Law firms and lawyers need to reexamine their financial strategies in tough economic times. Those that don’t anticipate the effects may find themselves in embarrassing straits. Here are essential to-dos for law firms to follow:
▪ In developing the firm’s budget for the next one to five years, plan for contingencies. Provide for greater and lesser than expected growth. Consider how a truly severe economic downturn would affect each of the firm’s practice areas.
▪ Look closely—and realistically—at cash flows and the matching of relatively liquid assets and liabilities.
▪ Check the firm's credit lines and borrowing capacity to make sure they’re sufficiently adaptable for greater than expected growth or shrinkage.
▪ For personnel costs, anticipate how to fund greater-than-usual dislocations. In a substantial downturn, senior partners and other personnel may be retiring early or otherwise severing their employment, giving rise to large retirement obligations, severance packages and partner payouts.
And speaking of retirement issues, while firms typically provide their lawyers with defined-contribution retirement plans, the burden of dealing with the long-term securities investments falls more to the individual lawyer. The third-party institutions that usually administer these plans periodically offer each participant choices in how to allocate investments. Here are quick tips for making such choices in today’s market:
▪ Rather than chance losing to the markets, use index mutual funds or exchange-traded funds.
▪ Be cautious about advisors suggesting securities other than "plain vanilla" publicly traded stocks, bonds, mutual funds and exchange-traded funds. More complicated financial “products" and strategies tend to be expensive, not proven over decades of use, and subject to risks that are hard to evaluate.
▪ Make sure your investments are well diversified and well allocated. For example, how much of your portfolio is devoted to each of big stocks, small stocks, international stocks, long-term bonds, short-term bonds, municipal bonds and money market securities?
▪ Don't try to time the markets in response to economic conditions. Over the long run and on average, attempts at short-term market timing and clever individual securities selection are much less likely than asset allocation to favorably impact investment performance.
▪ Review and understand your investment reports. Tradition dictates that you should receive four per year from your financial advisor. And be wary of reporting that is overly complex or lavish. If you don't understand something, ask your advisor to explain it.
An economic downturn might not be pleasant, but if it occasions properly intense scrutiny of finances, that will be at least one good result.
M. John Sterba, Jr. , is a member of the New York bar, author of Fundamentals of Personal Investing ( ABA, 1997) and Chairman of Investment Management Advisors, Inc. in Manhattan.