Legal Tender

Longtime readers of this blog may know that I’m a lawyer who doesn’t practice, but has worked in the legal industry forever a long time. I appreciate the law, the great good that attorneys can do, and the good-faith dedication of—I’m sure—the majority of practicing lawyers.

But, good lord have I been exasperated by many a lawyer. On this blog, I’ve from time to time focused on some of the reasons. In no small part in the financial area. As I’ve worked with (BigLaw) law firms, my ire generally has been directed at them and attorneys in those businesses. “Write what you know,” you know?

Briefly, I’ve found (BigLaw) law firms almost universally to be awfully run businesses. Stunningly awful. And individual lawyers to (with exceptions, of course) be terrible when it comes to anything involving money—their own personal finances, generally speaking, being a notable example. Like, face-palm terrible.

A Strom’s a-brewing

Not that I needed another reminder of this, but I got it after reading two articles by Roy Strom, a fantastic writer and one of the keenest observers of large law firms, and of the legal industry generally, writing today. If you’re interested in good reading and/or the business of law (might sound dry, but, actually, it’s fascinating), you should read his Big Law Business column. His other articles are worth reading, too.

I should note the irony in this blog post. On the one hand, I’m looking askance at BigLaw and BigLaw attorneys. On the other hand, one of the two articles I bring up is about arguably the best-run BigLaw firm in the country (maybe of all time), and the other is about a firm that I have reason to believe to be well run, too. I assure you that while there are a few other (pretty) well-run BigLaw firms out there, they’re outliers. I’d estimate that their ranks are no bigger than 15–20 firms. And that’s probably being overly generous. A ton of the remainder aren’t just not well-run, they’re awfully run.

I mention this because notwithstanding the impressive financial “success” (at least in terms of compensation) of these lawyers, I still shake my head at their life choices. A lot.

The first Strom article (in the order I read them) was one about one of the whitest of white shoe law firms, and how it had an eye-poppingly successful 2020 (and 2021, to date) in terms not just of revenues, but profits as well. Roy’s not easily amazed, but he sure was by this firm’s 2020 and 2021 numbers.

The second article was about another white shoe law firm (tho New York City East Coast snobs might dispute the whiteness of that firm’s shoes, what with it being headquartered in flyover country, and all), which has been on a tear over the last decade+, also in terms of both revenues and profits.

The lawyers in both profiled firms—who represent the deepest of deep-pocket clients (well, as to bankruptcy clients, I guess you’d say that they used to have the deepest of deep pockets)—bill out at eye-watering rates. They’re compensated in an equally impressive manner.

But they work. Hoo, boy do they work.

And pressure? Well, lemme ask you, if you were paying hourly rates of $795 for associates and $2,000 for partners, would you expect bad or mediocre results? No? Me neither. I’d be squeezing those lawyers until their pips squeaked. Likewise, if I were a law firm paying attorneys as handsomely as these firms do, I’d expect not just top-notch legal work and results, but for the lawyers to be bringing in business. Highly profitable business. A lot of it. And I’d have no shortage of accountability systems, too. To, you know, make sure that no one rower on the ship stops rowing.

It’s in no small part for those reasons that I not only don’t practice law, I’m not in the least interested in doing so. Not that I could get a job as a lawyer with one of those firms in the first place. But even if I could, I wouldn’t take it. The tradeoff of all-but-literally handing over my life to the firm in exchange for handsome pay is in no way worth it to me.

But I also wouldn’t want it because of some other math. I’ll explain.

A (big) numbers game

As Strom points out in the first article, the firm profiled, “turned in the best single-year financial performance in modern history.” Side note: that is remarkable because there have been a lotta good single-year performances reported by this or that law firm in modern history. He adds that, “[i]t’s hard to find examples of firms that have grown revenue by more than 20% and profits by more than 40%.” Briefly, the firm’s 2020 revenue was nearly $1.8 billion, and its 2020 profits per equity partner (PPEP) was $6.35 million.

But, after explaining some of the math behind this growth, Strom comes in with the kicker, “that kind of growth is only possible with a corresponding increase in hours.”

Strom assumes that each lawyer not only is required to, but does, bill 2,000 hours/year. That might not sound like a meat-grinding amount of time. But, oh, it is. In my experience billing time, I spend about 20-25% more time in the office than however many hours I’m billing. I have reason to believe that that’s not at all uncommon. I mean, ya’ gotta take lunch sometime. And nature calls every so often. And John just loves to chat you up when you run into each other in the hallway, you know. If true for these lawyers, it means that they’re in the office 2,400-2,500 hours a year. That’s not counting time commuting to and from work, to say nothing of getting ready for work, or decompressing. Or post- or pre-work fun time. Like, you know, trying to drum up more business.

