We practice law because it is interesting, challenging, we are good at it, and we are professionals. We also practice law because it is our business. As in any business, we expect that fees charged should equal fees collected and feel a certain amount of injustice when our bills go unpaid.1
Well, attorney, heal thyself. Ask yourself: Did I do everything I should have in presenting and collecting my fees?
It's a particularly important question to be asking during the current economic crisis when everyone, including the wealthy, is feeling nervous about their finances.
Not much has been written for lawyers on best practices regarding bill and fee collection in the trusts and estates practice. Typical suggestions in the few articles on this topic are obvious — bill timely, quote fees up front, don't surprise clients with unanticipated high bill amounts, and be careful when billing for phone calls or duplicating, for example.
The prevalence of the hourly bill as the billing model of choice has lulled many estate planners into a false complacency as to the acceptability of this model in the marketplace.
The reality is that clients perceive fees in estate planning differently than other legal fees.2 Estate planning can be a tough sell because it forces clients to contemplate their deaths, a depressing topic. New approaches to billing are available and tweaks to current practices can make the process more acceptable to clients. Among the most important insights: understand how to make hourly billing acceptable to clients, and when to use alternative methods that would be more attractive to clients.
To explore these new approaches, we adapt the lessons of behavioral economics to billing for estate-planning services.
Kill the Messenger
Estate planning refers to tax planning, drafting and structuring wills, living trusts, grantor retained annuity trusts (GRATs) and education trusts — and all other related planning matters that we do for clients while they are living. Bills are sent directly to individuals who've requested our services and over matters that often focus on: Where does my property go when I die?
This is an important, but not a fun discussion. Little wonder that clients are reluctant to engage in or pay for it, even if we lawyers can add significant value to their estates. Let's say we save them $5 million in future estate taxes — a current bill even of $5,000 may seem repugnant. Let's face it, in this area, even a bill for $10 may seem repugnant.
It's what they are doing, not the service we provide or value added, that is painful for clients to accept. (We have heard it said that white collar criminal defense lawyers who keep a client out of jail find clients more grateful and open-handed. This is no doubt an overstatement, but understandable.)
Understanding that we estate planners carry the faint whiff of the undertaker with us, what should our best billing practices be?
We need to examine under a microscope our current billing practices and admit that they often may be subpar; done simply because they were done before. It doesn't exactly cushion the blow of talking about a man's mortality to hand him a bill for $5,000 that has 10 entries all stating, simply: “drafting,” “meeting with underling attorney,” or the all-time favorite, “attention to file.” You might as well add, “Thought about client while pumping gas.” And you compound the insult if you send this bill before you send the documents to the client.
Indeed, this type of billing does not show clients the value your services have provided. It's tone-deaf, psychologically speaking.
Here's a prettier tune, sung well: We were recently engaged to work out a tax problem and given only one day to do it. The client was billed on a flat fee basis, quoted at the beginning of the project. The project was successfully completed, the bill paid, and the client pleased with the result and satisfied with the charge. The client understood the value of the service and found the fee to be reasonable, regardless of how the flat fee may have translated to the old hourly rate structure.
How do we come to develop new business techniques and attitudes?
A New Paradigm
Here are six hypotheses we've made on the road to finding a model for estate-planning billing practices:
Behavioral economics teaches that consumer behavior is often irrational, and not necessarily tied to real economic analysis. Consumers often engage in their own mental accounting that does not resemble real financial accounting. As practitioners, we often fail to think strategically about our billing practices and how they are perceived by consumers. Just because we think and know that a bill is fair, does not mean that the consumer will come to the same conclusion.
Practitioners spend only a fraction of the time they should on billing, and disregard its importance to clients' happiness in general and with their estate planners' services in particular.
Practitioners delay billing because they anticipate that clients may view their charges as unpleasant. But delay only exacerbates the problem.
Perception problems are the fault of the practitioner, not the client. Say a practitioner does an A-B estate plan for a client and quotes the client an hourly billing rate of $250. The project is done efficiently and within the client's time expectations. The hours spent are less than the practitioner anticipated. The hourly rate is less than others in the area. And the overall bill seems less than what it has been in the past. Yet the clients are still surprised at the amount and unhappy. Don't blame the clients. It's our job to manage client expectations throughout the relationship — not just to achieve an efficient result.
