Succession Planning: The Elephant in the Law Firm
The Lawyer’s Daily, October 4, 2019 – by Stephen R. Binder, Senior Private Client Business Advisor at KJ Harrison.
I have been working with lawyers and law firms for a good part of my four and a half decades as an accountant and strategic adviser, and I can say this with some confidence: lawyers aren’t quite like everybody else, at least when it comes to the issue of retirement. While the rest of the world dreams of kicking back and relaxing after a lifetime of work, many lawyers — especially those who have risen to the upper echelons of their firms — seem terrified at the prospect of not coming to the office. In fact, one recent survey suggests that nearly four out of five senior partners never want to retire.
Of course, someday, they will all leave their practices behind — voluntarily or involuntarily. But before they do, the risks to the firm and to their own financial future increase. Everyone might not retire at 65, but everyone still gets older. A firm where client relationships are owned by lawyers who never want to leave runs the risk of declining productivity, declining revenue and, worst case, liability if the partners in question cannot practise at a high enough level. Meanwhile, younger lawyers might understandably feel like they are on the outside looking in — and will decide to look elsewhere for advancement. (One U.S. study found that at two-thirds of the country’s biggest firms, partners over age 60 control at least a quarter of revenue.)
Perhaps just as worrisome, however, is the risk to the individual lawyer and his financial well-being, since every day spent avoiding the mere thought of retiring brings them another day closer to being underprepared for life after work.
Because of those challenges, many firms are realizing that succession planning is imperative. We are seeing more firms introducing mandatory retirement ages and adopting formal client handover processes. In my view, such measures are necessary, but not sufficient. Succession planning needs to go beyond a focus on the moment of a partner’s departure, and instead must be positioned at the core of the firm’s overall business strategy. The end game, if you will, is no longer about simply generating income for the partners, but rather to take into account how that income leads to capital accumulation, wealth creation and — ultimately — a secure financial future for the partners during their retirement years.
There is plenty of room for creativity in developing that approach, especially when it comes to compensation. Ask yourself: does your firm’s compensation scheme incentivize effective transitions, or does it work against effective transitions by incentivizing partners to hang on to profits for as long as they possibly can? Firms should explore new compensation models that are geared towards the long-term financial health of both the firm and its partners. In other words, compensation plans should not drive the firm’s growth strategy, it should support it.
Effective succession planning must also include a strong commitment to retirement planning. (After all, from the individual partner’s perspective, they amount to the same thing.) Lawyers need to be prepared for what might be the most important financial transition of their lives — from generating a significant amount of cash flow from their firms, to generating cash flow from their financial assets alone.
In this respect, lawyers really are like everybody else, in that they are subject to some common biases and mistakes in managing the transition to relying on their portfolios for income. Many underestimate how long they will live (fact: if you’re in reasonably good health at age 60, you can expect to last to 85) and, not unrelated, underestimate how much they need to save for retirement.
The substantial funds senior partners amass during their careers can lull them into a false sense of security; when they translate that nest egg into a monthly income over three decades, it’s often lower than they expected. Meanwhile, investors generally are prone to short-termism, to getting into (or out of) investments at precisely the wrong time, and to following the herd rather than sticking to their plans. At age 65, the impact of a misstep on your financial future is likely to be far greater than at age 35, when you have decades to make up your losses.
To help avoid that, I would argue that firms should incorporate financial education (in the form, for instance, of in-house workshops) and structure financial management advice into the succession strategy — indeed, into the overall business strategy. And remember: the best financial management plan starts early. Lawyers should be encouraged to start thinking about retirement while they are still young.
When I visit law firms, I’m struck by how often senior partners are clearly unprepared for retirement — which just makes them want to put it off for as long as possible. It shouldn’t be that way. And with a commitment to ensuring the long-term financial future of both the partners and the firm through sound succession and retirement planning, it doesn’t have to be.
Stephen R. Binder is senior private client business adviser at KJ Harrison Investors and provides his clients with strategic business advice on liquidation and exit strategies, family business and succession planning, as well as retirement and estate planning.
This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.
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