That works out to an average of more than 50 hours/week, assuming the lawyer doesn’t work on holidays on which days the firm is closed, and takes only two weeks of vacation or sick leave (and doesn’t work at all on those days). And I’ll repeat—because it bears repeating—that these attorneys are engaged in high-profile, high-dollar-value, often very mind-taxing work. For clients who expect nothing less than the best results.

Strom then comes to the point, adding flesh to his statement that “that kind of growth is only possible with a corresponding increase in hours.” By his very conservative estimates, partners billing out at $2,000/hour would have had to bill 40 more hours a year. And associates? A whopping 300 more billable hours, at $795/hour for the year. Yowza!

Triple whammy

My jaw was planted firmly on the ground as I read that first article. But it was Strom’s second article—in combination with the first—that inspired this blog post.

In that second article, Strom explains that the profiled law firm more than tripled its revenue from $1.4 billion in 2009 to $4.8 billion in 2020, and its PPEP (think of this as akin to a law firm’s stock price, were law firms publicly traded companies) from $2.5 million to $6.2 million in the same timeframe. Big numbers.

Strom posits in this article that should the firm’s essentially unmatched compound annual growth rate (CAGR) of 11.7% for revenue and 8.6% for PPEP from 2009–2020 continue at the same level for another 11 years, the firm would more than triple its 2020 revenue to $16 billion in 2031, and almost $16 million in PPEP. That ain’t chump change, folks.

As I read this second article, the term “compound annual growth rate” immediately jumped out at me. Because it’s not a term commonly used when talking about law firms and lawyers. In fact, I’ve not once seen it used in that context.

Where have I commonly seen it, however? In personal finance publications. That’s where. Most notably, in discussions of (index fund) investment growth.

CAGR match

That’s when it hit me. These lawyers, at the firm profiled in the second article, are seeing income growth of 8.6% a year (Mind you, that 8.6% CAGR is at the top of the spectrum. Lawyers at most every other firm have a lower CAGR). That’s a nice rate of return. And for the amount of business they’re bringing in and hours they’re working, and the pressures they’re under, it’s fair to say that they’ve earned it.

But you know what’s even better? Earning about that CAGR for doing absolutely nothing. Even, should one choose, for staying in bed and sleeping the days away. Because as a diligent saver and investor in index funds with a CAGR not too far from 7%, that’s what I’m getting. Sure, the real-dollar numbers I’m seeing aren’t even the same league as those for many lawyers. But at this point, they approximate or exceed our annual expenditures. More would be nice, of course. But, hey, if the base is there, the base is there.

And for doing absolutely nothing?! Yes, please!

Why a lawyer earning millions of dollars each year (or even “just” hundreds of thousands) would put himself or herself in a position where he or she needed all the money earned on the job in a year to survive, I have precisely no idea. But I know firsthand that a yuuuge percentage of them are in just that situation.

I’m equally befuddled as to why well-compensated attorneys (I recognize that the vast majority of lawyers don’t earn nearly the same amount of money as those in the firms profiled in the Strom articles, but that isn’t to say that a lot of them don’t earn a lot of money) don’t drop the mic and cash out decades before reaching the traditional retirement age of 65. But the vast majority don’t.

To my mind, those lawyers ought to slash their annual expenses (or, if their expenses already are low, to realize the power position that they’re in), dump their money in sensible index funds (to the extent they’re not already invested in them) to the point that they can leverage the 4% rule (or, better/safer yet, a lower percentage), and peace out.

Heck, a lawyer earning $6.2 million/year could have more than $200,000 in yearly expenses—a more-than-comfortable amount for the vast majority of humanity—park the remaining roughly $6 million from just that year in VTI or VTSAX, and at a 7% CAGR cover those expenses and the taxes on the withdrawal using the 4% rule. For those attorneys who wanna live a little higher on the hog, they can invest any spare change from years past, too. Or another year’s worth of excess income. Or both. Or more. Or maybe he or she wants to hedge by investing in bond funds, for example. That might lower the CAGR, but still allow for sleeping while you earn, rather than working like a dog.

Oh, and this all is assuming that the lawyer hasn’t invested a cent before this time. Unlikely. But, given my dim view of BigLaw attorneys’ financial prowess, possible.

For any lawyers who make these moves but “love/miss the intellectual challenge” of the law, or still want to practice for whatever reason, but with no hours requirements and far less pressure, great! Become a solo or of counsel to a firm and go nuts. Or start a different type of business. Or do whatever. You do you.

For the rest, c’mon! Stop, smell the roses, and enjoy your permanent vacation.

And in the end . . .

Sadly, tho, a lot of lawyers are good at fighting for the freedom of their clients, but not so good at securing their own financial freedom. This guy seems like he might be good at the former. Not sure about the latter, tho.