Volume 20, Number 3
Can Business as Usual Lead You to Extinction?
By Charles F. RobinsonCharles F. Robinson is an elder law
attorney in Clearwater, Florida. He is past chair of the American Bar Association Law Practice Management Section and has served on the ABA Coordinating Commission on Legal Technology and the ABA Commission on Legal Problems of the Elderly. For more information see his websites, www.Charlie-Robinson.com and www.Charlierobinsonfuturist.com.
In 1998, the American Bar Foundation published a study comparing the earnings of Chicago lawyers in 1995 to those of Chicago lawyers in 1975. Solo practitioners suffered a 30 percent loss of mean earnings during that time period, and a 45 percent decline in median incomes.1 If the Chicago experience reflects the rest of the country, solos and small firm lawyers need to look seriously at strategies to reverse this trend.
One reason for the decline in income has undoubtedly been the encroachment by non-lawyers into businesses that were once our exclusive domain. To remain competitive, lawyers need to remain responsive to the changing needs of our clients. In particular, we must consider ancillary business arrangements, multidisciplinary practice (MDP), and other nontraditional practices. The status quo is simply not an option.
There seems to be a near consensus from the bench that our civil justice system is in the middle of a huge crisis of relevance. Civil justice is perceived to take too long and cost too much. A professional mediator recently suggested that alternative dispute resolution (ADR) is now the real dispute resolution, and litigation is the alternative. What happens to lawyers if (or when) pro se or Internet negotiating systems become the dominant way civil disputes are resolved? As of 1999, there were more than 45,000 pro se litigators in the Florida court system on any given day. The numbers are higher now. The pro se trend is nationwide and growing. In Florida nearly 80 percent of marriage dissolutions are now handled without a lawyer on one side, and more than one-third without a lawyer on either side. In some cases the couple cannot afford lawyer services, but in many cases the parties don’t believe that a lawyer will be worth the cost. Many of these pro se cases were bread and butter to sole general practitioners ten or less years ago.The Erosion of Guild Power
When I started in law practice, lawyers drafted cheap wills with the expectation that profit would come from probate administration. Trusts were almost always testamentary; these trusts were administered by bank trust departments or lawyers, rarely family members.
Law practice functioned as a guild in those days. The bar had a monopoly on what it defined as legal services. As a classic guild, the bar determined who could be a member, what were the standards for service quality, what the prices of those services would be, and what quantity of services could be performed.
Our guild power started to erode when title companies appeared on the scene and competed effectively against real estate lawyers, particularly in the residential real estate practice. In 1965, Norman F. Dacey wrote How to Avoid Probate, a self-help book complete with living trusts, wills, and related forms. Lawyers made cynical jokes about the book and suggested that the loss of estate business would eventually be replaced by litigation over the poorly drafted trusts. Although the book was attacked by the New York County Lawyers’ Association and enjoined as unlicensed practice of law (UPL), the Supreme Court of New York ruled that publishing a book is not the practice of law regardless of subject matter. The first run of Dacey’s book sold more than 600,000 copies. Soon the antiprobate movement that Dacey started gained momentum until many viewed “probate” as a four-letter word.
A few lawyers, often working with financial planners, broke away from the traditional will practice and started preparing living trusts in volume and charging significantly higher fees, preferring the “pay me now to avoid probate” approach as opposed to the “pay me later, assuming I outlive you and you don’t outsmart me by avoiding probate” approach favored by the traditionalists.
I was one of those traditionalist young lawyers working as an associate for a traditionalist lawyer. We continued business as usual—cranking out $25 wills, or two for $35. We believed that our will files would “mature” in due time and that our probate practice would make up for the loss-leader wills we prepared.
We were wrong. Yet many of us kept doing our will practice and eventually added the living trust as an option that ultimately dominated what had been the will practice. As the living trust became more popular, we found ourselves in a price contest. Potential clients started calling our offices asking for price quotes on living trust preparation. When consumers call for price quotes, they believe they are buying commodity services.
In 1975 the U.S. Supreme Court made it clear that our profession was losing guild status; in Goldfarb v. Virginia State Bar 421 U.S. 773, the Court struck down minimum fee schedules as an antitrust violation. In 1977 Bates v. State Bar of Arizona 433 U.S. 350 came along, allowing lawyers to advertise. If one can advertise services and the bar association can’t hold members to a fee schedule, the only remaining guild power is the bar exam and the power to regulate ethical behavior.Law as a Commodity Service
The only exclusivity lawyers now have in the process of estate planning is in drafting documents, which has the lowest perceived value of any part of the process (“Don’t you just push a button, fill in some names, and my will comes popping out of the word processor?”). Financial planners, brokers, and accountants have taken over much of the planning process. I believe the non-lawyers leave drafting to lawyers because lawyers will do the work for lower fees than what planners charge to do the work. Law-yers are left with a sophisticated, liability-ridden opportunity to be perceived as commodity service providers. Commodity goods and services are sold on the basis of price and service, not on the addition of value. Few lawyers can compete effectively on volume of service rendered.
