Here's the bad news: Trusts and estates lawyers, like law firms in general, have been hit by the economic downturn that has battered most of corporate America in the last several years. In fact, 85.6 percent of 619 trusts and estates lawyers surveyed in the first quarter of 2003 say they are coping with downward pressure on their income. (See “Feeling Squeezed,” page 58).
But the future need not be grim. Law firms — trusts and estates lawyers in particular — have plenty of room to grow. Firms can greatly increase revenue by taking simple steps, such as encouraging their partners outside the T&E department to make more referrals. Another potential revenue stream: ancillary businesses. Prince & Associates studied 72 law firms from 2001 to 2002 who had either created side businesses or worked closely with other enterprises. Our finding: Of all the possibilities, the personal security business has the best synergies with a T&E practice. Financial services and administrative service companies also might prove profitable for T&E lawyers, according to the study.
One obvious way to increase income is to take on more clients. And, because clients most often come through referrals from other attorneys, the trick to keeping the client pipeline full lies in encouraging other lawyers to make more referrals.
Surprisingly, however, the T&E lawyers we surveyed don't seem to heed this advice. Only 4 percent said they are active in motivating other lawyers to refer affluent clients. What's more, in large firms, many non-T&E lawyers don't consider it a priority to make referrals to the trusts and estates team.
The upshot is that T&E lawyers are missing potential clients and large law firms are squandering opportunities to build their trusts and estates practice.
Prince & Associates analyzed four large multi-office law firms, each with at least 300 lawyers, eight practice areas and five T&E partners, to determine how much potential T&E revenue was lost each year. Our conclusion: The T&E practice of each firm could at least double revenues, and possibly increase them more than six-fold, if non-T&E lawyers make more referrals.1 Law firms' internal records from 1998 through 2002 show that, on average, just one of 78 affluent clients (those with a minimum of $1 million net worth) of non-trusts and estates lawyers are referred to the T&E practice.
We also studied firm revenue to see what would happen if that referral rate increased dramatically. We examined three possible scenarios. What if the referral rate doubled, to one out of 39 wealthy clients? This, we believed, was the most likely scenario. Then there was our best-case scenario, in which one out of every 24 clients were referred; and the worst case, that only one in 46 clients was referred. We assumed that between one-fifth and two-thirds of the referred clients would actually hire the firm's T&E lawyers — most likely the rate would be 32.7 percent; the best rate would be 68.6 percent and the worst rate, 21.3 percent.2
To calculate revenue, we used a time-and-expenses billing model (which all firms used), based on billing rates at the time of referral. We attributed time to each case based on benchmarks created at each of the four law firms.
The bottom line: Over a period of one year, the most likely scenario is that the trusts and estates practice for each of the law firms missed out on an increase in their T&E department revenues to the tune of 319.6 percent. (See “Untapped Wealth,” page 58). Even the worst-case scenario could result in a 207.8 percent increase in annual revenues. The best-case scenario has each law firm missing out on a 681.4 percent increase in revenues.
With so much more money to be made, why aren't non-T&E partners referring their clients to their T&E departments? To find out, we surveyed 131 non-T&E lawyers — all of whom had affluent, potential T&E clients — from four law firms. The most common excuse is that clients did not request a referral (94.7 percent). In other words, lawyers are waiting for clients to request a referral rather than proactively promoting their T&E colleagues. Why? Well, 38.9 percent say they are uncomfortable soliciting clients for another practice area.
But before T&E lawyers start blaming colleagues for failing as rainmakers, they should examine their own shortcomings. Perhaps they haven't sold themselves to their colleagues. (See “Lost Opportunities,” page 60). Most non-T&E lawyers (80.9 percent) say they don't see how introducing estate-planning services will help improve their practices. It is not about time or money: only about a sixth of these lawyers (16.0 percent) report that they are too busy with their own work to make referrals to the law firm's trusts and estates department — and just 14.5 percent say the reason they don't make referrals is that there is an insufficient financial inventive to do so.
The problem is bigger. A full 60.3 percent of these lawyers say they are unfamiliar or uncomfortable with their own firm's trusts and estates lawyers. They have little, if any, contact with their peers in the T&E practice — and about half (48.1 percent) worry that a referred client could be managed poorly, hurting their own attorney/client relationship. Ouch.
So how are T&E lawyers to solve their in-house image problem? Clearly, they must reach out and get to know their partners. Demonstrate how T&E can add value to their practices. Start by reminding them that client loyalty — not to mention revenues — increase with the number of attachments they have to the firm. Go on to teach them how to look for specific fact patterns that herald the need for a T&E expert. Show them that they would be doing their clients a favor by making the referral.
BEYOND THE LAW
Another avenue for increasing revenues is to create ancillary businesses. In the last decade, a growing number of law firms either started side businesses or formed alliances with other professionals.
But lawyers and non-lawyers joining together in business ventures can be controversial, largely because non-lawyers don't have the same ethical obligations to clients as attorneys. For instance, lawyers are required to keep clients' confidences, but many other professionals aren't bound by confidentiality rules; some lawyers worry that clients referred to a firm's side business won't appreciate that non-attorneys can reveal their secrets.
