The Wealth Management Approach For Civil Defense Attorneys

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1 The Wealth Management Approach For Civil Defense Attorneys Managing Director Senior Investment Management Consultant The Fishbein Group at Morgan Stanley Montgomery Village Ave. Suite 740 Gaithersburg MD

2 It s hard to find a profession that the recession has not affected for the worse. Defense attorneys have not only taken a hit, but continue to face long-term trends in the way attorneys in general are paid. Some of these trends are unique to the defense attorney field and likely to remain even as the economy improves, while other problems relate to the personalities and backgrounds of those who typically go into this field. We recently interviewed a group of these attorneys to obtain a sense of these problems. We d like to share our thoughts on how prudent financial planning, when delivered by a competent Wealth Manager, can help these attorneys achieve a comfortable financial life, now and in their retirement, as they continue to practice in a profession they find fulfilling. General Pressures Faced by Attorneys We started by exploring two separate issues for attorneys: how they run their practices and how they manage their personal finances. However, we quickly realized these were too closely related to separate. Indeed, we found that the major personal financial issue facing defense attorneys is planning for retirement an issue affected by various threats to income. Many issues are so pervasive that no amount of planning will make them vanish, but some firms have found ways to ameliorate some of the negative consequences. Sensible wealth management techniques can help manage personal financial issues. However, like many professionals, attorneys are often so consumed by their professional lives that they fail to develop a wealth management plan to help achieve their financial goals. Some, in fact, have given little thought to long-term goals, and didn t consider the amount of money required to educate their children or to retire at a specific age and income level. A common thread among the defense attorneys that we interviewed was that few had formed a wealth management plan for future financial needs and many naively assumed that they were fine financially because they had contributed to their retirement plan and had saved some additional money. Methodology for This Paper The respondents were interviewed in the Washington DC and Baltimore metropolitan areas. Firms ranged in size from the solo practitioner to the large multi-state firm. The majority of those interviewed had more than twenty years of experience as an attorney. A questionnaire was used with all participants to assure that the same topics were discussed. Although scientific sampling methods were not used, many attorneys participated in our interviews and generally provided consistent interpretations about the financial issues faced by the defense bar. Although we are not able to make scientific statements about the general applicability of the findings, it is our belief that many defense attorneys may find our comments useful. Pricing Problems We found that those attorneys who defend individuals who are sued and have insurance coverage such as an automobile accident case are under extreme rate pressure. The insurance companies are not only lowering the hourly rate that they will pay, but are often taking more control of the case. Attorneys find themselves in dilemmas, caught between defending their clients and meeting the financial constraints of the insurance companies. 2