The phone call comes in something like this: “Hello, Charlie, this is Nate George from ABC CPA and Investments, P.A. I am sitting here with your longtime client Bob Bigbucks. Bob says you have helped him many times through the years. He is a big fan of yours. Our office has done a financial analysis and determined that Bob needs a Qualified Personal Residence Trust, an Irrevocable Life Insurance Trust, and a new QTIP/Credit Shelter Trust. We have allocated $500 for total attorney fees to draft these documents. We will understand if you decline the work at this price, but we have other lawyers who will draft the documents for Bob. He wanted to give you first shot at doing the work. By the way, the client is leaving for a long trip next Wednesday, so we will need everything prepared by Monday afternoon. Will you do it?”
By 2003 the traditional trust and estate practice had atrophied to commodity level, with some exceptions. Some lawyers are finding valuable niche practices. Lawyers whose clients have very high net worth are now offering a set of concierge-type services that extend past traditional trust services. For example, for a client with a net worth over $25 million, the lawyer could take on the responsibility of overseeing investment and tax advisers, along with preparing documents. In addition, if the client’s yard service quits or fails to show up, the law firm will contract for these services, as well.
Another niche involves fiduciary planning for special needs. The special needs beneficiary may be a disabled adult with a substantial personal injury award or inheritance. Expertise is required in helping the injured or disabled person have a game plan to maximize the asset utilization with an eye to public benefits where appropriate.My Solution: A Fiduciary Services Alliance
As minimum asset requirements kept growing, trust offices became consolidated in distant locales, and a pool was assigned to trusts with assets of less than seven figures, I started thinking about how I might develop a broad fiduciary services practice with a highly developed infrastructure (asset custody, accounting, and investment services), yet maintain the personal relationships with clients I value so highly.
To make my fiduciary services dreams come true, I believed I would need a CPA who was fascinated by and skilled in fiduciary tax and accounting work, an investment adviser skilled and experienced in fiduciary investment requirements, and a means
of tying all the players together in a cost-
effective group able to communicate fully.
All efforts to set up the fiduciary alliance failed. There were too many players, and prices would exceed traditional trust department fees. I was ready to give up when, in the early 1990s, the answer arrived in the form of United Trust. More than 20 years ago, the principals of United Trust saw the opportunity to partner with law firms doing fiduciary work. United Trust is a full-service, traditional trust department with an important difference: United Trust “wholesales” trust services to qualified law firms by serving as the law firm’s back office. There is no fee sharing. Change was scary, but I realized that the risks inherent in the status quo were ever scarier. I took the plunge, and I’ve not regretted it.Ancillary Business Practice and Elder Law
In the mid-1980s, I decided to focus my practice on the needs of middle-class elders. I learned that most did not place a lot of value on estate planning because death was not the typical concern. My clients were afraid of becoming incapacitated and losing control of their lives. They were terrified at the prospect of losing their life savings in the event of an extended nursing-home stay. I went into elder law, before it had a name, to help folks deal with the complex issues of incapacity and impoverishment.
As the field of elder law has matured and grown through the years, not only have more lawyers become involved—so have financial planners, CPAs, and others. Prices are dropping, the government is getting tougher, and, once again, there are no laurels to rest on. Some elder law attorneys are licensed to sell annuities, investments, long-term care insurance, and other products as part of the elder law practice. There is evidence that many consumers like the idea of one-stop shopping for these services (remember the imaginary phone call above). Others are setting up separate ancillary financial planning business entities or affiliating with businesses and sharing commission income.
UPL will not stop the competition from non-lawyers in the elder law field any more than it has in other areas of practice. Courts have come up with hundreds of definitions of law practice but none that fits all situations. I believe that if non-lawyers do their work competently, UPL will not come into play. A number of years ago, the Florida Bar UPL team went after actuaries for preparing deferred compensation plans. The Florida Supreme Court couldn’t find public harm and allowed the practice to continue.