For some clients, managing expectations requires giving estimates for upfront approval, even for hourly billing projects, and apprising them of any changes to the estimate as those changes occur. If you manage to beat the estimate, the client will be happy, instead of surprised at the size of the bill. If you exceed the estimate, the client will have been prepared and been given chances to stop the hemorrhaging before incurring more fees.
Which billing format would make a client happier: a detailed explanation of services rendered or a one-line statement with the total amount? Would it shock you if we said that most clients would be happier with a one-line statement? (See “Short and Sweet,” p. 51.)
Technology has increased the quality, efficiency, and lowered the cost of producing estate-planning work product. But this efficiency is not reflected in the billable hour concept, nor do clients accept that they should be billed for this efficiency. As practitioners, we have not developed a pleasing or understandable way to charge for technology.
What're We Missing?
Many of us think that if hours are correctly reported, the hourly rate is reasonable, and the project is done in a timely fashion, the clients will accept the bill as reasonable or a good value. But we practitioners fail to take into account a fundamental tenet of economics: The rational consumer does not always make rational choices. Rather, consumers are influenced by their own mental accounting.3 Indeed, consumers often behave irrationally.
What do we mean by “mental accounting”?
In “Mental Accounting Matters,” a 1999 article that appeared in the Journal of Behavioral Decision Making, Richard Thaler, one of the nation's leading behavioral economists, explains: Financial accounting consists of numerous rules and conventions that can be explored in a textbook. But mental accounting rules — a description of the ways consumers perceive their economic choices — can only be observed by behavior and inferring the rules.
So, say you go to the video store to buy your favorite movie on a DVD. It's priced at $14.99. While at the store, your best friend mentions that the same DVD is available for $4.99 at the Walgreen's about five minutes away. Would you travel to the Walgreen's to make the purchase there instead? Probably yes. Paying three times more for a product than you have to seems unfair.
Then, you're at an electronics store and a salesperson says a stereo system costs $499. Your best friend says the same system is available for $489 at a store five minutes away. Would you travel to the other store to make the purchase? Probably not. A 2 percent price differential on such a large purchase does not seem unfair.
And yet, there's no difference financially. A mere $10 is saved in both cases, and the same amount of effort is required to save that $10. Yet, in one case, the consumer will make efforts to save the funds; and in the other, the consumer will not. Most consumers want to be treated fairly in their purchases, and when they perceive they are being treated unfairly (for example, the DVD situation but not the stereo example), they will take actions to change the purchase.
The Hourly Rate
So how do clients' irrationality and perceptions of fairness translate to their legal bills?
We believe that most clients would see $350, $450, $550 or even $100 as way too much to pay for a lawyer to spend an hour thinking, analyzing, solving or drafting.
Yet the same clients would find it reasonable to pay a much larger bill of, say, $5,000 for a tangible work product, such as estate-planning documents that achieve estate tax savings, creditor protection trusts, management of assets in the event of disability, and so on. The hourly rate concept is often from the outset perceived as unfair by consumers, independent of the actual amount of the rate or its relation to the marketplace.
That's why we and others suggest that practitioners get away from hourly billing and, as much as possible, engage in project/value billing for estate planning.4
Estate planning has substantial elements of value to consumers. When focus is placed on those elements, then understood and appreciated by the consumer, it is the amount of the bill that the client will see as fair (acceptable) or unfair (unacceptable). The process (for example hourly rate) will no longer get in the psychological way.
Indeed, our experience suggests that clients appreciate project billing more and that such billing works in the estate-planning arena. Common sense also supports this conclusion. Assume you smooth out an estate-planning wrinkle for a client that saves the client about $500,000 in taxes. The client is interested in the fee, $X, that it will cost to implement the strategy successfully. The client is not interested in paying by the hour to implement the strategy. Even if the aggregate bill by the hour might be less than $X, the client may perceive the hourly rate as unfair because it begs the questions, “Could another attorney have achieved the same result in less time?” and “Did the attorney have an incentive to work quickly for me?”
With flat fee project billing, the client knows exactly what he will be paying, end of story.
Flat fee billing for individual projects also addresses the technology costs issue, to an extent. It often seems impossible to bill for technology as a reimbursable cost, without being perceived as gouging the client. Clients understand court costs, recording fees and the like, but a software charge for a tax program or an hourly charge for Westlaw searches are difficult to swallow. The flat fee quoted could incorporate estimated technology costs.