3 In some instances, hourly rate pressure lessens in proportion to the size of the potential judgment. For example, if a supervisor is sued by an employee for sexual harassment, the hourly fee to defend that case may be much lower than the fee to defend an employer from a case claiming a systemic policy of company discrimination. This is because the latter case could lead to a much larger judgment. Some firms have tried a new strategy, accepting cases only where the chance of a big judgment is possible. Lawyers have pointed out that the highest paid cases involve product liability or major employment issues. Serious medical malpractice cases also appear to pay well when both the hospital as well as a doctor are being sued. Automobile accident cases usually pay the least unless the potential judgment is huge. However, given the degree of knowledge that is required before becoming proficient in an area like medical malpractice, it is sometimes difficult to specialize in more than one area of defense law. Other firms have branched out into new areas that make use of traditional defense litigator skills. For example, the managing partner of one firm that primarily handled medical malpractice cases indicated that his firm was developing a specialty in marital law. A further variation was to handle cases for plaintiffs where the only question was the degree of liability. Defense attorneys are excellent in assessing reasonable damages, and when there is no question of liability, these skills apply. Increasing Popularity Of Flat Fees Another threat to income is the trend away from traditional hourly billing and toward a flat fee. (An exception is trial work, because it is so difficult to predict the number of hours needed.) With a flat fee model, the law firm shares the business risk with the defendant. This forces the law firm to manage each case from a business perspective and have attorneys assigned to the case with background knowledge in the area of dispute. As a partner in a major firm indicated, law firms are having to learn how to manage brainpower rather than just manpower. If the flat fee model has sticking power beyond just being a phenomenon of the recent economic downturn, profits at law firms may suffer as well as the salaries that are paid to associates. The flat fee model is an attack on the basic structure of law firms and the incomes of attorneys at both the associate and partner level. That is, the current typical structure of law firms is to pay associates and paralegals salaries but have their billable hours far exceed their salary and benefits, with the law firm keeping the difference as profits. With a flat fee structure, those paying the legal bills are basically saying that they do not want to pay high hourly rates for someone who is not already an expert to do background research or to allow a law firm to charge significantly more per hour than the employee is being paid per hour. A wonderful example of the huge difference between the rate being billed to the client and the cost to the law firm is provided in the December 2009 Washingtonian Magazine in an article titled Top Lawyers, by Kashmir Hill and David Lat. The authors cite an instance where legal work was contracted out at a rate of $35 per hour but billed to the client at a rate of $250 per hour. Those negotiating fees for organizations requiring legal services know that these situations exist and are not willing to allow a law firm, and hence the partners, to reap a profit of $215 per hour for background work. 3

4 The defense attorneys who are less threatened by the movement to flat fees are those who have a unique set of skills or where the cost of losing a case is very high. Such a unique set of skills will not be necessary in the routine case, but the superstar may still be able to charge an hourly rate at the very high end of the specialty. However, the typical partner who is experienced and competent but grinds away at mainly routine cases will find his or her income threatened. Downward Pressures on Personal Finances Unlike the plaintiff s attorney, who may be able to increase income by winning larger judgments, most defense attorneys can only work more hours or see income fall. Most defense attorneys are in a very similar situation to physicians who can only increase patient load to a certain maximum point but have fees controlled completely by insurance companies. Retirement planning was the single most important financial issue mentioned by those attorneys that we interviewed. Some cited as a problem the elimination of the guaranteed defined benefit pension plan and a mandatory retirement age often, a retiring partner was not paid for leaving a client base with the firm. Therefore, for those with only the typical defined contribution profit sharing/401k type of plan, retirement security may be determined completely by the strength of the markets and one s ability to manage investments or choose a competent wealth manager. One of our findings was a strong tendency to think verbally rather than mathematically. The successful litigator has strong analytical skills and is an excellent speaker and writer. Most often, the litigator majored in college in a subject such as history or English. With some exceptions, our respondents told us that litigators almost never majored in a subject like math or computer science. In fact, several respondents told us that one of the main reasons people attend law school and then become litigators is that they are strong verbally and a bit weak in math skills. Perhaps because of their background, the vast majority of those that we interviewed indicated that they had no idea whether they were saving enough for retirement or even how much money they would need for retirement. The notion of developing a savings plan for retirement based upon some kind of mathematical forecast and periodically monitoring progress was not on their radar screen. If they thought about retirement planning and many of the older attorneys were concerned about their own retirement because of recent poor investment performance it was more of a general worry than something based on a mathematical projection. Successful defense attorneys work very hard, do not have much time to think about personal wealth planning, and often naively assume that if they participate in the 401k/profit sharing plan and save a little money beyond that, they will be fine. The defense attorneys whom we interviewed seem much less inclined to plan for retirement than some of the more mathematically oriented clients that we have worked with over the years who ask us to develop retirement analyses with multiple retirement date options, retirement incomes, and rates of return on investments. Defense attorneys need to realize that proper planning is required to help increase the probability that a high income during one s work years may result in a high income during one s retirement years. 4