Now that UPL is no longer a protection for lawyers, we should be able to compete openly with the non-lawyers just as they compete openly with us, right? Wrong, at least in many states. For instance, is it an ethical violation to advise an estate-planning client on the need for life insurance and then receive part or all of the commission from the sale? Is it possible for an attorney to offer independent advice and still profit if the client takes the advice? In my home state of Florida, there is an ethics opinion that says I can advise a client that she needs life insurance and tell her I am licensed to sell insurance, or am affiliated with an agency that is one of her choices for the insurance, but it is unethical for me to tell her how much insurance she needs. Go figure.A Test to Help You Decide: Status Quo or Nontraditional Practice
Microsoft founder Bill Gates observes that we tend to overestimate what change will take place during the next two years and underestimate the change that will take place during the next ten years. Picture your practice as remaining status quo ten to 15 years from now. As an exercise, write a story or scenario describing your practice in 2015 as you would describe your practice today. In writing this scenario, tell how you were able to deal
with some of the following possibilities
without having to change: technology changes; self-help lawyering; nontraditional legal service providers; the Internet; changes in how the courts work; the profession’s traditional arrogance in the face of change; the erosion of public confidence in the profession; the elimination of billable hours; bar-owned ADR centers; increased discipline; MDP; or judicial determination that UPL violates the Commerce Clause.
Now take a look at how you might change your practice and write a scenario to get a sense of what your new practice can become. Go through the same possibilities and any more you think likely. If the new scenario doesn’t look a lot better than the status quo, consider more practice alternatives until you can draft a scenario that describes the way you prefer your personal and professional life to evolve over the years to come.
Major change is very tough for a profession trained to look to the past (stare decisis) to predict the future, but those who won’t change may be looking for different occupations in the years to come.
Native American tribal wisdom says that when you discover you are riding a dead horse, the best strategy is to dismount. In law firms we often try other strategies with dead horses, including the following:
l Buying a stronger whip
l Changing riders
l Saying things like, “This is the way we always have ridden this horse”
l Appointing a committee to study the horse
l Arranging to visit other firms to see how they ride dead horses
l Increasing the standards to ride dead horses
l Declaring the horse is “better, faster, and cheaper” when dead
l Harnessing several dead horses together for increased speed
It is time for solo and small firm lawyers to start looking for a new horse.Notes
1.American Bar Foundation Report (1998)
Ancillary Business Practice. According to Model Rule 5.7 of the Model Rules of Professional Conduct, ancillary services are those that traditionally may be provided by lawyers but if provided by non-lawyers will not draw a successful unlicensed practice of law (UPL) complaint. In other words, ancillary or law-related services—services such as real estate closing and title insurance—are fair game for any provider in the marketplace. In many parts of the country, independent title companies have virtually replaced lawyers in residential and, in some cases, commercial contracts and closings as well. Lawyers or law firms have opened separate title companies (ancillary businesses) in order to stay in the real estate closing business. The ancillary business must make it clear to customers that it is not providing legal advice and there is no confidentiality or attorney-client privilege.
Multidisciplinary Practice (MDP). An MDP is an entity that provides legal services as one but not all of its services and where lawyers and non-lawyers share ownership and fees. Another form of MDP is an arrangement where law firms and other service providers share a fee that covers services for all members. MDP is currently not allowed under Model Rule 5.4, which prohibits fee sharing between a lawyer or law firm and a non-lawyer and forming a partnership with a non-lawyer if any of the entities’ services include the practice of law. However, a number of states have changed their rules to allow limited MDP practice. (See www.abanet.org/
cpr to review the MDP Commission report and developments since the final report was issued in 2000.)
Ancillary business tends to favor large firms. It takes capital to open, staff, manage, and market a new business. Many solo and small firm practitioners do not have the capital, the time, or the experience to manage their law practices very well, not to mention the additional complications of a separate business. MDP allows for alliances of several disciplines that share fees and responsibility and provides a one-stop solution for many client problems.
Are You Ready for a Little Something on the Side?The status quo may no longer be an option, but ancillary business practice is not free of risks, either. Here are some questions to help you decide whether to take the plunge:
l Will your ancillary business create irreconcilable conflicts of interest with your law practice, so that you would lose from your existing law practice what you would gain from the ancillary business?
l Are you prepared to invest capital and take on management responsibilities in a new entity? If you are not fascinated with law firm management, how will you handle ancillary business management and law firm management at the same time?
l Have you prepared a business plan and a marketing plan for your proposed ancillary business?
l What is the level of competition for your proposed ancillary business?
l Are you getting into an ancillary business in the early pre-growth or growth phase of the business, or is it a mature business with high levels of competition?
l Does the proposed ancillary business fit your interests and your talents, or do you see it only as a means to financial success?
l Have you sought an ethics opinion from your state bar regarding your ancillary business idea?