Perception of Fairness
We must accept that consumers are happier when they perceive themselves as having been treated fairly; the product, result or cost can be the same. Indeed, consumers can even pay more or get a worse result. So long as they think they were treated fairly, they will be more content.
This psychological phenomenon works in the reverse as well. If people perceive themselves as having been treated unfairly, they get angry even if they get the same result.
Ponder an Internal Revenue Service examiner who has two identical cases, both capable of yielding either $300,000 or $500,000 for the government, depending on the level of effort the examiner exerts. We all know that odds are, if the agent perceives the “lower amount taxpayer” as trying to pull a fast one over him, and the “higher amount taxpayer” as acting reasonably and honestly, the agent is more likely to audit the lower amount return more ferociously.
The “perception of fairness” factor operates in all settings. Imagine you're sitting on the Beach at La Semana in St. Marten's, hot as the dickens. And thirsty. Your buddy says he is going to buy a beer at the hotel and asks if you want one. You say “yes,” and he asks if you care how much it costs, even if it costs as much as $15? You say that you don't mind. The hotel at which you're staying is expensive, so you expect that it'll charge a lot for beverages. Your buddy decides not to go. Instead, a man with a pushcart comes by and asks if you would like an ice cold Heineken. “Yes,” you think, until he says he wants to charge $15 for the drink. You don't buy the beer — because you feel the man's overhead is low, so he shouldn't be charging so much.5
So what does the “perception of fairness” theory teach lawyers?
Once again, we have an argument against the hourly rate. Because no matter how low the rate or the total charged, it rarely will be perceived as fair.
Yet we have to stick with the hourly rate in many settings, for example, trust administration, novel tax issues that we are researching, will and trust contests, and even garden variety estate planning, when we just can't get ourselves to do the background necessary to quote the right flat fee.
When we must bill hourly, we can make it more appealing. One way is quite literal: Dress well.
Take a second and consider why anyone in our profession would want to dress casually in a professional setting. Present yourself like the expensive hotel, not the man on the beach selling beer. Show that you take your work seriously, that you are not selling the client a prefab will he could buy off the Internet for $59.99. A lawyer in a nice suit connotes value, suggesting a certain professionalism that carries with it the expectation that the charge for services will be substantial.
Be well-groomed, manicured and articulate.
Make sure your offices are equally presentable.
Back up these appearances with evidence of your professional affiliations, speeches given, articles written, reputation made, and other clients serving as references (being careful to preserve confidentiality, very important for estate planners).
Price should never be a factor in trying to convince a client to use your services. “We're cheaper” is just about the worst marketing technique you could use.
It is smart, however, to let clients know that the costs for your services will be in the range of what others at your level are charging; that adds to the client's perception of fairness.
As in many luxury markets, there is an argument that if you charge more than your peers, it signals that you're worth more. Urban folklore has it that Martha Stewart made her start selling cookies and charging gourmet prices for them. We do not advocate the “charge more” philosophy. Rather, we suggest you charge a reasonable fee consistent with your expertise, overhead, custom and other factors mandated by ethical rules.
Bottom line: stick to delivering a superior work product at a fair price.
Pull the Band Aid Off Quickly
People experience the marginal pain caused by incrementally small, but repeated, losses as greater than the larger pain felt because of one big loss — even if the aggregate small losses are less than the one large loss. What does this mean for our billing? Flat fees avoid the marginal pain associated with each hourly “loss.”
Thaler (the behavioral economist) notes that “consumers don't like the experience of ‘having the meter running’. This contributes to what has been called the ‘flat rate bias’ in telecommunications. Most telephone customers elect a flat rate service even though paying by the call would cost them less.”6
This observation brings us to the formatting of bills. To the extent that a flat fee is implemented, there's a bill with only one entry. (See “Short and Sweet, p. 51.) In a flat fee environment, clients most appreciate these one-line bills. So, resist the urge to supplement the descriptions for a flat fee with a detailed time sheet of effort and time for each part of the project.