5 The Wealth Manager Approach Like other professionals, many defense attorneys may have worked with one or more financial professionals, but a 2007 study by CEG Worldwide indicated that only 6.6% of financial advisors use a Wealth Management approach. In our opinion, the Wealth Management approach is the best strategy available to help the defense attorney cope with the challenges of managing a successful law practice, plan for retirement, and distribute assets after death in the most tax efficient way possible. What differentiates the Wealth Manager from other financial professionals is that the Wealth Manager uses a consultative process to discover the values important to the individual, designs a customized Wealth Management Plan, coordinates work with other professionals (e.g., CPA, estate attorney, and insurance specialist), and meets often with the client to monitor the progress of the Wealth Management Plan. In other words, the Wealth Manager is like a good general practice physician who gathers a detailed family history, conducts varied diagnostic tests, monitors and coordinates the work of other medical specialists, meets with the patient as often as is necessary, and considers the whole person. The Wealth Manager contrasts sharply with the traditional investment generalist who offers a wide array of investment products but does not use a consultative process to understand all of the issues involved in a person s financial life. The Wealth Manager also differs from the product specialist who focuses on a single type of investment product such as managed stock portfolios or life insurance. The true Wealth Manager is a person s Chief Wealth Officer (CWO) who develops and monitors a person s wealth plan and meets often with the client to report on progress. Wealth Manager Services A Wealth Manager will offer a wide range of services to help their clients achieve their goals. Below are some of the essential services offered by a true Wealth Manager that may help the reader differentiate the Wealth Manager from the investment generalist or product specialist. Planning services financial planning, education planning, and mathematical retirement planning. Asset management services mutual funds, managed accounts, fee-based brokerage accounts, and alternative investments. Charitable gifting services private foundations, donor-advised funds, charitable remainder trusts, charitable lead trusts, and other types of trusts. Wealth transfer services identifying and facilitating the most tax-efficient ways to pass assets to succeeding generations. Wealth protection services shielding wealth from litigants, creditors, children, in- laws, and ex-spouses. Property and casualty insurance covering everything from the mundane (autos, homes) to the exotic (rare artwork, top-end yachts). 5

6 Credit services mortgages, personal and business loans. The Wealth Manager who uses a consultative process to assess your needs and develop customized strategies should be able to show you the specific steps in their wealth management process. Exhibit 1 outlines the five-step Consultative Client Management Process (CCM) recommended by CEG Worldwide and other firms who have studied the wealth management process (see Prince, R.A and Harris, R. L, Advanced Planning with the Ultra-Affluent, pp , and Bowen, J.J, Abram, P.J, and Powell, J, Breaking Through, pp ). As you can see from Exhibit 1, the wealth management process is consultative and detailed. It looks time-consuming, but it s time well-spent. We believe it provides the best chance of helping defense attorneys and other high-net-worth individuals achieve their financial goals. Conclusion Exhibit 1 The Consultative Client Management (CCM) Process CCM1: Discovery Meeting Duration: hours Interval to next meeting: Two weeks CCM2: Investment Plan Meeting Duration: hours Interval to next meeting: One week (prospect decides) CCM3: Mutual Commitment Meeting Duration: 1 hour Interval to next meeting: 45 days Although our study of defense attorneys was not a scientific undertaking, we feel that our research produced useful anecdotal information. The chief finding was that the paramount personal financial issue facing defense attorneys was planning for retirement and that most of the defense attorneys that we interviewed have failed to develop a retirement plan based upon mathematical projections. We feel that the best way for the defense attorney to deal with the complicated business and personal financial challenges that they face is to hire a financial professional who uses a detailed consultative wealth management process that employs mathematical forecasts for retirement and legacy planning. The employment of the wealth management process will allow the financial CCM4: 45-Day Follow-up Meeting Duration: 1 hour Interval to next meeting: 90+ days CCM5: Regular Progress Meetings Duration: 1 hour Interval to next meeting: Regular/Periodic/Quarterly professional to help the defense attorney design a program that reflects the specific business challenges facing that attorney, personal values the attorney has about money, and long-term aspirations. 6