Firms should carefully evaluate their own strengths and weaknesses before rushing into a new enterprise. Central to this assessment is an analysis of current clients. Law firms must have a clear understanding of their top clients — natural candidates for an ancillary business. Firms also must inventory their available skills in areas including technical expertise, marketing capabilities and operational abilities.
The next step — and the hardest for most law firms — is to weigh business options. Most law firms do not have the capacity to add more than one or two sidelines. In the trusts and estates arena, the three most realistic are: financial services, personal security, and trust and related administration services.
In a financial services business, the law firm receives commissions and fees for the sale of financial products such as investment accounts and life insurance. A personal security business involves the firm in receiving retainers and fees for a broad range of security services, including close protection, investigation and strategies to mitigate workplace violence. With trust and administration services businesses, firms receive fees for back-office services related to the T&E practice such as Crummey notices or accounting services for trusts.
Any ancillary business requires a financial investment from the law firm, but some require more than others. Creating a financial services business is a relatively costly endeavor. The administrative services business is likely to be less expensive, but still is not cheap. In contrast, the personal security business is considerably less expensive to get up and running. For every $1,000 that would have to be invested in the personal security business before it could become profitable, the law firm would have to invest between $3,000 and $4,000 in the administrative business and between $8,000 and $11,000 in the financial services business. (See “Evaluating New Ventures,” this page.)
There is also a disparity in how quickly the different business options can become profitable on a cash-flow basis. The personal security business should be profitable in three to six months; the financial services business is likely to take between nine and 18 months to be profitable; and an administrative services business probably will take longer still — 12 to 18 months.
MIXING AND MATCHING
Lawyers must feel comfortable allying themselves with side businesses for a new venture to work. The financial services business causes the greatest unease, based on focus group surveys of 14 T&E partners from law practices ranging in size from 400-lawyer international firms to solo practitioners. A lot of T&E lawyers express discomfort with the idea of affiliating themselves with people who sell a product and are paid on commission.
On the other hand, lawyers report less resistance to security and administrative services businesses, both because the potential for ethical problems seems low and because payment is the way attorneys like it — based directly on services rendered.
The ability to attract new business for the trusts and estates practice from these three businesses varies significantly, based on our study of 72 law firms in the years 2001 and 2002. Of the firms surveyed, 32 had strategic alliances with security or investigative firms, 18 had some sort of ancillary enterprise in administrative services, and 22 owned part of a business that sells a financial services product. We found that a personal security business is most likely to turn into a feeder of high-net-worth clients for T&E lawyers, while financial services businesses tend to produce only intermittent referrals, and administrative services businesses are unlikely to lead to new T&E work. Breaking it down quantitatively, we found that for every 0.04 clients the administrative business sends to the trusts and estates practice in a year, the financial services business refers 4.1 affluent clients, while the personal security business refers a whopping 23.9 affluent clients.
What's in it for departments other than T&E? In the firms we looked at, the personal security business provided a stream of new clients to other practice areas (ranging from intellectual property to employee benefits to real estate). The financial services business was not nearly as effective in generating new clients for other practice areas, and we never saw an administrative service business create legal work for any other practice area.
As problematic as it can be to make financial services a sideline, the lure is great, as it has the greatest profit potential. Selling financial products is extremely lucrative.
Close behind is the personal security business, with conservative profit margins hovering around 70 to 75 percent (for every $1,000 the client pays, the business makes $700-$750). The administrative business, meanwhile, has low profit potential and only really becomes financially worthwhile after considerable economies of scale are reached. Our study found that for every $1,000 the administrative business generates, the personal security business generates between $71,000 and $102,000. Meanwhile, the financial services business generates between $96,000 and $203,000.
Of course, deciding to create a side business and selecting an enterprise are only the first steps. Implementation issues, including ownership agreements, compensation and personnel decisions will soon come to the fore — bringing with them a whole new set of challenges.
- We focused on revenues, not profits, because each law firm has a different cost structure. The possibility that the law firms would have to add professionals to handle the new work, for instance, was not taken into account.
- These rates were calculated by participating law firms and statistically aggregated based on their trusts and estates practices' five-year history of converting internal referrals into new business.
Revenues could increase up to seven-fold if more lawyers referred clients to their T&E partners
|SCENARIO||REFERRAL RATE||CONVERSION RATE||IMPACT ON REVENUES FOR T&E DEPT|
|Baseline||1 in 78||81.2%||current revenues|
|Worst case||1 in 46||21.3||+207.8%|
|Most likely||1 in 39||32.7||+319.6|
|Best case||1 in 24||68.6||+681.4|
|Note: Based on data from 1998 to 2002 from four law firms of 300-plus attorneys.|
EVALUATING NEW VENTURES
A personal security business has the lowest start-up costs, and will likely bring in the most referrals to a law firm's T&E practice
|MEASURES||FINANCIAL SERVICES||PERSONAL SECURITY||ADMINISTRATIVE SERVICES|
|Cost to Implement||$8,000-$11,000||$1,000||$3,000-$4,000|
|Time to Market||9-18 months||3-6 months||12-18 months|
|Referrals per year||4.1||23.9||0.04|
|Potential profit per year||$96,000-$203,000||$71,000-$102,000||$1,000|
|Note: Based on data collected in the two years beginning in 2001 from 72 law firms who had started side businesses or allied themselves with other enterprises.|