Thaler explains why such detail would work against the practitioners: “Consider the case of the pricing policies of the Club Med resorts. At these vacation spots consumers pay a fixed fee for a vacation that includes meals, lodging and recreation. This plan has two advantages. First, the extra cost of including the meals and recreation in the price will look relatively small when combined with the other costs of the vacation. Second, under the alternative plan each of the small expenditures looks large by itself, and is likely to be accompanied by a substantial dose of negative transaction utility given the prices found at most resorts.”7
Not having a detailed bill frees consumers from assigning a value to each charge. Consumers may get greater transaction utility out of powers of attorney than out of the drafting of a complicated trust, but when each of these items is listed separately on a bill, they will evaluate each separately and determine whether they got their money's worth for each.
If hours must be reported, make sure the bills tell the story of what has been accomplished without inflicting daily pain.
When it comes to lawyers' billing, a bill with 20 daily time entries feels like 20 losses to the client. (See “Kill Me Now,” p. 54.) The pain of the repeated incremental losses can be decreased by a daily log of timekeeper and effort, without daily hours. Total hours and rates can instead be summarized, to achieve the less painful “one loss” concept (versus the perceived daily losses with a daily reporting of hours).
Also, the bill should frame the daily services in the positive rather than the negative. (See “Formatting for the Hourly Bill,” p. 56.) For example, clearly it's more appealing to say “incorporation of estate tax savings trusts” instead of “draft of trusts to address estate tax issues.” Clients would likely prefer to read that they are paying for you to “structure trusts to save the payment of estate tax as assets move from generation to generation” rather than simply for you to “draft generation-skipping trusts.”
Be sure that the bill, read as a whole, presents a clear picture of all the value added by the estate-planning process, and the efficient sequence by which this was achieved.
Delay the Pain
On the payment side, consider what Thaler calls decoupling the purchase from the pain: “A credit card decouples the purchase from the payment in several ways. First, it postpones the payment by a few weeks. This delay creates two distinct effects: (a) the payment is later than the purchase; and (b) the payment is separate from the purchase. A second factor contributing to the attractiveness of credit card spending is that once the bill arrives, the purchase is mixed in with many others.”8
Here's a thought: Credit cards can be used for service businesses. It is possible to let clients pay for legal services with credit cards. This will decouple the payment from the pain. One caveat: beware credit card fraud, for which there may be no insurance.
How else might we decouple our services from our charges? Consider flat retainers, annual charges, along with project fees for specific parts of the project.
Give of Yourself
What else can we do? Is “discounting” off the hourly rates or bill effective? We couldn't find a discussion of evidence indicating that this is or is not effective. But from a fairness perspective, clients certainly would view positively a discount based on a true statement — for example, “Long-standing Client.” They might see as fair a discount related to, say, a delay in getting the final drafts out or even one related to our current troubled economy.
All consumers like discounts — provided the discount is not because the product is so overpriced at the start that the discount brings the new price to what it should have been originally.
What are we doing for clients above and beyond providing them services? Many of our clients also are our friends, or they become friends as we represent them over the years. Do we go out of our way to treat them in this regard, with non-work related notes, congratulating them when congratulations are in order, sending small gifts, calling to say hello?
Make the Time
A foray into behavioral economics forces us to view our billing practices as our clients do. Thinking about how we can translate these lessons into our billing practices takes time and focus — and nobody is paying us immediately for that effort. Yet, we need to understand that billing is part of the overall project, and that bills and billing protocol need to satisfactorily transmit to the client the substantial value that our projects provide.
- The amount of all bills is subject to the governing jurisdiction's ethical requirements. All bills and billing protocol need to be consistent with those requirements.
- We should note that although many of the billing principles are the same in pre- and post-mortem matters, there are important differences. The most significant is that detailed billing, which may not be relevant in pre-mortem matters, is significant and required in post-mortem matters because of the trustees' and executors' fiduciary obligations to review the reasonableness of the fees, and sometimes the need for fee petitions. But we'll stick to pre-mortem matters in this discussion.
- Richard Thaler, “Mental Accounting Matters,” 12 Journal of Behavioral Decision Making, at pp. 183-206 (1999).
- We are not suggesting project billing for estate administration or contested litigation, or for what can be regarded as open-ended engagements.
- This example is adapted from Thaler, supra note 3.
- Thaler, supra note 3, at p. 192.
