Entertainment and technology are among the most high-profile industries in California, and advisers there compete fiercely for clients in these businesses.

Tom Palecek focuses on an industry that gets far less attention from the advisory community – agriculture.

“Agriculture clients are great,” says Palecek, a founding partner of Summit Trail Advisors. “Farmers drive tractors, wear jeans and cowboy boots. But they are real businessmen.”

(Bloomberg News)
A farmer holds grains of wheat. (Bloomberg News)

Palecek got some experience in his unusual specialty during a business training program in which he participated between college and graduate school. Palecek spent several years working with the vintners at E. & J. Gallo, a private company that makes and markets spirits, before returning to Stanford for an MBA.

The Gallo Management Development Program introduced him to the business side of farming, and helped him develop contacts in a world that is otherwise skeptical of Wall Street, Palecek says.

After graduate school, Palecek joined Goldman Sachs in San Francisco and noticed that all his colleagues were chasing tech clients. But Silicon Valley isn’t just about its prominent high-tech firms; it’s also home to dozens of agri-businesses that are run and managed by an equally promising prospective clientele.


“I wondered why no one paid attention to agriculture,” Palecek says. Now, he continues, “we work with almond farmers, chicken farmers, vintners. Once you get into that community, they start to trust you. But it is a more difficult industry to break into.”

Summit Trail’s client base is certainly not exclusively farmers – they make up about 15% of the practice. But from a planning perspective, farmers have some unique challenges – Mother Nature, for one. While farmers have control over what they plant, the yield on any given crop will vary based on weather conditions. Too much or too little rain or cold can decimate a harvest.

“We think there are a lot of people like us …. and are looking for people who are like-minded and want to merge their books with ours.”

Meanwhile, perfect weather conditions can create bumper crops, which can drive down market prices. Most farmers deal with this classic conundrum by hedging their bets in the commodity market – essentially pre-selling a percentage of their crops at a price that will cover their cost of production.

But some nature-related risks can’t be hedged away.

“If you are planting walnuts, pistachios or grapes, it’s going to be three to five years before you have a real crop,” Palecek says. “And you can’t hedge five years into the future.”

Water restrictions put into place as the result of California’s long-term drought caused a number of almond farmers to uproot their trees, for instance, wiping away a huge capital investment.


Palecek’s solution: Diversify your farm, just as you’d diversify your portfolio.

“When you have a massive asset, you look at how to protect it,” he says. “How much do you need to have on the side to make sure that you can weather the storm for one to three years?”

Real estate funds: Who’s on top?
The volatility can be painful, but these funds are often used to diversify portfolios and generate alpha.

Most farmers also have the bulk of their wealth tied up in real estate, Palecek adds. While crops may bring in a few million dollars each year, the land could be worth 100 times as much. Thanks to urban sprawl, the value of some California farmland has soared tenfold in just the past few years. Real estate developers are increasingly approaching farmers and offering them vast sums to move to less-populated pastures.

“That’s basically what happened with the dairy industry,” Palecek says. “They started in Los Angeles, got bought out and moved to Orange County, got bought out and moved to Riverside and got bought out again. People were coming up and saying, ‘I’ll pay you for $50 million for your land.’”

Moving a few miles to cash out a fortune on real estate can help diversify crop risk with investment risk, Palecek says. However, he adds, it’s wise to consider estate planning issues while contemplating such an offer, because not every farmer is going to have a second generation wanting to step in and run the business. Before you invest in more land, it might make sense to converse with the kids. You may simply decide to retire and invest your money elsewhere.


Those who have children who want to take over the farm should engage in sophisticated estate planning to transfer the land to the kids before death, Palecek adds. Otherwise, the taxes that will be due at the farmer’s death could force the second generation to sell prematurely, just to pay Uncle Sam.

Keeping an eye on the complex ecosystem necessary to run and maintain a business for generations is something Palecek recently learned well through personal experience. Two years ago, he was working with London-based Barclays and watching with some alarm how new financial regulations were changing the way European banks dealt with their financial planning divisions.

Convinced that this shift — which required more money to be spent on compliance and less on cash compensation — meant that Barclays would become less competitive in the planning field, he began to talk to his colleagues about breaking off.

“We felt we needed to get the ownership of our practice out of the European bank, or the practice would die a slow death,” he says.


Other U.S. banks were willing to pay dearly for planners who wanted to jump ship, Palecek adds. But the changes happening in Europe are just a precursor to what will happen here in a few years, he says. Instead of joining another bank, he was inspired to set up an independent shop.

He and several like-minded Barclays partners got to work setting up the proper legal and regulatory framework for a break. Their plan was to launch in late July of 2015, but the departing partners worried that Barclays might fight to impose non-compete agreements on them. As luck would have it, a month before their launch, Barclays announced it would be selling its financial planning arm, which gave Summit Trail a clear takeoff path.

Just over a year later, Summit Trail has $3 billion in assets, 39 employees and 200 clients, and is growing rapidly, both through client referrals and the addition of other planners, who are joining and bringing clients with them.
And they’re just getting started.

“We think that there were a lot of people like us that acted like fiduciaries even though they were [working as brokers through banks and were] not,” Palecek says. “Now we have an open partnership and are looking for people who are like-minded and want to merge their books with ours.”

Kathy Kristof

Kathy Kristof, a Financial Planning contributing writer in Los Angeles, also contributes to Kiplinger's and CBS MoneyWatch.