First it was CPAs; now it's attorneys.
Are they really practicing financial planning?
If you haven't noticed it, lately some law firms are
starting to call their estate planners "wealth managers" and publicize
financial planning services. Are attorneys the next big wave of
competition for RIAs?
Some advisors don't see a problem. Bedda D'Angelo of Fiduciary Solutions in Durham, N.C., says, "I've gone to a few 'by-invitation-only-including-free-lunch' public events given by attorneys who hold themselves out as being wealth managers that always turn out to be the same old estate planning seminars. I ask them, 'What's the optimal distribution election for a defined benefit pension?' and not one attorney has ever had a clue about what I am asking. Competent estate planning attorneys don't try to be something they are not."
Al Wroblewski, a CFP certificant from Uxbridge, Mass., isn't particularly worried either, although he does acknowledge the beginning of a trend. "I have mutual clients with Edwards Angell Palmer & Dodge LLP in Boston, a firm that developed a top-rate investment management capability. I actually think our profession is a little bit snooty if we feel law firms are somehow less holy than financial planning firms managing money. The challenge for all advisory professions is finding streams of recurring revenue. Asset management is a natural."
Ron Pearson of Beach Financial Advisory Service in Virginia Beach, Va., also is seeing the new wave of attorneys-turned-financial advisors. "We have our first law firm doing investments in our area. This attorney I've known for many years has hired a money manager and is advertising money management services." Pearson says he doesn't care about the competition as long as attorneys have to comply with the same regulations as nonattorney financial advisors. "I asked this attorney about oversight, and he said his money management services were incidental to the practice of law." Although the attorney later registered as an RIA, Pearson says, "I have significantly reduced my referrals to him for his primary practice of Elder Law."
In response to this trend, some advisors aren't saying, "the more the merrier" when what we really mean is "we'll guard our turf." And, in doing so, some of us are outspoken. "We used the services of a securities attorney in Springfield, Mass., who became a portfolio management client of ours, and also occasionally referred clients to us," says Michael Potito of Singer Potito Associates Inc. in Amherst, Mass. "About six years from the start of the relationship, he dropped the bomb on us: After gaining an intimate knowledge of our business model, he told us he was starting a money management business. How's that for a slap in the face?"
It seems clear, then, that attorneys are doing various forms of financial planning and/or money management and, like CPAs over the last decade, they do constitute new competition. And although every reader undoubtedly knows of a CPA-turned-financial-advisor who is tops at what he does, the CPA profession, as a whole, has not embraced financial planning. (Approximately 1% of CPAs have earned the PFS designation). And many have compromised their integrity by selling products. Will attorneys travel the same path?
Michael Dubis of Touchstone Financial LLC in Madison, Wis., has seen two sides of the issue: "In one case, an attorney tried to prevent a client from hiring me, saying his firm could do everything we could do. He told me, 'I don't want to insult you, but I don't want my clients working with a broker.'" Says Dubis, a fee-only planner, "He was protecting his client just as I would do. By the end of conversation, he admitted he didn't know the difference between a [fee-for-service] financial advisor and a broker."
Yet, Dubis also has a working relationship with at least one firm in his area. Says Johanna Allex, an associate in the Madison office of Michael Best & Friedrich LLP, and a member of its Wealth Planning Services Group, "We rely on Michael to design the asset allocation strategy and provide investment management services for some of our clients because we don't have a brokerage component. We review his recommendations, of course."
This happens after the Wealth Planning group within this 150-year-old law firm does the client's estate and retirement planning, cash flow planning and even his tax return. "In the beginning, this firm was a litigation and business work office; estate planning was one of services we provided our business clients. Now we've got 20 attorneys doing wealth planning."
Are Best & Friedrich's services attorney-driven or client-driven? "Clients are asking for these services as their needs become more complex. We deal with [the financial affairs of] multiple generations as part of succession planning, and the clients want a one-stop-shopping opportunity. For us, it's a chance to form relationships with various generations."
Kristofor Behn of Fieldstone Financial Management Group LLC in Boston, expresses an opinion that seems to reflect the experiences these other advisors are having: "My sense is the smaller one- to two-person law firms will have trouble competing. However, there's something to be said for having multiple professionals involved in a client relationship so, if a larger firm can partner with a fee-only advisory firm, that solves the marketing problem for both of them."
In the end, though, doesn't it all come down to personality? Let's face it, this profession has for some time been moving toward an advisory process that blends traditional number-crunching with counseling-the act of really listening to our clients and continuously helping them reach beyond goals like "retirement security" that are critical, yet superficial in their lack of definition. So the question is, are the personality types drawn to the legal profession (or the accounting profession, for that matter) well-suited to giving financial advice-a discipline that increasingly draws on both the left and right brain?
No, according to David Maister, a Harvard Business School student and an authority on the management of professional service firms. "There are always shining counterexamples but, in general, lawyers are more in love with the law than with their clients. 'People people' are not naturally drawn to the profession of law."
After he graduated from Harvard knowing a lot about business, Maister was shocked to find out the world was full of people. "If you're going for an advanced degree, odds are high that you like intellectual games, things of the mind, which means the generalizations are by and large true: lawyers are smarter than your average person but not naturally people-oriented."
In addition, success in the legal profession, says Maister, demands adherence to four principles: trust no one, challenge ideology, be professionally detached and don't finalize any decision. "Lawyers are professional skeptics," he says. "They are selected, trained and hired to be pessimistic and to spot flaws. To protect their clients, they place the worst possible construction on the outcome of any idea or proposal and on the motives, intentions and likely behaviors of those they are dealing with. As Tony Sacker, my brother-in-law and a solicitor in the United Kingdom, says: 'I am paid to have a nasty, suspicious mind.'"
According to Maister, the single biggest source of trust in an organization occurs when everyone acts in accordance with a commonly held, strictly observed set of principles, or mission statement, such as, "Our clients' interests always come first." "Commercial benefits do not come simply from encouraging these principles but from actually achieving an organization where partner behavior is consistent with them." Yet, he says, law firms appear unable to achieve this level of ideological consistency.
Professional detachment is the third requirement for success. "As researchers have shown, lawyers score low in the areas of intimacy skills and sociability. This doesn't mean they don't like people. It just means that, statistically speaking, lawyers prefer focusing on the job at hand rather than investing in relationships with partners or clients."
Finally, it doesn't pay for lawyers to finalize decisions in a way that's common to the financial advisory profession. Maister explains it this way: "The essence of lawyers' training is to contest with other lawyers. In a room full of lawyers, any idea, no matter how brilliant, will be instantly attacked. A common strategy, therefore, is to keep all proposals ambiguous so that there is nothing specific to be attacked."
The resulting indecision, says Maister, isn't necessarily a problem for lawyers. "My own attorney pointed out, 'You are taught in law school that there are no right answers. We are trained to be indecisive and we're comfortable with a lack of closure.'"
In the end, my best guess is that, on a smaller scale, the attorney-as-financial-advisor phenomenon will look a lot like the CPA-as-financial-advisor phenomenon: some will succeed, most will not. The ones who succeed may well have not been good lawyer material in the first place. On a larger scale, some firms will make it work, just as the major accounting firms have made financial services work. How much competition they will pose, though, remains to be seen.
David J. Drucker, M.B.A., CFP, an independent financial advisor since 1981, now writes, speaks and consults with other advisors as president of Drucker Knowledge Systems. Learn more about him at www.practicelifecycle.com or at www.virtualofficenews.com.