Louis S. Harrison and Emily J. Kuo are partners in the Chicago-based firm of Harrison & Held LLP. Lou also is a member of the Trusts & Estates advisory committee on estate planning & taxation
Short and Sweet
This bill lacks all detail — and spares the client pain. It's great for flat fee engagements
Harrison & Held, LLP 333 West Wacker Drive, Suite 950 Chicago, III 60606-1218, www.harrisonheld.com
Invoice submitted to:
Marc and Cleo Antony
One Mag Mile
Chicago, IL 60610
Tax ID: 30-0077509
April 28, 2008
For professional services rendered: $3,500.00
Kill Me Now
Eeekghads! The level of hourly rate daily detail in this bill is enough to drive any sane client to the other side. Don't do it — unless you must (for example, the client requests it or it's necessary for estate and trust administration)
|Client name||Folder name||Initials||Effective date||Hours||Rate||Dollars||Comments|
|Estate of Josey Smith||Tax Compliance||M. Stennett||09/19/2007 00:00:00||5.9||$255.00||$1,504.50||Estate Planning - Section 6161 Analysis v Strangi Note, Cash Flow Projections|
|Estate of Josey Smith||Tax Compliance||M. Stennett||01/15/2008 00:00:00||0.5||$268.00||$134.00||Estate Form 706|
|Estate of Josey Smith||Tax Compliance||M. Stennett||01/11/2008 00:00:00||1.2||$268.00||$321.60||Form 706|
|Estate of Josey Smith||Tax Compliance||M. Stennett||09/21/2007 00:00:00||2.2||$255.00||$561.00||Estate planning analysis, prep for next weeks meeting|
|Estate of Josey Smith||Tax Compliance||M. Stennett||09/20/2007 00:00:00||1.9||$255.00||$484.50||6161 analysis - meeting with Joe|
|Estate of Josey Smith||Tax Compliance||M. Stennett||12/24/2007 00:00:00||0.5||$255.00||$127.50||Form 706 and valuation communications|
|Estate of Josey Smith||Tax Compliance||M. Stennett||09/28/2007 00:00:00||0.7||$255.00||$178.50||Client communications|
|Estate of Josey Smith||Tax Compliance||M. Stennett||11/20/2007 00:00:00||0.3||$255.00||$76.50||Estate Form 706|
|Estate of Josey Smith||Tax Compliance||M. Stennett||09/24/2007 00:00:00||7||$255.00||$1,785.00||Estate cash flow projections|
|Estate of Josey Smith||Tax Compliance||M. Stennett||09/26/2007 00:00:00||6.6||$255.00||$1,683.00||Cash flow projections and preparation and attendance of meeting|
|Estate of Josey Smith||Tax Compliance||M. Stennett||07/27/2007 00:00:00||4.9||$230.00||$1,127.00||Preparation for, attendance, and recap of Estate of AJ Smith meeting|
|Estate of Josey Smith||Tax Compliance||M. Stennett||09/27/2007 00:00:00||1.1||$255.00||$280.50||Cash flow projections and T/C with Harvey|
|Estate of Josey Smith||Tax Compliance||M. Stennett||01/09/2008 00:00:00||0.8||$268.00||$214.40||Form 706|
|Estate of Josey Smith||Tax Compliance||M. Stennett||08/27/2007 00:00:00||4||$230.00||$920.00||Planning Meeting 2.5 hrs, Estate tax projections for Citibank Loan v 6161 1.5 hrs|
|Estate of Josey Smith||Tax Compliance||M. Stennett||07/26/2007 00:00:00||4.6||$230.00||$1,058.00||Estate tax projections, research section 6161, WELLS FARGO loans|
|Estate of Josey Smith||Tax Compliance||M. Stennett||12/13/2007 00:00:00||0.5||$255.00||$127.50||Form 706|
|Estate of Josey Smith||Tax Compliance||M. Stennett||10/16/2007 00:00:00||4.2||$255.00||$1,071.00||WELLS FARGO note cash flow analysis|
|Estate of Josey Smith||Tax Compliance||M. Stennett||01/07/2008 00:00:00||0.8||$268.00||$214.40||Form 706 open points|
|Estate of Josey Smith||Tax Compliance||M. Stennett||08/22/2007 00:00:00||0.6||$230.00||$138.00||Estate correspondence|
|Estate of Josey Smith||Tax Compliance||M. Stennett||01/10/2008 00:00:00||1||$268.00||$268.00||Estate Form 706|
|Estate of Josey Smith||Tax Compliance||M. Stennett||11/07/2007 00:00:00||0.6||$255.00||$153.00||Estate of AJ Smith, Form 706|
|M. Stennett Total||49.9||$12,427.90|
