Index; 5. $50.4 billion in federal storm-related aid was provided by President Obama. Alan Blinder and Nicole Perlroth; A Cyberattack Hobbles Atlanta, and Security Experts Shudder; The New York Times; March 27, 2018; Available at: https://www.nytimes.com/2018/03/27/us/cyberattack-atlanta-ransomware.html; Accessed April 11, 2018. Independent Budget Office of the City of New York; Available at: http://www.ibo.nyc.ny.us/fiscalhistory.html; Accessed April 11, 2018.
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