|Estate of Josey Smith||Tax Compliance||J. Putin||10/05/2007 00:00:00||0.4||$295.00||$118.00||Review Harvey's worksheet for depreciation and cash flow|
|Estate of Josey Smith||Tax Compliance||J. Putin||08/07/2007 00:00:00||0.3||$275.00||$82.50||Discussion with Harvey|
|Estate of Josey Smith||Tax Compliance||J. Putin||10/23/2007 00:00:00||1.6||$295.00||$472.00|
|Estate of Josey Smith||Tax Compliance||J. Putin||09/27/2007 00:00:00||0.2||$295.00||$59.00||With Harvey|
|Estate of Josey Smith||Tax Compliance||J. Putin||07/27/2007 00:00:00||1.5||$275.00||$412.50|
|Estate of Josey Smith||Tax Compliance||J. Putin||08/27/2007 00:00:00||2||$275.00||$550.00||Meeting|
|Estate of Josey Smith||Tax Compliance||J. Putin||12/11/2007 00:00:00||0.3||$295.00||$88.50||Call from Harvey re: estate|
|Estate of Josey Smith||Tax Compliance||J. Putin||11/07/2007 00:00:00||0.1||$295.00||$29.50||Phone with Harvey|
|Estate of Josey Smith||Tax Compliance||J. Putin||09/26/2007 00:00:00||2||$295.00||$590.00||Meeting|
|Estate of Josey Smith||Tax Compliance||J. Putin||12/11/2007 00:00:00||0.2||$295.00||$59.00||Smith Building Corp estate-related matters|
Formatting for the Hourly Bill
Note that, done well, hourly bills tell a story and avoid inflicting the pain of showing hours (and dollars) for every daily entry
Day & Night, 333 Aurora Borealis Way, Chicago, IL 60606-1218, www.dayandnight.com
Invoice submitted to:
Marc and Cleo Antony
One Mag Mile
Chicago, IL 60610
Tax ID 30-0077509
July 01, 2007
Invoice Number: 4950
|5/12/2006||CGW Meeting with Marc and Cleo to discuss different recommendations and steps required to implement initial portions of their estate plan. Post meeting, initial outline of distribution provisions to be included in estate planning documents, and outlining terms of credit shelter and marital trusts, for Marc and Cleo Antony. Determination to use will/living trust format for the estate plan.|
|5/15/2006||CGW Draft distribution provisions for credit shelter and marital trust, to incorporate tax and creditor planning; work on terms consistent with decisions at meeting.|
|5/10/2007||CGW Draft trusts for children, including spousal and creditor protection features; work on trustee provisions in documents, including successor trustees and means to appoint successors when none are named, including subtrusts for children; tax and trustee provisions. Draft letter to Marc and Cleo summarizing key terms of their new estate planning documents, tax consequences thereunder and asset reallocation issues.|
|5/30/2007||LSH Review and analysis of drafts of documents; update to fiduciary provisions; update to generation skipping provisions; transmittal of documents to Marc and Cleo for review.|
|6/26/2007||CGW Meeting with Marc and Cleo to review and discuss drafts of their new estate planning documents and proposed revisions to documents, to incorporate new provisions dealing with trusts for the children.|
|6/27/2007||CGW Following meeting, update and finalize living trusts and wills for Marc and Cleo to incorporate different distribution provisions, protective tax and creditor provisions for children. Follow up phone conference with Cleo regarding fiduciary backups; preparation of documents in final form.|
|6/28/2007||CGW Meeting with Marc and Cleo to execute estate planning documents; prepare for meeting; post-meeting notes regarding issues for follow up.|
|6/29/2007||CGW Calendaring key dates for review plan documents, to finish on funding and beneficiary designation update; work and review of closing book to make sure no additional items needed. Work on document book to Cleo and Antony.|
|Subtotal of charges||$3,683.60|
|Courtesy discount to eliminate phone charges||(183.60)|
|For professional services rendered||$3,500.00|
|Constance G. Work (CGW)||10.40||325.00|
|Len S. Happenstance (LSH)||0.92||330.00|